Oil and Energy Security

Mark Green
Posted May 10, 2012

The Congressional Budget Office has a new report out on energy security that’s sure to spark conversation.  Much of that will seem muddled and polarized – not because of the speakers, but because of the nature of the report itself.  Let’s start with its basic premise:

“One widely used definition of energy security – and the one used in this report – is the ability of U.S. households and businesses to accommodate disruptions of supply in energy markets. Households and businesses are ‘energy secure’ with respect to a particular source of energy if a disruption in the supply of that source would create only limited additional costs.”

CBO is correct that the cost of energy matters, but having actual energy also matters. The report notes, for example, that the U.S. lacks “alternatives” that can be substituted in large quantities for oil for transportation needs if there’s a significant global supply disruption or global price increase. This brings us to supply and demand:

“Policies designed to decrease the impact of increases in oil prices that persist for several years or more can also be divided into those that would increase the supply of oil or oil substitutes (such as increasing domestic oil production) and those that would encourage consumers to reduce their reliance on oil (such as increasing the gasoline tax or developing vehicles that are more fuel efficient or that use other types of fuel). Both types of policies would tend to lower the world price of oil, either by making more oil available to the world market or by reducing demand for it …”

There’s certainly a divide between those pushing for greater U.S. supply and those pushing for decreased U.S. demand.  But that’s a political divide. The energy reality is that we need both – a true all-of-the-above strategy.  

Still, political opponents of increased domestic oil and natural gas development (and increased U.S. supply) surely will seize on this line in CBO’s report:

“Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increases in oil prices stemming from supply disruptions elsewhere in the world,”

While ignoring what comes after the comma:

“even if increased production lowered the world price of oil on an ongoing basis.”

First, let’s note that even as CBO downplays the usefulness of increased domestic oil production, it acknowledges that increased domestic supply is, well, useful in the context of the world price of oil. As for the first part of CBO’s assertion, the fact is that more domestic production must result in one of two outcomes:

1. Greater supply on the world market resulting in greater crude and/or refined product storage; or
2.  Increased worldwide spare capacity

In either case, energy markets would be in a better position to weather a supply disruption without a major spike in prices. That’s not to say there would be no impact, but it would certainly help provide greater protection from such shocks.

Oil is a worldwide market for which the price is determined by supply and demand. What CBO is saying is that on an ongoing basis, increased U.S. supply could lower the worldwide cost and thus, on an ongoing basis, the price for U.S. consumers. CBO argues, however, that if there’s a sudden supply drop (see Libya last year) or even a possible supply drop (see Iran this year), there could be consumer price spikes regardless of the level of U.S. production. The problem with arguing this way against increased domestic production is that day-to-day prices also are an energy security argument. Yet, there also are day-to-day costs to reducing demand:

“Such policies would impose costs on vehicle users (in the case of fuel taxes or fuel-efficiency requirements) or taxpayers (in the case of subsidies for alternative fuels or for new vehicle technologies). But the resulting decisions would make consumers less vulnerable to increases in oil prices.”

In other words, let’s raise day-to-day costs for consumers to shield them from sudden increases in oil prices. New technology vehicles that remain out of the price range of most Americans aren’t much of an energy policy. But it’s really this next part that drives home the need for a real all-of-the-above strategy:

“An increase in crude oil prices would also have a permanent effect on the economy, as the increase in payments to foreign producers and owners of oil assets would represent a transfer of wealth out of the United States.”

But what if, instead of a negative permanent effect, we created a positive permanent effect by keeping that money here:

• By securing 100 percent of our liquid fuel needs by 2024.
• By not placing 87 percent of our offshore acreage off-limits.
• By not slowing down federal permitting in the areas where we’re allowed to develop U.S. resources, both offshore and onshore.
• By not keeping a million barrels a day from ANWR sitting on the sidelines.
• By not blocking upwards of 800,000 barrels of oil a day from Canada.

What if we took charge of our energy future by taking charge of supplying it? Combined with continuing efforts, led by the oil and natural gas industry, to reduce demand and find alternatives – that’s what energy security looks like.