RFF: Security goals should reflect changed outlook for US oil, gas

US security goals based on crude oil import disruptions in the 1970s and ‘80s need to be reconfigured to reflect the country’s improved oil and gas outlook resulting from the burst of unconventional exploration and development since 2005, speakers said during a Nov. 30 discussion at Resources for the Future.

US security goals based on crude oil import disruptions in the 1970s and ‘80s need to be reconfigured to reflect the country’s improved oil and gas outlook resulting from the burst of unconventional exploration and development since 2005, speakers said during a Nov. 30 discussion at Resources for the Future.

“The domestic oil and gas supply sector is more responsive to prices now, raising the notion that the US could become the global swing producer and the Strategic Petroleum Reserve has less security value now,” said RFF Pres. Richard G. Newell. “Almost all price reactions lie in the drilling decision early in the unconventional exploration and development process. While a higher price can speed the process up for unconventional properties, the market cares more about barrels produced than production rates.”

Howard K. Gruenspecht, a senior economist at the MIT Energy Initiative who was deputy administrator at the US Energy Information Administration from 2004 through August 2017, said US oil-related security concerns involved the US Strategic Petroleum Reserve, fuel economic standards, and biofuel mandates. Oil market changes in the last decade and recent studies suggest that early macroeconomic estimates of oil price spikes’ impacts may have been overstated, he said.

Observing that the US Environmental Protection Agency was due to release its yearly final renewable fuel quotas later that day, Gruenspecht said biofuel mandates that agricultural interests favored originally were supposed to promote national security, but now are advanced as ways to reduce greenhouse gases. “The Renewable Fuel Standard is not doing what energy security advocates hoped it would in 2007, both in security and GHG mitigation terms,” he said.

The traditional US energy security paradigm focused on imported crude from politically unstable suppliers, noted Alan J. Krupnick, an RFF senior advisor who previously advised the administration of US President Bill Clinton on environmental and resource policy issues. Since the 1990s, crude imports have fallen, domestic production has risen, the ban on crude exports imposed following the 1973-74 oil supply interruption has been lifted, renewable energy’s contribution has widened, and resilience has emerged as a new goal, he said.

Security premiums appear

Oil security premiums emerged around 2009 when a major study found that price shocks had preceded the nine most recent economic slowdowns at that time, said Stephen P.A. Brown, an RFF university fellow who was energy economics and microeconomic policy analysis director at the Federal Reserve Bank of Dallas where we worked for 27 years. Brown now works as an economics professor at the University of Nevada at Las Vegas.

Security premiums, however, have looked less important in the last 7 years when new research has found that the US does not respond to oil-price shocks as much as it once did, Brown said. “Some studies have found that less US crude-oil import dependence has reduced US economic vulnerability during a supply interruption. There’s much less sensitivity to prices now. Reducing consumption may be more important now than increasing production.”

A new US energy strategy will have to include natural gas and electricity as well as crude oil and move from the earlier secure supply emphasis to addressing environmental issues meaningfully, Krupnick said. “The environmental movement has figured out that pipelines are the most vulnerable part of our nation’s fossil fuel system. That’s where the keep-it-in-the-ground movement is focusing its efforts,” he said.

It also has become necessary to rethink the strategy behind and management of the SPR, speakers agreed. “Many European countries, rather than having the government hold stocks, contract this to private companies. There’s also been talk about using tickets to contract for storage,” said Newell.

“It’s also important to remember that we already have commercial inventories that re significantly bigger than the SPR,” Newell said. “As long as the government manages it efficiently, however, there could be questions about moving our national strategic reserve to private operators.”

Contact Nick Snow at nicks@pennwell.com.

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