NOTE

President Obama's Energy Security Blueprint

by Trevor Houser and Shashank Mohan | April 21, 2011

In a speech at Georgetown University on March 30, President Obama announced a goal of cutting US oil imports by one third by 2025 and released a “Blueprint for a Secure Energy Future” laying out the policy pathway to achieve that target. In this note we assess the President’s oil ambitions and policy proposals in terms of their aggressiveness, feasibility, and impact on US energy security. We find that:

The President’s target is achievable. Politicians have a fondness for announcing pie-in-the sky goals that play well with constituents but have little chance of being met. Trimming America’s foreign oil purchases by a third over the next 15 years, by contrast, is perfectly achievable. US net petroleum imports are already projected to decline considerably by 2025 thanks to existing policy and current economic trends. And the new initiatives the President laid out, if adopted, would add enough umph to meet his import reduction goal.

The Blueprint addresses part of the energy security equation:  By improving vehicle efficiency and expanding domestic fuel supply, the President’s Blueprint would reduce the impact of high oil prices on the US economy and improve America’s terms of trade.  But these benefits won’t materialize for a decade or more, and do nothing to reduce the frequency and severity of oil market disruptions.

A greater focus on international oil market stability is needed: Due to the global nature of oil markets, the US will still be vulnerable to international supply disruptions even if President Obama’s target is met. Promoting reliable, stable and transparent international oil markets, which the President’s Blueprint does not include, is the other piece of the puzzle which Washington needs to address.  


Putting the President’s Target in Context

With US gasoline prices approaching $4 per gallon, instability in the Middle East threatening further price increases, and Republican leadership in the House criticizing Administration policies as contributing to the problem, the President used his Georgetown speech to address America’s growing energy anxiety. Before laying out his prescription for making the US more energy secure, President Obama castigated previous Administrations for failing to act:

We’ve known about the dangers of our oil dependence for decades.  Richard Nixon talked about freeing ourselves from dependence on foreign oil.  And every President since that time has talked about freeing ourselves from dependence on foreign oil.  Politicians of every stripe have promised energy independence, but that promise has so far gone unmet. 

Part of the reason past attempts have failed, the President noted, is because despite periodic spikes, oil prices have always returned to their historic average of $15-$25 per barrel (adjusted for inflation). But this time is different, the President warned. Demand growth in China and India will help keep prices high for years to come, making it all the more important that we now get serious about reducing oil demand.

If the President is right and today’s high prices do persist (something most energy forecasters now expect), than much of his import reduction target will be achieved through market forces. And despite the President’s harsh words for the energy security actions of past Administrations, legislation signed into law by his predecessor will do as much to reduce US oil imports as the new policies President Obama just proposed.  

The President chose 2008 as the benchmark against which to measure his import-reducing ambitions. America’s net petroleum imports (imports minus exports of both crude oil and refined products) averaged 11.1 million barrels per day (bpd) that year.  According to the Energy Information Administration’s (EIA) Annual Energy Outlook 2011 (AEO 2011), net imports are slated to decline to 9.2 million bpd in 2025 thanks to both existing energy legislation and current market developments.

Below we discuss the vehicle efficiency improvements, biofuels expansion, and domestic oil and gas developments that are responsible for this projected decline in US dependence on foreign oil. Figure 1 shows the relative importance of each in reducing US net petroleum imports relative to a world in which vehicle efficiency, domestic oil and gas production and biofuels supply is frozen at 2008 levels. There are policy and market drivers behind each wedge and together they get the President three quarters of the way to his 2025 goal, even without the policy proposals he just announced.

Vehicle Efficiency

EIA projects US liquids demand (oil or oil substitutes) will pretty much stay flat between now and 2025, despite a 50 percent increase in the size of the economy during that period. While trend reductions in the energy-intensity of US economic activity from de-industrialization (not shown in Figure 1) play an important role in keeping oil demand at current levels, its improvements in vehicle efficiency that get most of the credit. Between 2008 and 2025, EIA predicts the efficiency of US passenger vehicles on the road will increase by 23 percent, which more than offsets the 15 percent growth in the size of vehicle fleet projected during that same period. Assuming stable domestic oil production, these gains cut 2.1 million barrels per day off America’s oil import bill in 2025.

Policy plays an important role in delivering these savings, and President Obama is partly to thank. Corporate Average Fuel Economy (CAFE) standards hadn’t been raised for 20 years before he took office, and in May of 2009, his Administration announced a 5 percent annual increase in CAFE standards for light duty vehicles between 2011 and 2016.

But President Obama can’t claim all the credit.  In 2007, President Bush signed into law the Energy Independence and Security Act of 2007 which mandated a similar increase in CAFE standards, but gave the auto industry until 2020 to comply.

In addition, at currently projected oil prices vehicle efficiency will improve significantly even if no federal requirements were in place. The first big increase in CAFE standards between 1977 and 1982 essentially codified a consumer trend already underway as a result  of America’s first big oil price spike (Figure 2). And when oil prices shot up again between 2001 and 2008, the efficiency of new vehicles improved by 13 percent, all before the new CAFE standards were introduced. Likewise, if EIA’s prediction that crude oil prices stay in the $100-$110 range through 2025 (in real 2009 dollars) turns out to be correct, then vehicle efficiency will improve significantly even if the 2011-2016 CAFE rules never take effect.

Using the same model that EIA employs for its Annual Energy Outlook, we find that the efficiency of new cars sold in 2016 would fall by 1.6 mpg in the absence of a federal standard.1 By 2025, this gap would raise US net oil imports from 9.2 million bpd to 9.5 million bpd – meaningful, but only a fraction of the 2.1 million bpd reduction in oil imports passenger vehicle efficiency improvements are currently projected to deliver. 

Domestic Oil & Gas

Increased domestic oil and natural gas production are together projected to curb US oil imports by 1.7 million bpd by 2025.  Despite the six month Gulf of Mexico (GoM) drilling moratorium last year, EIA is forecasting a 270,000 bpd increase in GoM output between 2008 and 2025. While further permitting delays could significantly reduce GoM output below EIA projections between 2014 and 2018, production would likely return near trend in time for the 2025 target. Onshore oil production in the Lower 48 is projected to grow by 880,000 bpd between 2008 and 2025, and that’s without the boom in shale oil many expect will occur. A 270,000 bpd decline in Alaskan production curbs overall US oil output growth somewhat, but the country is still projected to add 830,000 bpd in domestic supply.

On the natural gas side, currently low prices and increased production, if sustained, will increase natural gas plant liquids supply significantly – 860,000 by 2025 in the AEO 2011. And there’s the prospect of increasing natural gas consumption in the vehicle fleet either through CNG or gas-to-liquids, even in the absence of new policy.   While this would be bad news for US electricity consumers by helping to close the US oil-natural gas price gap, it would reduce US oil imports even further than currently projected.

Biofuels

After vehicle efficiency and domestic oil and gas production, the most significant decline in oil imports under “business-as-usual” comes from growth in both domestically produced and imported biofuels. Between 2008 and 2025, EIA projects a 1 million bpd increase in biofuels supply, most in the form of corn ethanol (Figure 3).

In 2005, the US Congress passed, and President Bush signed into law, a Renewable Fuels Standard (RFS). The 2007 Energy Independence and Security Act increased the ambition of this program considerably, putting in place a requirement that 36 billion gallons of biofuels be supplied to US motorists by 2022.  Of this, 16 billion gallons must come from cellulosic ethanol and 5 billion from other advanced biofuels, while the remaining 15 billion barrels can come from corn or other starches.

EIA predicts that the US will have no problem meeting its corn ethanol target under the RFS (Figure 3). Indeed, corn ethanol production has grown more than three-fold over the past five years, surpassing 12 billion gallons in 2010.  EIA also sees significant growth in non-cellulosic advanced biofuels, primarily sugarcane ethanol imported from Brazil and biodiesel produced from seed and waste oil.

The tough part is meeting the cellulosic ethanol target under the RFS. Currently EIA is expecting that only 4 billion gallons of supply will be technologically and economically feasible in 2022 and that the EPA will have to waive the RFS requirement for the rest (as it has done for cellulosic ethanol each year so far). 

This also means that most of the increase in biofuels supply EIA does see happening, would take place even in the absence of the RFS. Again using the same model that EIA employs for the Annual Energy Outlook, we ran a scenario with the same oil price projections ($107 per barrel real in 2025) but without the RFS. Biofuels supply grows by 0.83 million bpd between 2008 and 2025 rather than 1.03, but still makes a significant dent in US petroleum demand.

Where that Leaves Us

If oil prices stay above $80 per barrel, permitting delays in the Gulf are relatively short-lived, and there is no backlash against biofuels, the AEO 2011 forecast that US oil imports will decline from 11.1 million bpd in 2008 to 9.2 million bpd in 2025 is reasonable if not a bit conservative. That leaves 1.8 million bpd of additional oil import savings the President will need to achieve to reach his one third reduction target. 

Will the President’s Policy Proposals Achieve the Target?

The Administration’s Blueprint identifies a range of policy initiatives intended to close this gap, some more clearly defined than others. Of those that were clearly defined, we took the four with the greatest potential to reduce US oil imports and modeled them using our in-house version of EIA’s National Energy Modeling System (RHG-NEMS). All assumptions are the same as the AEO 2011, with the exception of the specific policies selected for analysis, to make the results comparable to the AEO 2011’s reference case.

What we include

Below are the four Blueprint proposals we analyzed. Given how little detail is provided in the Blueprint itself, we had to make a number of assumptions about the nature and impact of the policy. We decided to error on the optimistic side for those policies we modeled given the number of Blueprint proposals we omitted.

Medium and Heavy Duty Vehicle Efficiency: The Blueprint references forthcoming fuel economy and greenhouse gas emissions standards for medium and heavy duty vehicles for model years 2014 through 2018. We assume these standards will be in line with EPA’s Draft Regulatory Impact Analysis released last October.

Light Duty Vehicle Efficiency: The Blueprint proposes new fuel economy and greenhouse gas emissions standards for light duty vehicles for model years 2017 through 2025. We assume that these standards continue the average annual increase in fuel economy for the 2011 through 2016 model years reaching 56 mpg for cars and 36 mpg for light trucks in 2025.

Advanced Biofuels: The Blueprint sets a goal of building four commercial-scale cellulosic ethanol demonstration plants by 2014 and increasing both federal R&D and government procurement of next generation biofuels. We assume that these policies are successful in maturing advanced biofuels (cellulosic ethanol in particular) to the point where full compliance with the 2022 RFS mandate is possible by 2025.

Electric Vehicles: The Blueprint calls for a significant increase in electric vehicle R&D, government procurement of electric vehicles, and support for local electric vehicle infrastructure. We assume that together these activities reduce electric vehicle battery costs by 15 percent in 2015 relative to business-as-usual.

What we leave out

Included in the Blueprint, but not included in our analysis, either because there was not enough detail available or because we don’t believe the proposal will have much impact are:

Domestic Oil and Gas Leasing: The Blueprint describes a number of steps the Administration plans on taking to change oil and gas leasing policy to encourage domestic development. These include shorter lease times, lease extensions in exchange for rapid development and changes in fee and royalty structures. There is not enough information available about these potential changes to assess their impact. 

Natural Gas Regulation: The Blueprint calls for a pragmatic approach to regulating unconventional gas development, in the interest of both protecting the environment and preventing accidents in individual projects that could slow down the growth of the industry more broadly. While such an approach can mitigate downside risks to current gas development projections, it would not result in an increase in gas production over our business-as-usual scenario (which assumes unconventional gas development continues without the type of major accidents such regulation seeks to prevent).

Reducing Oil Demand Abroad: The Blueprint outlines a number of diplomatic efforts either planned or underway by the Administration to reduce oil demand in other countries, either through efficiency or the development of oil alternatives. While such efforts can reduce oil costs for US consumers, on balance they will increase rather than decrease US oil imports (lower oil prices result in higher oil demand).  

Strategic Partnerships with Oil Producers: The Blueprint describes current Administration efforts to deepen energy ties with friendly oil-producing states like Mexico and Brazil. This has no impact on net US oil imports and little impact on US energy security in all but the most extreme supply disruption scenarios (discussed in more depth later).

Public Transit and High Speed Rail: The Blueprint calls for investments in mass transit, which if large enough have the potential to meaningfully impact US oil demand over the long-run. There is not, however, enough detail in the Blueprint to include this in our analysis.

Building Efficiency: The Blueprint includes a number of proposed initiatives to improve energy efficiency in buildings. While these have the potential to significantly reduce household and corporate energy expenditures and overall US energy demand, they will have only a modest impact on US oil imports.

Clean Electricity: The Blueprint also includes a number of initiatives aimed at accelerating the deployment of clean forms of electricity generation, such as a federal Clean Energy Standard (CES). Despite the fact that little oil is used in US power generation, greater reliance on low-carbon sources of electricity can have a meaningful impact on US oil imports. For example, carbon dioxide captured from coal-fired power plants can be used for Enhanced Oil Recovery (EOR), increasing domestic oil supplies. There is not enough detail in the Blueprint about the Administration’s clean electricity plans, however, to include them in our analysis.

The Results

The four Blueprint policy initiatives included in our analysis come very close to achieving the President’s target. Net oil imports in 2025 are 7.59 million bpd, down 32 percent (3.53 million bpd) from 2008 levels and 18 percent (1.64 million bpd) from 2025 levels under business-as-usual. Of this 1.64 million bpd reduction in 2025, 60 percent comes from improvements in light duty vehicle efficiency, including greater penetration of electric vehicles (Figure 4). Eight percent comes from improvements in medium and heavy duty vehicle efficiency. The remaining 32 percent comes from increased biofuels production.

Impact on US Energy Security

Assuming President Obama achieves his oil import reduction goal; will it make the country more secure? Energy security is a nebulous concept, often used but rarely well defined.[2]The following policy objectives, however, show up regularly in energy security discourse and guide our evaluation of the President’s Blueprint.

Improving US Terms of Trade

The US runs a large trade deficit in oil and when oil prices rise, US terms of trade (the amount of imports you can buy with money earned from exports) decline. A decline in a country’s terms of trade is generally assumed to reduce economic welfare, which has a range of national security implications. 

The increase in the price of oil between 2001 and 2008 boosted America’s oil import bill from 0.7 percent to 2.3 percent of GDP, accounting for most of the growth in the overall US trade deficit during that period (Figure 5).

In the AEO 2011 reference case, oil imports decline to 1.5% of GDP by 2025, even though oil prices continue to rise in real terms. Obama’s Blueprint accelerates this decline, shaving an additional $50 billion a year off the country’s import bill by 2025 in today’s dollars (Figure 6). That reduces the country’s oil trade deficit to 1.2% of GDP – significant but still higher than pre-2004 levels.

Reducing Vulnerability to Price Spikes

Curbing US oil imports can improve the country’s terms of trade, but it doesn’t necessarily reduce the frequency or severity of oil price spikes. Oil is a fungible globally traded commodity, so volatility in international oil prices directly impacts the price of oil produced in the US, regardless of how small a share of overall US oil demand imports compose. Figure 7 demonstrates this clearly. US dependence on foreign oil has varied from 25 percent in the early 1980s to as high as 60 percent in recent years, but domestic and imported oil prices have continued to move in tandem, regardless of changes in America’s net oil position.

The President’s Blueprint does not count on increased domestic oil production to meet his import reduction target, but it does rely heavily on an expansion in biofuels supply. And biofuels prices are just as correlated to international oil prices as domestic petroleum supply (Figure 8). Expansion of domestic biofuels production can improve US terms of trade and help ensure energy adequacy in more extreme national security scenarios (discussed below). But it does little to protect Americans at the pump unless the increase in biofuels production frees up enough international oil supply to make market disruptions less likely or less severe. The level of biofuels expansion we’d expect the President’s Blueprint to effect does not meet this test.

There is also growing concern in some circles that biofuels demand in the US is contributing to food price inflation globally. If correct (and we are waiting to weigh in on this question until some ongoing internal research on the topic is complete) biofuels support could increase oil price volatility if food price inflation sparks unrest in oil exporting, food-importing regions like the Middle East.

While the Blueprint’s increase in domestic fuel supply would do little to reduce the frequency or severity of oil price spikes, it would help take the edge of such spikes for the economy as a whole by recycling oil revenue that would have flowed abroad back into the US economy.

The vehicle efficiency portions of the Blueprint, however, provide even greater protection. The plan would reduce passenger vehicle oil demand by 590,000 barrels per day by 2025. This would lessen the cost of a $10 spike in oil prices on motorists by 7 percent or $2 billion over the course of a year.  

Improving Petrostate Behavior

An oft-cited energy-related national security concern is the behavior of certain oil exporting states. US oil purchases help prop up rogue regimes, or so the argument goes, help fund terrorist activities, and limit Washington’s ability to advance other foreign policy goals like protection of human rights.

In general, we are skeptical that reducing US oil imports is an effective strategy for combating terrorism or changing Petrostate behavior. The financial needs of terrorist cells are extremely small in relation to the value of the global oil market so any plausible reduction in US petroleum consumption is unlikely to prevent states seeking to support terrorism from doing so. And America’s track record when it comes to changing state behavior through economic leverage is mixed.[3] And even if the US was successful in starving rogue Petrostates of export revenue to the point of regime change, it’s far from certain they would be replaced with more liberal or pro-American governments will emerge.

And with developed countries account for a declining share of global oil demand, it’s getting harder for the US alone to change oil producer’s economic fates.  The President’s Blueprint would reduce oil producer revenue by quite a bit in absolute terms. Assuming Saudi Arabia, Iran and Venezuela maintain their current share of international oil production through 2025, the Blueprint would reduce their annual oil sales by $34 billion, $15 billion and $2 billion respectively (Figure 9). But that’s only a 2-7% reduction in total revenue, easily survivable by all but the most cash-strapped regimes.

Ensuring Supply Adequacy

Most potential international oil supply disruptions would take enough crude off the market to spike prices (see Libya), but not enough to create physical shortages serious enough to require rationing at a national level or military action to secure sources of supply. There are, however, exceptions. Low-probability, high-impact energy security events where supply adequacy would be an issue include another OPEC oil embargo, a major act of terrorism or widespread political instability in Saudi Arabia, or outright war between the US and China. In such situations, America’s net oil position matters and efforts to reduce oil imports, whether through vehicle efficiency or oil alternatives, help.

What’s Missing

If implemented, the Blueprint would deliver modest oil import reductions by 2025 and lay the foundation for more ambitious cuts after that. That’s good news for America’s trade balance and the vehicle efficiency provisions in particular will help protect the economy from future price spikes. But what’s missing from the Blueprint is a game plan making such spikes less likely and less severe. This requires effective foreign policy more than domestic energy policy, and a strategy for stabilizing international oil markets rather than hoping for energy independence. This has the best chance of delivering near-term energy price relief and is a necessary compliment to the Administration’s long-term energy security plans.



[1] EIA uses the National Energy Modeling System (NEMS) to forecast US energy market changes. We use a version of this model managed by the Rhodium Group (RHG) called RHG-NEMS to assess the alternative market and policy scenarios described in this analysis.

[2] See http://www.cfr.org/energy-security/energy-security/p22427 for a good overview of the range of views on what energy security means and how to improve it.

[3] See Economic Sanctions Reconsidered by Gary Hufbauer, Jeffrey Schott, Kimberly Elliott and Barbara Oegg (http://bookstore.piie.com/book-store//4075.html)