The idea of energy security emerged after the energy crises of the 1970s. It has evolved from the initial paradigm of assuring sufficient energy supplies to include a price affordability perspective and, eventually, many other energy-related issues, such as infrastructure, environmental impacts, societal effects, energy efficiency and governance. However, security of physical supply and price affordability remain the paradigm’s two key pillars. This study applies financial portfolio theory to the energy security issues of East Asia’s four major energy importers: China, Japan, South Korea and Taiwan. The authors calculate the relative risks associated with the dynamics of oil imports, and the import prices paid, and estimate the efficient frontiers for corresponding import portfolios. Lastly, the study runs several scenarios that simulate the effects of restructuring the four countries’ oil import portfolios and of external disruptions, notably US sanctions on Iranian oil sales. The paper’s key findings include: The short-run impact of a fully enforced Iranian oil export embargo would increase portfolio risk across the board, within a 3% to 15% range. However, the subsequent substitution of Iranian oil imports by other suppliers would prove beneficial for Japan and Taiwan. The risk premium associated with passing through the Malacca Straits would result in a 27.5% increase in price volatility for China’s oil imports, although the negative impact on its average import price level would be less pronounced, at 2.6% compared to between 5.2% and 5.8% for the other three importers.May 28, 2019
Carlo Andrea is a visiting researcher who currently works as a professor of economics at the University of Perugia, and a professor of energy economics at the University LUISS, Rome. He has been the president of AIEE, Italy (Italian Association for Energy Economics) since 2014 and was the president of the IAEE (International Association for Energy Economics) in 2008. Formerly, he was energy advisor to the Minister of Industry of Italy, president of GRTN (Italian Electric Transmission Network), chief economist at ENI, an economist at the Bank of Italy, a research associate at Project LINK, United Nations, and a lecturer and professor of economics at the universities of Pennsylvania (USA), Campobasso, Sassari and Urbino (Italy).
Carlo Andrea’s fields of research include econometric modeling, consumer behavior, energy markets, sustainable and renewable energy, liberalization and regulation policy. He has testified to Italy Senate and Parliament briefings, and has provided various governments with technical and policy reports on electricity market liberalization and renewable energy development. Carol Andrea has also authored over 200 scientific articles and is chief editor of the Review of Economics and Institutions.