Quantifying Energy Supply Security
According to Christian Winzer, there are four types of approaches to
quantify energy supply security. The first one depends on a
dimensionless rating, such the price index proposed by the International
Energy Agency, which is “calculated by adjusting the Herfindahl-Index
of market concentration for each primary energy market by a political
risk rating of the export countries.” Tweaking the Herfindahl-Index
would result in different, albeit similar ratings. The second type uses
portfolio theory which depends on volatility measures. For example, S
Hayden Lesbirel used portfolio theory to evaluate the diversification
efforts that Japan had undertaken after the Arab oil embargo of 1973.
Using variance minimal portfolios, he found that “diversification has
been a useful strategy for reducing specific security risks as it spread
the risks of dependence across different fuels and different regions
supplying those fuels” but the significant systematic risk reduction
was a result of the fundamental changes in the political and economic
structure of oil markets. The third type relies on producing a measure
of disruption probabilities. The frequency of disruption is used to
produce a reliability index. One would expect that the disruption of
natural gas supply from Russia to the European Union would not result in
a very high index of reliability. The fourth types uses strategic models
to predict prices, quantities and capacity investment in the market. For
example, one study divided the European natural gas supply into two
stages of upstream market and a downstream market. They analyzed three
scenarios: Cournot competition on both markets, perfect competition on
both markets, and perfect competition on the downstream with Cournot
competition on the upstream market, and found out that Cournot
competition on both markets is the most realistic representation on the
European gas supply market.