A financial option perspective on energy security and strategic storage

• Main Authors: Lawrence Haar, Laura N. Haar
• Format: Article
• Language: English
• Published: Elsevier 2019-08-01
• Series: Energy Strategy Reviews
• Online Access: http://www.sciencedirect.com/science/article/pii/S2211467X19300513

On the whole, research into energy security falls into one of three perspectives: The political perspective, the engineering and geologic perspective, or the economic perspective emphasising market resilience. Common to these perspectives is the emphasis upon examining exposure to supply disruption, but not its probability of occurrence. As petroleum markets have shown themselves generally resilient to secular events and actual disruptions rare, despite perennial concerns, we ask if our understanding of security cannot be improved? We apply financial option theory to three eventful periods to learn the expectations of market participants on the probability of disruptions. We find the forward-looking views of petroleum market participants to be accurate with regard to both price persistence and the resilience of markets in absorbing shocks. Our results cast doubt upon the need for emergency inventories unless justified to dampen market volatility on public good grounds. Keywords: Energy security, Strategic inventories, Financial options and risk neutral density functions