Acil allen Consulting



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Acil allen Consulting




Report to




Department of industry





September 2014




OIL MARKET responses to crises:









An HISTORICAL SURVEY



















ACIL ALLEN CONSULTING PTY LTD
ABN 68 102 652 148

Level FIFTEEN


127 Creek Street
Brisbane QLD 4000
Australia
T+61 7 3009 8700
F+61 7 3009 8799

Level TWO


33 Ainslie Place
CANBERRA ACT 2600
AUSTRALIA
T+61 2 6103 8200
F+61 2 6103 8233

Level NINE


60 Collins Street
MELBOURNE VIC 3000
AUSTRALIA
T+61 3 8650 6000
F+61 3 9654 6363

Level one


50 Pitt Street
SYDNEY NSW 2000
AUSTRALIA
T+61 2 8272 5100
F+61 2 9247 2455

Suite C2 Centa Building


118 Railway Street
WEST PERTH WA 6005
AUSTRALIA
T+61 8 9449 9600
F+61 8 9322 3955

Acilallen.com.au





suggested citation for this reportACIL Allen consulting, Oil Market responses to crises: AN historical survey, june 2014

© Acil allen consulting 2014

Contents


Executive Summary 5



1Introduction 11

2The Global Oil Market 12

2.1Global Oil Production and Sources 12

2.2History of Oil Shocks, Prices and Evolution of Oil Market 14

2.2.1References to Crude Oil Prices 14

2.2.2Pre-1973 14

2.2.3Oil Shocks and Prices since 1973 14

2.3Institutions 16

2.3.1Organisation of Petroleum Exporting Countries (OPEC) 16

2.3.2International Energy Agency 17

2.3.3International Energy Forum 17

3Australian Economy, Policy and Oil 18

3.1General Economic Context 19

3.2Oil and the Australian economy 22

3.3Petroleum Market Arrangements 23

3.3.1General Background 23

3.3.2Regulation and Taxation of Petroleum 24

3.3.31970 to 1980 25

3.3.41980 to 1990 26

3.3.51990 to Present Day 27

4Markets and Oil Shocks, 1964-2014 28

4.1Types of Oil Shocks 28

4.1.1Crude Oil Shocks 29

4.1.2Refined Oil Product Shocks 30

4.2Oil Market Responses to Shocks 31

4.2.1Roles of Oil Markets and Prices 31

4.2.2Price Elasticity of Demand and Supply 32

4.2.3Estimates of Price Elasticity of Demand and Supply 35

4.2.4Effects of Highly Price Inelastic Demand and Supply 41

5Repudiation of agreements and Yom Kippur Arab-Israeli War, 1973-74 45

5.1Preceding Circumstances 46

5.2Political Conflict Trigger 47

5.3Policy Tactics and Market Responses 47

5.4Causes of the 1973-74 Price Shock 50

5.5United States Price Control 51

5.6Impacts on the Australian economy 52

5.7Policy Issues and Policy Responses 55

6Iranian Revolution and Iran-Iraq War, 1978-80 57

6.1Preceding Circumstances 58

6.2Iranian Revolution 59

6.2.1Unfolding of Events 59

6.2.2Market and Policy Responses 60

6.2.3Petrol Queuing Returned in the United States 61

6.2.4Causes of the Oil Shock 62

6.3Iran-Iraq War 64

6.3.1The Conflict and Its Origins 64

6.3.2Market and Policy Responses 64

6.3.3Causes of the Oil Shock 65

6.4Impacts on the Australian Economy 65

6.5Australian Policy Issues and Responses 67

7Responses to high oil prices and withdrawal of Saudi Arabian support for the oil price, 1985-86 69

7.1Oil Market Circumstances, 1981-1985 70

7.2Saudi Arabia’s Abandonment of Price Support 71

7.3Market Responses to Positive Oil Supply Shock 72

7.4Causes of Oil Shock 72

7.5Impacts in Australia 72

7.6Australian Policy Issues and Responses 74

8Iraq’s invasion of Kuwait, 1990-91 75

8.1Preceding Circumstances 76

8.2Invasion 76

8.3Market and Policy Responses 77

8.4Causes of the Price Shock 77

8.5Impact on Australia 78

8.6Australian Policy Issues and Responses 80

9Venezuelan oil supply crisis and Iraq War, 2002-03 82

9.1Preceding Circumstances 83

9.2Closely-Spaced Supply Shocks 84

9.3Market Responses 84

9.4Causes of the Small, Short-Lived Price Spike 84

9.5Impact on Australia 85

9.6Policy Responses and Issues 86

10Multiple Shocks, 2003-14 87

10.1Preceding Circumstances 88

10.2Multiple Interacting Shocks 88

10.3Strong Global Economic Expansion, 2003-2008 89

10.4OPEC Production and Capacity Constraints 90

10.5Conventional Supply Shocks, 2003-2008 92

10.5.1Hurricanes Katrina and Rita, 2005 92

10.5.2Plethora of Small Supply Shocks, 2008 95

10.6Speculative Demand, 2003-2008 95

10.7Global Financial Crisis and Recovery, 2008-2014 97

10.7.1Global Financial Crisis 97

10.7.2Libyan Revolution 98

10.7.3Iran Tension 99

10.8Impacts in Australia 100

10.9Policy responses and issues 102

11Economic Effects of Oil Shocks 103

11.1Economic Effects Depend on Shock Type and Net Energy Exports/Imports Position 104

11.1.1Oil Supply Shock 105

11.1.2Aggregate Demand Shock 105

11.1.3Speculative Oil-Specific Demand Shock 106

11.1.4Refined Products Supply Shocks 107

11.1.5Compound Shocks 107

11.2Changes Across Time and Countries 108

11.2.1Net Energy Export/Import Balances 108

11.2.2Energy Intensity 108

11.2.3Price Elasticity of Supply and Demand 109

11.2.4Magnitudes of Oil Shocks 109

11.2.5OPEC’s Changed Price Control Policy 110

11.2.6Productivity Shocks 110

11.2.7Monetary Policy and Real Wage Flexibility 110

11.2.8Exchange Rate Flexibility 112

11.3Implications for Australia 112

12Conclusions 113





Contents 4

1Introduction 11

2The Global Oil Market 12

2.1Global Oil Production and Sources 12

2.2History of Oil Shocks, Prices and Evolution of Oil Market 14

2.2.1References to Crude Oil Prices 14

2.2.2Pre-1973 14

2.2.3Oil Shocks and Prices since 1973 14

2.3Institutions 16

2.3.1Organisation of Petroleum Exporting Countries (OPEC) 16

2.3.2International Energy Agency 17

2.3.3International Energy Forum 17

3Australian Economy, Policy and Oil 18

3.1General Economic Context 19

3.2Oil and the Australian economy 22

3.3Petroleum Market Arrangements 23

3.3.1General Background 23

3.3.2Regulation and Taxation of Petroleum 24

3.3.31970 to 1980 25

3.3.41980 to 1990 26

3.3.51990 to Present Day 27

4Markets and Oil Shocks, 1964-2014 28

4.1Types of Oil Shocks 28

4.1.1Crude Oil Shocks 29

4.1.2Refined Oil Product Shocks 30

4.2Oil Market Responses to Shocks 31

4.2.1Roles of Oil Markets and Prices 31

4.2.2Price Elasticity of Demand and Supply 32

Crude Oil 32

Refined Oil Products 34

4.2.3Estimates of Price Elasticity of Demand and Supply 35

Crude Oil 35



Short-Term Price Elasticity of Demand – Crude Oil 35

Short-Term Price Elasticity of Supply – Crude Oil 36

Reasons for Declining Short-Term Crude Oil Price Elasticities 38

Long-Term Price Elasticity of Supply of Crude Oil 39

Refined Oil Products 39

Price Elasticity of Demand - Products 39

Price Elasticity of Supply - Products 41

4.2.4Effects of Highly Price Inelastic Demand and Supply 41

5Repudiation of agreements and Yom Kippur Arab-Israeli War, 1973-74 45

5.1Preceding Circumstances 46

5.2Political Conflict Trigger 47

5.3Policy Tactics and Market Responses 47

5.4Causes of the 1973-74 Price Shock 50

5.5United States Price Control 51

5.6Impacts on the Australian economy 52

5.7Policy Issues and Policy Responses 55

6Iranian Revolution and Iran-Iraq War, 1978-80 57

6.1Preceding Circumstances 58

6.2Iranian Revolution 59

6.2.1Unfolding of Events 59

6.2.2Market and Policy Responses 60

6.2.3Petrol Queuing Returned in the United States 61

6.2.4Causes of the Oil Shock 62

6.3Iran-Iraq War 64

6.3.1The Conflict and Its Origins 64

6.3.2Market and Policy Responses 64

6.3.3Causes of the Oil Shock 65

6.4Impacts on the Australian Economy 65

6.5Australian Policy Issues and Responses 67

7Responses to high oil prices and withdrawal of Saudi Arabian support for the oil price, 1985-86 69

7.1Oil Market Circumstances, 1981-1985 70

7.2Saudi Arabia’s Abandonment of Price Support 71

7.3Market Responses to Positive Oil Supply Shock 72

7.4Causes of Oil Shock 72

7.5Impacts in Australia 72

7.6Australian Policy Issues and Responses 74

8Iraq’s invasion of Kuwait, 1990-91 75

8.1Preceding Circumstances 76

8.2Invasion 76

8.3Market and Policy Responses 77

8.4Causes of the Price Shock 77

8.5Impact on Australia 78

8.6Australian Policy Issues and Responses 80

9Venezuelan oil supply crisis and Iraq War, 2002-03 82

9.1Preceding Circumstances 83

9.2Closely-Spaced Supply Shocks 84

9.3Market Responses 84

9.4Causes of the Small, Short-Lived Price Spike 84

9.5Impact on Australia 85

9.6Policy Responses and Issues 86

10Multiple Shocks, 2003-14 87

10.1Preceding Circumstances 88

10.2Multiple Interacting Shocks 88

10.3Strong Global Economic Expansion, 2003-2008 89

10.4OPEC Production and Capacity Constraints 90

10.5Conventional Supply Shocks, 2003-2008 92

10.5.1Hurricanes Katrina and Rita, 2005 92

10.5.2Plethora of Small Supply Shocks, 2008 95

10.6Speculative Demand, 2003-2008 95

10.7Global Financial Crisis and Recovery, 2008-2014 97

10.7.1Global Financial Crisis 97

10.7.2Libyan Revolution 98

10.7.3Iran Tension 99

10.8Impacts in Australia 100

10.9Policy responses and issues 102

11Economic Effects of Oil Shocks 103

11.1Economic Effects Depend on Shock Type and Net Energy Exports/Imports Position 104

11.1.1Oil Supply Shock 105

11.1.2Aggregate Demand Shock 105

11.1.3Speculative Oil-Specific Demand Shock 106

11.1.4Refined Products Supply Shocks 107

11.1.5Compound Shocks 107

11.2Changes Across Time and Countries 108

11.2.1Net Energy Export/Import Balances 108

11.2.2Energy Intensity 108

11.2.3Price Elasticity of Supply and Demand 109

11.2.4Magnitudes of Oil Shocks 109

11.2.5OPEC’s Changed Price Control Policy 110

11.2.6Productivity Shocks 110

11.2.7Monetary Policy and Real Wage Flexibility 110

11.2.8Exchange Rate Flexibility 112

11.3Implications for Australia 112

12Conclusions 113

Appendix AFuel taxation 115

Appendix BReferences 119



List of boxes


List of figures


List of tables


Executive Summary

Australia’s vulnerability to a major interruption to global oil supply has been addressed in previous ACIL Allen reports to government for National Energy Security Assessments, and considered by the House of Representatives Standing Committee on Economics in its 2012 Inquiry into Australia’s Refining Industry.

These recent reviews found that Australia’s supply security was high – with a watch point concerning increasing net imports – underpinned by the ability of international markets to supply crude oil and refined oil products to Australia, and to respond to international and regional perturbations in supply and demand. This position has been reinforced by the availability of surplus refining capacity in Asia.

This report builds on previous work by ACIL Allen. It examines historical oil market responses to global oil market crises. The examination is based on a wide-ranging literature review, and archival evidence’ and/or ‘oral history’ or similar. It discusses in detail how Australian and international oil markets responded to selected oil shocks of different types. It also discusses the economic consequences of different types of shocks in the context of changing economic and policy circumstances over time, particularly in the Australian case. It aims to answer five key questions.

How has the international oil market changed since the 1970’s?

Does the oil continue to flow?

How does the oil price respond during shock episodes and what role does it play?

How have Australia’s oil and refined products markets performed historically?

What conclusions can be drawn?

Six oil market events are considered:

“first oil crisis”: Arab-Israeli War and repudiation of agreements, 1973-74

“second oil crisis”: Iranian revolution and Iran-Iraq war, 1979-80

withdrawal of Saudi Arabian support for oil price, 1985-86

first Gulf war: Iraq’s invasion of Kuwait, 1990-91

Venezuelan oil supply disruption and invasion of Iraq (second Gulf war), 2002-03

multiple oil shocks, 2003-14.

The six case studies serve to illustrate the changes in both the global market over time and the way in which the responses of the market and economies to oil shocks have changed. The case studies also consider the effects on Australia as distinct from global impacts.


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