Podcast script:

The dominant views of energy security usually revolve around the security of physical supply and its price affordability, which is an importer-centric view and ignores the perspective of the energy exporters in the energy security domain. Energy exporters face some specific challenges, such as global and regional macroeconomic concerns, global market instability, increasing competition from emerging producers and substitutes, protectionist policies, and sanctions among others. While the market participants, international organizations and academia should adopt a more holistic approach to energy security to correct this imbalance, energy-exporting countries must address these risks by developing and articulating comprehensive energy security policies and strategies, which would help identify challenges and threats, in addition to the need for applicable political tools.

To better assess and manage energy security from an exporter’s perspective, KAPSARC researchers utilized one of the most widely used and respected economic tools in the financial industry, the Modern Portfolio Theory. This theory allows for the creation of models that can find the balance between maximizing returns on investments and minimizing the associated risks depending on the investor's priorities. In a discussion paper titled, “Energy Security and Portfolio Diversification: The Exporter’s Perspective,” the researchers used the historical oil export “mirror” data from 2018 of five GCC countries to construct two portfolios for each. Using these two portfolios allowed the researchers to assess the balance between risks and the two core priorities of exporters’ energy security separately; these priorities are increasing export volumes and prices optimization.

Of these, the first portfolio examined Oil Export Volume Growth, which represents the trade-off between focusing on a lower number of buyers who can provide higher export growth on one hand, and having lower risks through a more diverse base of buyers on the other. The second portfolio investigated the Oil Export Price, which represents the trade-off between a riskier portfolio that is concentrated on fewer buyers offering the best price terms, and a safer, more diversified one with a lower expected return.

Among the countries in focus, the analysis demonstrated that Saudi Arabia has composed the most efficient oil export portfolio with an emphasis on securing export volume growth, closely followed by Kuwait and the UAE. Qatar and Oman have less optimal portfolio structures and risk profiles.

Later, to better understand how global events might impact GCC countries’ energy security, KAPSARC researchers developed three scenarios to test the resilience of the GCC countries’ portfolios in the face of external demand and logistical shocks, which are the increase of Chinese oil demand, exports redistribution, and Malacca Strait blockade. In the first scenario, increasing oil demand from China by 20% over Baseline 2018 levels may improve the performance of Saudi Arabia and the United Arab Emirates, but it will increase volatility of export portfolios of Kuwait and Oman in particular.

In the second scenario, the reduction in oil exports to the USA by 20% compared with Baseline 2018 levels, while also proportionally distributing these exports to other buyers, will mildly increase Kuwait and Saudi Arabia’s export portfolio risk levels only. However, it will also improve export prices slightly for both countries. In the third scenario, the closure of the Malacca strait leads to a 20% reduction in export volumes to East Asia, which will have an impact on all oil exporters in the GCC, both in terms of reducing export volumes and the portfolios’ risks. Kuwait and Oman would be the worst affected by the disruption.

This analysis shows that portfolio theory can be used to assess and manage energy security from the exporter’s perspective. Understanding the compositions, characteristics, and risks of the GCC countries’ portfolios will allow decision-makers to mitigate risks via policy measures that target either the domestic market or foreign trade, such as fiscal incentives, public-private investments, diversification of buyers and shipping routes, and vertical integration across global energy value chains.

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Authors: Philipp Galkin and Carlo Andrea Bollino