Energy Security and Strategic Storage from a Financial Options Perspective

There are many approaches to measuring energy security: some researchers use geologic and technical factors while others focus upon supply and demand. Common to these approaches is the emphasis upon exposure to supply disruption but not to the probability of its occurrence. As petroleum markets have shown themselves resilient to secular events, we ask if an alternative approach might be useful in quantifying energy security. We apply financial option theory to four eventful periods to learn the expectations of market participants to 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 to absorb shocks. Our results cast doubt upon the need for emergency inventories unless justified to dampen market volatility on public good grounds.