[MUSIC] Welcome back, today we are discussing threats to oil supplies. It is a stereotype, almost universally accepted, that oil as a source of energy is subject to multiple threats and is extremely insecure. This is what many people have in mind and keep repeating. In fact, as I will argue to you, historical evidence tells us the opposite. It tells us that oil is a relatively secure source of energy for several reasons that we will consider. The perception that oil is an insecure source of supply originates in the 1973 Arab oil embargo. In 1973, in the occasion of a war between Israel and its neighbors, the Yom Kippur War. The Arab countries of OAPEC, the Organization of the Arab oil Petroleum Exporting Countries, which is not OPEC, it's a different organization. Imposed an embargo on oil exports to the United States and to the Netherlands, one country in Europe in particular. The perception was that this embargo was very damaging, although, in fact, statistics that we have, and the graph that I'm showing confirmed this, tell us that total oil supplies in that year, in 1973, did not decrease at all. They did decrease in the following year because of decline in demand, and this decline on demand took place because prices increased as a consequence of the embargo. So the effectiveness of the 1973 embargo imposed by the Arab oil producing countries is very debatable. And, in fact, ever since, what we have seen is rather sanctions being imposed by the importing countries on the exporting countries, rather than the other way around. There has never ever again been an attempt on the part of the exporting countries, either one specifically or more of them, to limit or punish importers by withholding oil supplies from them. The sanctions that have been imposed at different times on Libya, Iraq, Iran have not been very successful, not always been very successful, over time they have become more sophisticated. But it remains true that it is not easy to achieve political objectives by tampering and interfering with the flow, international flow of oil. In fact, we have the very clear experience that even in the event of major international wars, major international wars involving two major oil producing countries. Even in that case, oil supplies at the global level have not been seriously affected. We have the precedent of the Iraq-Iran War which lasted eight years, from 1980 to 1988, and it involved two major producers, Iraq and Iran. And in the conduct of the war oil installations were frequently attacked by both sides. And yet, until the end of the war, both Iraq and Iran were capable of continuing exporting at least some of the oil, although at a lower level. And the shortfall in their exports was easily made up by increases in exports from other oil producing countries. So that the world was able to very easily bear the consequences of this major international war and protracted war without any serious consequence on economic stability or well-being. Similarly, we can refer to the experience of the Iraqi invasion of Kuwait in 1990. In that case, the Iraqi troops controlled the whole territory of Kuwait. So for a short moment the production and exports from Kuwait were stopped altogether. And when they were forced to withdraw from Kuwait, the Iraqi forces set on fire each and every one of the oil wells of Kuwait. They created a huge environmental disaster. They created what many people called a doomsday, an inferno. And we have very dramatic pictures of all these oil wells burning with thick black smoke billowing from the wells. And yet, once control over the Kuwaiti territory was reestablished, these fires could be extinguished in a relatively short time. And in a matter of one year, Kuwaiti production was back to normal, and the environment could also be cleaned up. And so the consequences of this really extreme event, it is difficult to imagine a more thorough and complete destruction than what took place in Kuwait. Nevertheless, the consequences were remedied in a relatively short time. And in the meantime, the world did not suffer from a shortfall of supplies, because supplies, the production that was lost in Kuwait, was made up by increases in production in other countries. What does this tell us? What does this historical experience tell us? It tells us that in fact oil installations are fairly resilient, it is not that easy to take out and damage oil installations. You need to be in control of the territory, you would need to be close to the installation and exercise some quite deliberate force to destroy them. And normally, these are also rather easily repaired, this is the experience also with respect to pipelines. People have always been concerned about the stability of pipelines. But, in fact, we see that, on the one hand, obviously, it is easy to damage a pipeline. Pipelines run across the desert. It is not possible to police a pipeline along thousands of kilometers that it may run. So terrorists have an easy time blowing up a pipeline, but then it is also relatively easy to repair it. So this is quickly done. And so the benefit for terrorist forces or for enemy forces that they can gain out of blowing up or damaging a pipeline is in fact quite limited. We have the experience, again referring to the Iraq-Iran War, of the pipeline that used to take Iraqi oil to the Mediterranean across Syria. Iran attacked this pipeline in Iraqi territory from the air many times, and it damaged it, but for short periods of time, and then it started resuming the shipments. It is only when Syria, the Syrian government, which was and is allied with Iran, decided to close off the pipeline to Iraqi oil and essentially turn the tap, not allowing Iraqi oil to flow across Syria any longer. It is only at that point that the flow of Iraqi oil to the Mediterranean actually stopped. So it shows that pipelines are more resilient than we normally think. Similarly, there has been talk about what the International Energy Agency, at some point called the Dire Straits. The fact that much of the oil passes through certain narrow sea passages, and therefore is vulnerable to attack from the riparian states. People worry traditionally especially about the Strait of Hormuz. The Strait of Hormuz, which is the mouth, the opening of the Gulf, through which most of the oil exported from Saudi Arabia, Kuwait, Iraq, Iran, Abu Dhabi. So lots of oil passes through the Strait, and the two riparian countries that are Iran and Oman, especially Iran, would in theory have the possibility of closing of the Strait, attacking tankers that pass through it or mining the Strait. And this is something that has been agitated as a possible threat to global oil supplies many times. But in fact, when we go and look at the details, first of all The Strait is not so narrow, and so preventing passage of tankers is not that easy. And then secondly, even if we assume that Iraq, Iran would be capable of interrupting the flow of tankers and flow of oil across the Strait, you have to assume that the rest of the world does not react in any way. It will be possible to close it, but would the rest of the world accept this closure? The answer is obviously no. The rest of the world would intervene and do something to reopen the Strait, the flow of oil. And this would probably be possible in a relatively short time. And therefore, the damage to global oil supplies would most likely be limited, and all research that has been done on this confirms that it would not be possible to survive or resist the closure, an attempt to close the Hormuz Strait. So one reason why this is the case is that oil is easy to store. And we actually have very large storage, both commercial and strategic storage, that allows us to survive even in case of a shortfall in oil supplies for a fairly extended period of time. This is a key policy of the International Energy Agency. The International Energy Agency was in fact born to guarantee the security of supply, and it has in place something which is called the Emergency Response Initiative. And that mandates the member countries to take a list of measures of which maintaining strategic storage for at least 90 days of imports. And pledging solidarity with oil countries, so that it is not possible for any oil producers to single out an oil importer and attempt to squeeze supplies to that specific oil importer. These two measures, 90 days imports coverage in strategic storage and solidarity, are sufficient to guarantee that under no event, one of the members of the International Energy Agency will be affected. There is also the possibility of managing demand and making sure that unnecessary consumption of oil, for example, for recreational travel is curtailed at least in the short term. All of this underlines certain qualities of oil that are very important. Oil, differently from gas or electricity, does not require the user to be connected to a network. It is highly flexible, all you need is a tank, you fill it up and you can take it around. It has high energy density, oil provides high energy density relative to both weight and volume. So you don't need a large tank in volume and it's not going to be a very heavy tank when it's full. And it will provide you a lot of energy, more so than any other alternative. And that gives the user a huge flexibility. So this is why all users that need energy while moving around or while being in remote places, end up relying on oil products. Because it is not possible to achieve the same with any other source of energy. As a matter of fact, oil provides the fallback solution for all other forms of energy that are more vulnerable. In particular, when you think of electricity and electricity network, if you have critical installations, for example, hospitals, what they do in order to guarantee the continuity of supply, they have their own back up generators. And those back up generators normally function on the basis of oil products, diesel specifically. So it is undeniable fact that oil has characteristics that provide security whenever other system fail to do so.
