The Analysis of Oil Supply Security and Diversification Policy in Taiwan --A Shannon-Weinen Index Approach

1. The Analysis of Oil Supply Security and Diversification Policy in Taiwan--A Shannon-Weinen Index Approach Ssu-li Chang, Yen-yin Chen   Professor, Institute of Natural Resource Management, National Taipei University  Master, Institute of Natural Resource Management, National Taipei University

2. Content • Introduction • Energy Security and Measures of Oil Supply Security • Energy Security: A Changing Concept • Measures of Supply Security • Dependence index • Vulnerability Index • Shannon-Weiner Index for Six Asian Countries of APEC Members • Conclusion

3. WTI Price and Average Energy Import Price in Taiwan, 2003.7-2004.8 • The monthly average spot market price of WTI increases more than 40 percent since July 2003 and reaches its record high in history as over 50 dollars per barrel on October 1 • The percentage increase for the imported crude oil price is about 29.42 percent in Taiwan. • The reason for the relative lower import price of oil in Taiwan is that Taiwan imports most of its crude oil from Middle East area where the quality of crudes is generally lower and hence the price.

4. World Oil Supply Disruptions • The current upheaval situation in ME area lends urgency to Taiwan regarding the issue of the alleviation of the import dependency of Middle East oil. • Over the past half century, there have been at least 14 significant disruptions involving a loss of 0.5 mb/d or more of crude oil, in which ME accounted for 11 of them.

5. Most of the disruptions had negative effect on oil price and/or physical quantity. • Oil consuming countries were stricken by high inflation, trade and payments imbalances, high unemployment and weak business and consumer confidence.

6. Oil proved reserves, share 1980-2002 • However, it is foreseeable that the concentration of the global oil supplies in the Middle East and the declination of supplies from outside the regions will undoubtedly cause growing dependence on Middle East oil.

7. Oil Production Projections by Region (1965-2030) • Market manipulation power is expected to increase for OPEC, and hence exert an upward pressure on the price of oil. • Taking into account of the highly unstable situation in this area, the growing dependence on Middle East oil will pose threat to energy security for all the oil importing countries.

8. Crude Import Shares of Taiwan (%) • Currently, about 80 percent of the crude oil is imported from ME for Taiwan. • At the same time, Taiwan also has the highest proportion of imports from Africa amongst Asian APEC importers, which was 23.6 percent in 2001

9. In Summary • Given the upheaval situation in Middle East, the energy security and oil supply diversification policies have been given high priorities for the Energy Bureau of Taiwan. • West Africa has emerged as a major diversification source for Taiwan in searching for alternative oil import region. • It is thus the purpose of this paper to examine the effect of this diversification direction to the oil supply security as well as energy security in Taiwan.

10. II. Energy Security and Measures of Oil Supply Security • Energy Security: A Changing Concept • Due to the constant evolution of the energy market and technologies, security of supply is a changing concept and therefore requires new policies to deal with the issue. • A number of different approaches and definitions of security of supply have been put forward to accommodate the new economic and commercial environment.

11. Different definitions, common features: • all the definitions avoid the term ‘policy’, which reflects the growing conviction that security of supply is a shared responsibility among governments, firms and customers . • by defining security of supply in terms of a risk-management strategy, the concept has been perceived as some sort of cost/risk judgments. • both physical availability and price volatility are two equally important constituent parts and its effect are inextricably linked in the concept of supply security.

12. Measures of Supply Security Source: Kendall, 1998; IEA, 2001 ;INDES, 2004

13. Dependence Index

14. Vulnerability Index • general measures (percentage of world imports); • supply-side indices (diversity and concentration index); • demand-side measures

15. Diversity Index • Shannon-Weiner Index (SW) Xi：the market share of supply country i • The index increases as the number of different supply countries increases. • it assumes value in a range 0 ≤ SW ≥ 2, of which 0 and 2 each denotes the lower and upper bound of the diversity.

16. Adjusted Shannon Weiner-Neumann Index (SW1 and SW2) where bi represents an index of political stability of exporting country, 0-100% where g represents the share of indigenous production.

17. III. Shannon-Weiner Index for Six Asian Countries of APEC Members • Shannon-Weiner Index was estimated for six Asian countries of APEC members, namely, Taiwan, South Korea, Japan, China, Thailand and Philippines. • The diversity of these countries in their energy supply and demand structures provokes wide-ranging discussions and perceptions about energy security. • The comparative results of oil supply diversification on reveals relative instead of absolute implications on security issues and we suggest that the result of this study should be perceived in this way.

18. Indicators of Crude Import Diversity for Six Asian Countries of APEC members (by Import Countries) • the degree of oil import diversification achieved by Taiwan are rather impressive, especially in the period of 1995 to 2001. • the SW for Taiwan, Japan and South Korea are relatively stable over the years. • the import shares of China shows substantial changes

19. Indicators of Crude Import Diversity for Six Asian Countries of APEC members (by Import Region) • The SW index change when the sources of oil import are grouped by region. • Taiwan, second to China, shows relative balance on oil import areas among six countries. • The import areas for the rest of the countries are mostly concentrated in Middle East so that the index deteriorates to certain degree in this way of estimation

20. Political Stability Indicators (Selected Countries), 2002 • The political stability indicators are obtained from the World Bank Report on Governance Matters III: Governance Indicators for 1996-2002 in which the information are drawn from 25 separate data sources constructed by 18 different organizations • The oil producing countries in Africa generally have poor performance in political stability.

21. Comparison of SW, SW1 and SW2 for six Asian Countries of APEC members • The value of SW1 and SW2 decrease considerably after the political stability factor been added for all the six countries. • The largest decrease of the value of SW1 and SW2 can be found in the case of Taiwan, which also has the highest proportion of imports from Africa.

22. IV. Conclusion • According to the calculation results, the sole consideration of import sources diversification while leave out the internal political situation of the import country and/or region, may be insufficient to reveal vulnerability of supply disruption that specific country may be confronted, as shown in Taiwan’s case. • From this viewpoint, the policy direction regarding the contribution of diversify import sources to West Africa to release oil disruption risk and hence strengthen the energy security of Taiwan are not conclusive and need further investigation.

23. IV. Conclusion (continued) • In fact, the reasons for the West Africa being emerged as a major diversification source for Asian-Pacific countries are not merely energy security consideration. • Most of West African crudes are low-sulphur content, as the demand of low-sulphur products increase due to the stringent environmental regulation of consuming countries, demand of West African crudes expected to grow in the coming years.

24. IV. Conclusion (continued) • the effect as well as the contribution of the diversification should be evaluated not only on the ground of energy security, but also taking into account of the production and export capacities of alternative supply sources; crude oil quality; transport distance and freight costs and the refining capacity make-up of the country.

25. IV. Conclusion (continued) • Finally, this paper argue that in the long run measures of vulnerability are likely to be more useful to policymakers than measures of dependence. Measures of dependence simply show the extent of the Nation’s imports. • In contrast, measures of vulnerability show the meaning of the imports, indicating the Nation’s vulnerability to shortages, disruptions, and price spikes. • By studying measures of vulnerability, policymakers can weigh their progress toward insulating the Nation from the harmful effects of sharp changes in the world oil market.

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