OPEC’s ability to raise prices in the short run to levels that may be damaging to the economies of major consuming countries poses a major policy challenge to the governments of consuming coun­tries. Rising oil prices threaten consumer country national interest in several ways. Oil price volatility can inhibit investment, inhibit economic growth, and spur inflation in major economies that purchase consumer country exports.

The burden of rising energy import costs also threatens social stability in key regional consuming countries such as India and Pakistan and the South­east Asia region. Moreover, supply constraints also make it easier for governments or subnational groups to threaten vital interests of the United States, Japan, and their allies.

Thus, consuming countries have a clear interest in undertaking policies that will undermine OPEC’s short – and long-term ability to act as a cartel to inflate oil prices. Policies undertaken in conjunction with other consuming nations are likely to be more effective than policies undertaken individually by increasing the strength of the monopsony wedge.

Policy options include the following:

• Expand and restructure the IEA to better reflect the change in consumer country demand trends.

• Encourage investment in diverse non-OPEC oil resources.

• Develop and deploy alternative energy technologies.

• Develop federal policies to continue enhancing energy efficiency.

• Maintain or expand taxes on oil and gasoline.

The IEA was created a quarter of a century ago as a mutual protection society of OECD countries. Designed as a political grouping to prevent any oil – producing countries from using oil exports as a political instrument to influence the foreign policies of IEA members, the IEA was formed at a time when the OECD countries dominated global energy con­sumption. Today, the IEA excludes the most rapidly growing energy-consuming countries in the world, including China, India, and Brazil. And, as a result, these new consumers become vulnerable economic­ally during times of disruptions and become poten­tially vulnerable to political pressures of producers.

During recent years, there has been discussion about increasing the number of member countries inside the IEA, and South Korea has joined the organization. Other countries, such as China and India, are investigating creating national strategic oil stockpiles. The IEA invited both China and India to participate as observers in recent meetings and is pursuing options for finding mechanisms for major non-IEA oil-consuming countries to participate in joint stockpiling emergency programs.

However, the extent of effectiveness of the IEA system will depend on oil market developments, including Asian demand trends. The member coun­tries of the IEA now represent a smaller portion of the oil market than they did at the time of the IEA’s formation in 1977. As oil demand growth in Asia expands during the coming decade, new strains could come to the international system if new policies are not put into place. The omission of key consumer countries from Asia in the global emergency stock­piling system will increasingly put pressure on the effectiveness of limited existing stocks in the OECD countries. Moreover, tensions created by Asian ‘‘free riding’’ or possible ‘‘hoarding’’ actions during a crisis could hinder the IEA’s ability to stabilize interna­tional oil markets in the future.

The OECD countries comprising the IEA ac­counted for 42.3 million barrels/day out of a total world oil use of 60.6 million barrels/day in 1977 or approximately 70% of world oil demand. The United States alone consumed 30% of the world’s oil used in 1977. Asia Pacific demand at that time, at 10.1 million barrels/day or roughly 16% of world oil demand, was a less critical component in the world oil use situation.

By 2001, the OECD share of world oil use had declined to 62% of total world demand, while Asia Pacific use had grown to 28%, overtaking the U. S. share of 25%. Asian economic powers Japan, South Korea, Australia, and New Zealand are OECD members and, as such, are part of the IEA system now. A few Asian countries, such as Pakistan and China, have announced plans to create strategic stocks, but other key Asian oil consumers, such as India, Taiwan, Thailand, and The Philippines, are not. As their share of world oil demand grows, this disconnect between Asia’s size and importance as a consumer region and its lack of energy policy coordination with other large oil-consuming coun­tries (and/or the IEA) will create new problems and challenges for international oil markets and the international economic system. In particular, it is important that large Asian consuming countries not purchase and ‘‘hoard’’ oil during an IEA stockpile release because this activity would reduce the effectiveness of a stock release to calm markets and prevent oil supply shortages. The best possible win – win scenario would be for new links to develop between the IEA and other large consumer countries or consumer country groups.

Despite the obvious benefits from an Asian stock­piling group or system, Asian countries have been reluctant to commit to the expense involved in creating such a system. Although an Association of Southeast Asian Nations (ASEAN) delegation visited

Japan in 2000 to study the industrialized country’s emergency stockpiling system, the cost per capita was considered ‘‘high’’ by many ASEAN delegates. Press reports indicate that ASEAN energy ministers have focused on security of sea lanes and interna­tional gas pipelines, rather than on joint stockpiling arrangements, at recent meetings.

Meetings between IEA officials and Chinese state planning officials have similarly failed to produce an agreement of coordination. The Chinese government has announced its intention to build a strategic petroleum reserve, but so far the government has failed to define the reserve’s size or possible location publicly. It is considering requiring state oil compa­nies to hold stocks comparable to 10% of their import levels. There has also been no official verification that China would like to work coopera­tively with its Asian neighbors or OECD countries to develop measures to safeguard against disruptions in oil supplies from the Middle East. In March 2001, the State Council and the State Development Planning Commission included a ‘‘strategic petroleum reserve’’ as a key project in the 10th 5-year plan, but conti­nued debate about its size, location, and funding among party leaders, State Council agencies, National People’s Congress deputies, and the three central-owned state oil and gas companies has called into question the quick construction of such a reserve.

Although informal programs to encourage stock­piling by developing world countries would have a positive impact, such efforts cannot replace the more effective tool of centralized coordination with the IEA. Centralized efforts are needed so that interna­tional norms and standards can be met during a crisis. The United States and Japan are reviewing ways in which the IEA can work with key countries that are not members of the IEA to encourage them to define their strategic oil stockpile requirements and to build strategic stocks (or create minimum inventory requirements for industry). Russia has also made pronouncements recently, offering to establish a Russian strategic oil stockpile to be used to supply countries lacking in their own strategic stocks. This concept was aired at the U. S.-Russia Energy Summit in Houston, Texas, in October 2002.

In the post-September 11 climate, consumer governments are increasingly discussing enhancing development of backstop technologies or promoting alternative energy sources that can serve to reduce the need for fossil fuel. In this practice, backstop technologies create an incentive for oil producers to avoid oil price shocks and supply disruptions for fear that the new technologies would be released and used, permanently eliminating sales markets. Alter­native energy supplies provide ready substitutes if an increase in the price of oil is too extreme, and they can shield the economy from the negative impact from disruption of any one fuel source.

The deployment of improved car technology could have a dramatic effect on future oil demand trends as well as play a major role in lowering CO2 emissions by advancing fuel efficiency. The benefits to the role that enhanced energy efficiency has played in protecting the domestic Japanese economy from oil price variability are well known. Japan did not experience a severe recession after the 1979-1980 price shock, whereas the United States, United Kingdom, and Germany, all of which were less energy efficient at the time, did experience a painful loss in economic output.

It has been shown that the lower a country’s energy consumption to gross domestic product (GDP) ratio or the shorter the period that oil prices will remain higher, the lower the cost of the trade-off between inflation and GDP loss. New technologies on the horizon could allow more gains in energy efficiency. Such technologies may include microtur­bines for distributed power markets, improved car technologies, and household solar technologies. OECD governments should encourage the deploy­ment of these technologies in the marketplace through tax incentives or other vehicles in an effort to reduce their individual exposure to OPEC’s monopoly power.


Economic Geography of Energy • Environmental Injustices of Energy Facilities • European Union Energy Policy • External Costs of Energy • Geo­graphic Thought, History of Energy in • Global Energy Use: Status and Trends • Nationalism and Oil • OPEC, History of • World Environment Summits: The Role of Energy

Further Reading

Bohi, D. R., and Toman, M. A. (1996). ‘‘The Economics of Energy

Security.’’ Kluwer Academic, Boston.

Chinese energy majors in long march upstream. (2002). Petroleum

Intelligence Weekly, January 28, p. 3.

Fujian Petrochemical, ExxonMobil, Aramco sign agreement for

submission of Fujian project joint feasibility study. (2001).

Business Wire, November 15.

Gately, D. (1982). OPEC and the buying power wedge. In ‘‘Energy Vulnerability” (J. L. Plummer, Ed.), pp. 37-57. Ballinger,

Cambridge, MA.

Hartley, P., Medlock, K., and Warby, M. (n. d.) ‘‘First Things First: Development and Global Warming.’’ Working paper. Baker Institute, Rice University.

Huntington, H. G. (1998). Crude oil prices and U. S. economic performance: Where does the asymmetry reside? Energy J. 19(4), 107-132.

Jaffe, A. M., and Barnes, J. (n. d.). ‘‘Energy Trade in Asia.’’ Policy forum paper, Johns Hopkins University, School of Advanced International Studies.

Jaffe, A. M., and Lewis, S. W. (2002). China’s oil diplomacy. IISS Survival 44(1), 115-133.

Jaffe, A. M., and Soligo, R. (2002). The role of inventories in oil market stability. Q. Rev. Econ. Finance 42, 401-415.

Japan’s crude oil imports fall for 4th month in July. (2001, August 24). Kyodo News Service.

Manning, R. (2000). ‘‘The Asian Energy Factor.’’ Palgrave, New York.

Maugeri, L. (2003). Not in oil’s name. Foreign Affairs 82(4), 165-174.

Morse, E. L., and Richard, J. (2002). The battle for energy dominance. Foreign Affairs 81(2), 16-31.

Ng, E. (2001, November 7). ASEAN not in favour of ‘‘expensive’’ oil stockpile. Agence France Presse.

Russia’s TNK pushes for new markets, oil reserve sites for urals. (2002). Oil Daily, October 4.

Saudi Arabia’s petrochemical industry diversifies to face chal­lenges. (1999). Oil and Gas Journal, August 16, p. 65.

Yergin, D. (1991). ‘‘The Prize.’’ Simon & Schuster, New York.

Yergin, D., and Hillenbrand, M. (Eds.). (1982). ‘‘Global Insecur­ity.’’ Houghton Mifflin, Boston.

Updated: March 12, 2016 — 5:18 pm