Oil import portfolio risk and spillover volatility

Abstract

The concept of energy security has been recently extended to encompass not only the concept of physical supply availability or concerns about the lack of, but also new aspects related to price stability and affordability. Energy security is viewed, in a financial perspective, as a concept of economic convenience of energy supplies, available from a portfolio of partner countries.This paper analyzes the oil imports structure of four major Asian energy importers: China, Japan, Korea and Taiwan. We measure the total and bilateral volatility spillovers of the portfolio risk associated with the composition of the main oil suppliers, using forecast-error variance decompositions derived from a vector autoregressive model. Results show that the composition of oil import composition determines varying risk levels for given oil import growth rates and average import prices and before and after the Financial Crisis of 2008. We simulate two shocks: Covid-19 Scenario and Increased imports from KSA, showing that risk increases within a 3–15% range. As expected, spillover effects are increasing and exhibit a consistent reallocation effects, confirming that a deep shock can modify the quality composition of the variance and not only its level.