World Energy Outlook 2007

production and 2 mb/d of refining capacity caused by hurricanes Katrina
and Rita in the United States.
To ensure the potential of IEA countries to respond rapidly and effectively
to oil emergencies in changing oil market conditions, the IEA Standing
Group on Emergency Questions (SEQ) conducts a regular cycle
of Emergency Response Reviews of IEA member countries. These peer
reviews cover procedures and institutional arrangements, and result in
recommendations for improvements. In addition, the IEA carries out a
series of workshops and emergency-response exercises every two years to
train personnel and test policies and procedures.
4
How Supply Disruptions Affect Consuming Countries
The consequences of a disruption in energy supplies for a consuming country
or region depend on several factors, including the type of fuel, the nature and
size of the disruption or shortage, expectations about how long the disruption
will last and the fuel-import intensity of the economy. In practice, economic
vulnerability depends not just on the nature and duration of a disruption, but
also on the flexibility and resilience of the economy to respond to and
withstand the physical loss of supply and the higher prices that result.
Experience has shown that the sudden loss of even a modest volume of oil can
lead to sharp increases in prices, particularly when global spare capacity is tight
or when geopolitical tensions are high.
A well-functioning, competitive market will reallocate supplies according to
ability to pay, though macroeconomic damage may result from the increase in
price. In this case, particularly where supplementary emergency measures are
available, a supply disruption should not, in principle, cause a physical
shortage, as price adjusts upwards to bring demand back into balance with the
new, lower level of supply. Similarly, where prices are driven higher by a lack of
supply capacity as demand outstrips capacity additions, more investment
would normally be forthcoming, eventually driving prices back down. But
there may be important time lags. Where prices are not free to adjust because
of price controls or infrastructure constraints on deliverability, physical
shortages can occur at local or national levels. In the case of oil, all OECD
countries and many other non-member states have liberalised their oil markets,
so prices are free to rise in response to a supply disruption. In these countries,
the risk of physical unavailability is largely reduced to extreme events – such as
weather-related catastrophes, strikes or terrorism.
The effects of a disruption in oil supplies, regardless of where it takes place and
which buyers are directly affected, mainly depend on the extent of the global
price response – not on whether the consuming country obtains its oil
physically from the country from which supply is disrupted. Crude oil and
Chapter 4 - The World’s Energy Security 163