Oil supply disruptions and modelling methodologies: The role of LP models

This paper has three main objectives. First, an argument is made that oil vulnerability is not a problem of the past, but remains a significant concern for all oil-consuming countries, especially beyond 1990. Second, it is suggested that the severity of past disruptions can be attributed, in part, to physical and institutional constraints that prevented the oil market from reacting quickly to what were relatively minor supply disruptions. The currently changing structure of the world oil market, in particular the evolving sales agreements under which an increasing percentage of world oil is traded and the vertical integration of major OPEC members into areas such as refining, could decrease the ability of the market to adjust to future disruptions. Third, it is suggested that linear programming (LP) models offer unique capabilities in assessing the degree to which the world and domestic oil markets could adjust to short-term supply disruptions, given constraints on transport, trade, and refining possibilities imposed by the physical structures of those market sectors or by control of those sectors by increasingly powerful producing countries. The assessment of this flexibility will help pinpoint areas needing attention and also contribute indirectly to the evaluation of short-run demand elasticities for world oil. The US Department of Energy's Petroleum Allocation (PAL) Model is used as an example of one LP model that can address such issues.