Assessing the U.S. oil security premium

Abstract

World oil supply disruptions lead to U.S. economic losses. Increased oil consumption increases the vulnerability of the economy to oil supply disruptions, but it matters where the additional oil is produced. Increased production from stable producers can dampen future oil price shocks, whereas increased production from unstable producers can exacerbate future oil price shocks. Because oil is fungible, U.S. pricing and import policies can differentiate only between domestic and imported oil rather than between stable and unstable sources. The economic losses associated with oil supply disruptions—GDP losses and some transfers abroad—are externalities that can be quantified as oil security premiums. We estimate these premiums by taking into account projected world oil market conditions, probable oil supply disruptions, the market response to oil supply disruptions, and the resulting U.S. economic losses.