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.