alan krupnick is the co-director of Resources for the Future's Center for Energy and Climate Economics in Washington, DC.
Published February 27, 2017
The election of Donald Trump — and his instant reversal of President Obama's decision to cancel the Keystone XL pipeline — has once again thrust energy security issues into the national consciousness. Indeed, it appears that the United States is headed for yet another debate about the meaning of “energy security.” Strikingly, until this election the world’s economic powers seemed to be converging on a comprehensive definition, aiming to minimize volatility in global energy supplies, among other things. But so far, there are few signs the new administration in Washington plans to keep America pointed in the right direction.
The Rude Awakening
The idea of energy security as something we lack and need really only surfaced with the oil crises of the 1970s — the Arab oil embargo of 1973-4, followed by the 1979-80 shortages in the wake of the Iranian revolution. Concern about dependence on unstable and unfriendly sources of the oil that propelled our transportation fleet and heated tens of millions of homes led to calls for more reliable supplies, both from producers at home and from friendly neighbors (Canada), as well as through the accumulation of a strategic petroleum reserve to buffer short-term emergencies.
“Energy independence” became a slogan, as well as a promise by the Nixon and Ford administrations. But from the beginning, economists questioned the goal. In light of the fact that oil is traded in an almost seamless global market, supply disruptions anywhere in the world automatically translate into higher prices everywhere including the United States. So, it is impossible to be truly independent unless one seals the borders.
It would also be undesirable. The core benefit of trade is to take advantage of low prices elsewhere, and reliance on just U.S. production at the expense of imports would end up raising prices to U.S. consumers. Of course, the formation of the OPEC cartel and its ability to fix prices meant that oil did not trade freely at the cost of production at the margin. But, by the same token, the cartel was (and is) constrained in price and production decisions by a variety of factors.
The core benefit of trade is to take advantage of low prices elsewhere, and reliance on just U.S. production at the expense of imports would end up raising prices to U.S. consumers.
Cartel members have their own short-term needs for revenue to consider, and OPEC must strike a balance that inhibits cheating. OPEC must also be mindful of the oil reserves of non-members and their costs of production, lest the cartel lose control of global supply by giving non-members incentives to expand production. What’s more, members with very large reserves (Saudi Arabia in particular) must remain aware of the risk that a very high price will accelerate conservation, along with innovation (and greater use) of alternative fuels.
In any event, following the crises in the ’70s, OPEC adopted a lower profile, and energy independence in importing nations was generally relegated to the political backburner. The United States gradually increased its reliance on oil imports as demand grew and production from long-established domestic fields dwindled. While the issue never quite died, policymakers didn’t try to rouse the nation to sustained action.
Reversal of Fortune
Then came the fracking revolution, in which technology made it far less expensive to extract oil (as well as natural gas) in the United States. And as a result, domestic production soared and net imports fell to less than one-third of U.S. consumption in 2016. This generated a sense of self-congratulation, only modestly dampened by worries about greenhouse gas emissions, until candidate Trump promoted a muscular, nationalistic energy policy best summed up in a statement from the administration’s transition website:
The Trump administration will make America energy independent. Our energy policies will make full use of our domestic energy sources, including traditional and renewable energy sources. America will unleash an energy revolution that will transform us into a net energy exporter, leading to the creation of millions of new jobs while protecting the country’s most valuable resources – our clean air, clean water and natural habitats.
“Full use” of our domestic resources implies, at a minimum, opening the Atlantic Continental Shelf and the Arctic to oil drilling, along with fast-tracking oil and gas extraction on federal lands. Although not explicitly mentioned in the statement, “midstream” parts of the fossil fuel lifecycle — pipelines, and perhaps coal and natural gas export terminals, railroads and refineries — would also be boosted. Exhibit A: the Keystone XL pipeline project for transporting Canadian oil to American refineries.
The theme of nationalism mixes with older ideas of energy security in Trump's goal of transforming the United States into a “net energy exporter." Of course, many an administration has identified “energy independence” — a term that became shorthand for reducing or eliminating oil imports (as well OPEC's influence on U.S. oil prices) — as a desirable goal. But the Trump version, making energy a net export, is new to the energy independence lexicon.
It implies that, in the aggregate, more Btu-equivalent coal, oil and natural gas should be exported than imported — or perhaps that there should be a net trade surplus in monetary terms. But, as suggested above, while there is no particular reason to be energy independent in a world in which oil trades freely and changes in supply and demand anywhere are reflected in prices everywhere, there is even less reason to become a net exporter.
While there is no particular reason to be energy independent in a world in which oil trades freely and changes in supply and demand anywhere are reflected in prices everywhere, there is even less reason to become a net exporter.
Ironically, according to the U.S. Energy Information Agency, market forces, technology and policies in place have already put the country on track to become a net energy exporter (oil, gas and coal) by about 2028. That’s according to the Energy Information Agency’s reference scenario. In EIA’s “high resources” scenario, which makes optimistic assumptions about oil and gas reserves, the net export goal would be met by 2019! Thus, the country may already be heading down this path without a push from the Trump administration.
The last idea expressed in the transition statement is that this growth in energy production will be sustainable in terms of environmental quality. This inclusion is interesting because it borders on contradicting campaign assertions that costly environmental regulations of the fossil-fuel industry should be rolled back. We have few specifics on which regulations the administration believes fall into that category. The Obama Administration’s 12th hour initiative to beef of the Office of Surface Mining Reclamation and Enforcement's Stream Protection Rule affecting the coal industry’s monitoring of water quality near coal mines is already in the process of being rolled back. And the Bureau of Land Management’s methane rule, designed to reduce emissions of this potent greenhouse gas from the oil and gas industry’s operations on federal lands, is in the crosshairs. By the same token, President Trump is pledged to prevent implementation of the Clean Power Plan, the Obama Administration’s signal initiative to limit carbon emissions from power plants.
What to Wish For
An economically sophisticated view of energy security requires a broader vision that recognizes major changes in how we use and depend on energy, and its vulnerabilities to weather events, disasters and terrorism. It is tied to electricity and natural gas as much as to oil, and it redefines security as much by resilience to non-market shocks as by availability at reasonable cost.
Though it lacks popular exposure, this vision is widely accepted by mainstream policymakers. Indeed, it was codified at a 2014 meeting of the G7 countries and was echoed in the Fixing America’s Surface Transportation Act (FAST) passed by Congress in 2015. Prominent features:
Oil, gas and electricity. The idea is to consider the security of our energy system as a whole. Oil and electricity are increasingly substitutes in transportation, and electricity supply vulnerabilities to weather, disasters and terrorism are becoming more recognized. By the same token, natural gas’s importance to electricity generation is growing.
Flexible, transparent and competitive energy markets. When markets in energy are working efficiently, resources flow to the most productive sectors and prices reflect marginal cost of production. The markets for moving and storing fuels also matter — a lot. This is a big, complex, interconnected system with some 2.6 million miles of pipelines, 400-plus natural gas storage facilities, 330 ports for handling crude oil and refined products and 140,000 miles of railways and local distribution networks. Not to be ignored: the nascent system for liquefying, storing and transporting natural gas for export is already making natural gas markets more competitive.
Diversification of supply. Traditionally, the idea was to diversify oil imports as a hedge against embargo or other sources of supply disruption. But it’s also come to mean diversification of fuels to perform a given function, such as use of electricity or natural gas to propel vehicles, building public transport as an alternative to personal vehicles, development of electricity-driven heat pumps and distributed solar as an alternative to heating with natural gas, etc.
Reducing greenhouse gas emissions. Incorporating environmental concerns into an energy security discussion is a newer idea (although one surprisingly included in the politically conservative U.S. Chamber of Commerce's Energy Security Index). It recognizes that reducing the risks associated with climate change — storm intensities, sea level rise and higher temperatures in summer, to name three concerns — reduces risks of blackouts, and oil and gas interruptions.
Enhancing energy efficiency. Using less energy is a win-win strategy, reducing energy imports and slowing climate change. Prominent policy examples are federal mileage standards for personal vehicles, as well as new standards on heavy-duty trucks and appliance efficiency standards.
Promoting development and deployment of clean, renewable energy technologies. The federal government invests both directly and through tax incentives in technologies that increase fuel diversification and reduce the climate consequences of energy use.
Improving reliability and hardening to threats from physical and cyberattack, weather and disasters. Reliable electricity is becoming ever more essential, even as sources of volatility are growing. Some are internal, such as greater reliance on intermittent renewable sources (solar and wind), while others are external, such as the possibilities of distribution interruptions caused by cyber-terror and more intensive weather. To improve the reliability and resilience of the electric power sector, the Federal Energy Regulatory Commission is imposing new reliability standards to help the sector prepare for these contemporary threats.
Improving emergency response. Another aspect of energy security is the time and extent of recovery after an emergency. Toward this end, the United States has long maintained a strategic petroleum reserve and two regional product reserves. The aforementioned FAST Act gives the Energy Department broad powers (though not necessarily the means) to manage emergency repairs of the energy distribution system.
Both the old vision of energy security as self-sufficiency and the Trumpian variety as export strength are flawed at the core. The outline for a far more inclusive security paradigm is on the table. The question now is whether it will be stalled by a slide into crude nationalism. America first offers nothing constructive to the debate over energy security. Indeed, building an energy policy around jingoism is sure to be counterproductive.