ENERGY SECURITY - EXTERNALITIES AND POLICIES

In this paper we review conceptual arguments and empirical evidence related to two potential sources of market failure involving energy security. In doing so we consider several questions involving the distinction between externality and market inefficiency, and the distinction between market failures that are amenable or not amenable to correction given our current understanding of the workings of an economy. Several conclusions follow from our analysis regarding the potential sources of market failure and possible remedies. The problem of excess wealth transfer from exporter market power may be an issue, but current knowledge of oil market behaviour is too weak to support a strong conclusion. Other supposed costs of oil import dependence also are not well grounded, including externalities related to the vulnerability of the economy to energy price shocks.