Index of U.S. Energy Security Risk

//Index of U.S. Energy Security Risk

Index of U.S. Energy Security Risk

 ASSESSING AMERICA’S VULNERABILITIES IN A GLOBAL ENERGY MARKET

The U.S. Chamber of Commerce, the world’s largest business federation representing the interests of over three million businesses and organizations of every size, sector and region.


Institute for 21st Century Energy                              
Executive Summary

Since the early 1970s, energy has occupied the minds of policymakers to a degree rarely seen before the rise in influence of the Organization of Petroleum Exporting Countries (OPEC) in the 1960s. Indeed, energy is recognized as among the top challenges to our Nation’s future prosperity, national security, and quality of life. These concerns have been consistently voiced by a number of administrations, both Democratic and Republican, since the Arab oil embargo in 1973. In the nearly four decades since, the risks of supply disruptions, price spikes, blackouts, shortages, and environmental concerns remain, solidifying energy as pressing national economic and security priority.

While energy security is a significant and continual concern, that concern has not been matched with concrete metrics that allow for a quantifiable and dispassionate assessment of our nation’s energy security, where it has been, where it is now, and where it might be headed.

Today, statistics highlighting the amount of oil we import or the price of gasoline at the pump are a shorthand way to express the vulnerability of U.S. energy supplies. Such statistics, while enlightening, are inadequate for the task of describing the totality of U.S. energy security. They tell us precious little, for instance, about the reliability of the grid, energy efficiency of the economy, availability of human and intellectual capital, supply diversity, price volatility, or energy expenditures, all of which influence our energy security. A more comprehensive measure of energy security that integrates all of these concerns is necessary.

This shortcoming is what the U.S. Chamber of Commerce’s Institute for 21st Century Energy (Energy Institute) seeks to address by introducing a first-of-a-kind annual Index of U.S. Energy Security Risk to aid policymakers, government officials, businesses, academics, and the general public in assessing the state of America’s energy security.

Given the importance of energy to the U.S. economy, an index that measures our energy security is long overdue. Analysts, policymakers, and the public will find the Index of U.S. Energy Security useful in analyzing and quantifying the impact of economic, political and international events on the energy security of the US. Before now, there has been nothing comparable in the energy realm, despite a great wealth of energy data.

The Energy Institute’s new annual index has four components that identify the major areas of risk to our energy security: geopolitical, economic, reliability, and environmental. Energy security has many dimensions that collectively encompass a range of concerns—long-term and short-term, domestic and foreign, economic and political, and, at the same time not all risks to energy security are equal. The Index incorporates 37 different measures of energy security risk, covering a wide range of energy supplies, energy end-uses, operations, and environmental emissions, that allow us to answer with precision and regularity the question: Is our energy security getting better or worse and, importantly, why?

The methodology used to develop the Index provides a powerful tool to evaluate the effect of alternative policies, quantifying potential energy security impacts such as economic and environmental factors, shedding light on unintended consequences of some policies and the difficult tradeoffs among competing priorities—figure ES-1 presents this methodology graphically.

FIGURE ES-1: Building the Index of U.S. Energy Security Risk


The Index is designed to convey the notion of risk, where a lower number corresponds to a lower level of risk to energy security and a higher number corresponds to a higher level of risk.

Besides providing a historical look at U.S. energy security, the Index can be used in at least three useful ways.

  • First, it can use recently collected and published data to help explain whether our energy security is trending better or worse. Our historical data of U.S. energy security over the years shows that, had this Index been available in the past, the warning signs of impending threats to our energy security would have been unmistakable. With the Energy Institute’s Index, shifting trends can be spotted.
  • Second, the Index can be used to assess the potential impact of new policies on U.S. energy security. Although current projections do not bode well for U.S. energy security, different policies scenarios can lead to measurably different futures.
  • Third, various analytical and statistical techniques can measure the aspects of energy security that have had, or are likely to have, the greatest impact on energy security risks (through the 37 metrics) and thus provide insights on where policies should be focused.

The Index begins in 1970, when energy security first began to enter the American public’s consciousness, and analyzes every year up to the present before extending years into the future to 2030. The Index relies on widely available US government data and forecasts, and in some instances on accepted industry supplied data.

The year 1980—the worst overall year for U.S. energy security risks—is set with an Index value of 100, and the Index values for all other years are set in relation to 1980 (figure ES-2). The year 1994 represents the year with the lowest energy security risks with a score of 72.6—a virtual tie with 1995.

In this inaugural 2010 edition, the Index of U.S. Energy Security Risk dropped in 2009 to 83.7, an improvement of 16.1 points from the previous year, the largest single-year movement in the Index throughout the entire historical record. This improvement was, however, the by-product of a severe financial crisis that exacted an enormous economic toll with a significant drop-off in energy demand that expected to be temporary.

Forecasts suggest that as the global economy recovers, the risks to U.S. energy security outlined in the Index will approach the highs seen in 1980-81 and 2008 and remain at over 95 through 2030.

The Index demonstrates that there were two clear spikes in energy security risks over the past four decades: 1980-1981 and 2008, and one large trough connecting them. Highlights of the Index by decade follow.

1970s — Oil Shocks U.S. Complacency: The impacts of the 1973 Arab oil “embargo” and the Iranian revolution are clearly visible in the Index. The Arab oil embargo and its aftermath caused the Index to rise from 79.7 in 1970 to 92.4 in 1976, after which energy security risks began to ease slightly. The economy was soon hit with its second oil shock of the decade in 1979 in the wake of the 1978 Iranian Revolution and the U.S. hostage crisis.

FIGURE ES-2: Index of U.S. Energy Security Risk, 1970-2030


These and other events provoked a panic in world oil markets that spurred sharply higher oil prices. Because oil played a much larger role in our energy economy in the 1970s—especially in the power sector—than it does today, the oil shocks rippled more strongly throughout the economy. After dipping to 86.1 in 1978, the repercussions of the 1979 Iranian revolution propelled the Index to 100 in 1980 and just under 100 in 1981, the highest levels of energy security risk in the historical record.

The oil crises highlighted the need for a national energy policy. In 1973, President Nixon launched “Project Independence:’ an initiative designed to achieve U.S. self-reliance in energy by 1980. Presidents Ford and Carter also proposed energy plans of their own, with President Carter, likening the battle for greater energy security to the “moral equivalent of war.” The decade of the 1970s was, therefore, a busy time for energy policy, with eight major pieces of energy legislation enacted into law.

1980s — Free Markets and the Decline of OPEC: Energy security risks in the United States fell sharply throughout the 1980s. From its peak of 100 in 1980, the Index of U.S. Energy Security Risk to fell to 75.9 in 1989, a 24% reduction in risk over the period. The election of Ronald Reagan signaled a marked shift in U.S. energy policy, with a greater reliance of free markets and a lesser reliance on federal regulation.

Also, many positive trends begun in the mid- to late 1970s took hold and continued throughout the 1980s to improve U.S. energy security.

On the supply side, complete oil price decontrol, a more accommodating production posture from OPEC, increasing production outside OPEC (including from Alaska’s North Slope and the North Sea), a growing strategic petroleum reserve, and the replacement of oil-fired capacity with coal-fired and nuclear capacity in the power sector combined to increase the amount and diversity of global oil supplies. From a high of over $36 in 1981, crude oil had plunged to a little over $14 per barrel in 1988, its lowest level of the decade.

On the demand side, greater energy efficiency across all sectors was spurred on by clear price signals. In the auto sector, implementation of Corporate Average Fuel Economy standards enacted in 1975 increased the efficiency of the U.S. economy at the fastest rate over the historical record.

Policy responses in the 1980s were not nearly as intrusive as those of the previous decade. Many policies focused on repealing earlier provisions that regulated prices and assessed windfall profits on oil. However, Congress also imposed a moratorium on leases for oil and natural gas exploration and production on Outer Continental Shelf during the 1980s.

1990s — A Rising Tide of Energy Security Risks: By the end of the 1980s, the risks to U.S. energy security, as measured by our Index, were as low as they were before the Arab Oil Embargo. This was a remarkable turnaround, and the trend towards great energy security continued into the first half of the 1990s, despite the invasion of Kuwait by Iraq in 1990 and Operation Desert Storm. By 1994, the Index achieved its best score—72.6.

However, as the 1990s progressed, a number of factors conspired to reverse the progress made throughout the 1980s. It is difficult to attribute this reversal in energy security risks to any one or even a handful of individual events. Rather, this change was the culmination of many small changes affecting energy security that when combined led to rising energy security risk and thus a higher Index value. Key policy initiatives this decade included the creation of a wholesale market for power that served to encourage construction of natural gas-fired generating capacity. The U.S. also agreed to the UN Framework Convention on Climate Change and signed, but has not ratified, the Kyoto Protocol.

As the decade came to a close, the Index had climbed higher, reaching 79.6 in 1999 and 870 in 2000. In due course, energy security risks would approach those seen in 1980 and 1981.

2000s — Energy Security Challenges for a New Century: The worsening energy security situation that began in the mid-1990s carried over into the new century. While the upward trend in energy security risks was interrupted early in the decade by an economic recession caused by the bursting of the high-tech bubble of the late 1990s and exacerbated by the terrorist attacks of September 11, 2001, the economy recovered and the U.S. energy situation worsened.

Increasing reliance on fuel imports, sharply increasing energy demand in China, India, and other emerging economies, and access to global reserves becoming increasingly difficult and capital intensive led to prices that were both volatile and high. After dropping from 870 in 2000 to 81.1 in 2003, the Index of U.S. Energy Security reached 99.8 in 2008, just fractionally below the peak index years of 1980-81. It is clear that without continued long-term improvement in energy efficiency, transportation, and environmental measures, our energy security situation in 2008 certainly would have been worse.

However, the economic crisis that began in 2008 caused the Index to fall by 16.1 points to 83.7. Much of the decrease in risk can be traced to lower energy costs and price volatility stemming from a collapse in energy demand.

An increasingly worrisome energy situation led Congress and President George W. Bush to enact two energy bills this decade—the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007.These acts provided a broad range of incentives, loan guarantees, and mandates designed to accelerate the commercial use of clean energy technologies, increase the share of renewable fuels, and achieve greater energy efficiency in appliances, lighting, and transportation. Newly-elected President Obama acted to stem the slide of the economy by enacting a large stimulus package, The American Recovery and Reinvestment Act, which contained about $42 billion in funding for energy programs.

2010—2030 — Forecast Energy Security Risks: While the years 1980-81 and 2008 represent the high water marks for energy insecurity across the entire historical period, there are clear indications that our future energy security risk may approach, and perhaps even exceed, these historic highs. Index scores of 95 and above are forecast to be the norm in coming decades, well above the historical average of 84.2.

The main drivers to increasing energy security risks appear to be those connected to rising energy costs and expenditures, and these in turn are driven in large part by increasing costs for oil and natural gas affected by geopolitical and economic external factors. Crude oil prices are projected to come under tremendous upward pressure as global demand rises, particularly in large emerging markets. With rising natural gas prices and the expansion of more expensive renewable generating sources on the horizon, electricity prices could be pushed higher.

The main drivers decreasing future risks are for the most part the same ones that helped moderate risks in the 2000s—ample and stable supply of transportation fuels and electricity sources, greater energy efficiency in the residential, commercial, industrial, and transportation sectors and continued diversification.

The Energy Institute’s Index of U.S. Energy Security Risk measures what always seemed self-evident—policies matter and have long-term implications. With this new Index, U.S. policymakers have a much better idea of the degree to which they matter. Looking ahead, the outlook for U.S. energy security is full of risks comparable to those of 1980-1981. Uncertainty surrounding legislation, new taxes, mandates, environmental regulations as well as economic growth and trade increase our energy security risk, which can exact a heavy toll in geopolitical, economic, and human terms.

This is not to say, however, that future energy crises are preordained, even if no further policies are implemented. Nor is it to say that implementing smart policies that lower the Nation’s energy security risks will guarantee that future crises are avoided. The choice before our nation is whether and how to take the right actions that limit our exposure so that when crises do occur—as they inevitably will—they are less disruptive to our economy, security, and well-being.

The Index shows that energy insecurity anywhere can create energy insecurity everywhere. In a constantly changing world, the nature of the risks to our energy security also is constantly changing, often in unpredictable ways. What is important, therefore, is that our energy systems have the resilience needed to weather the crises of the future.

It is not expected that the Index presented here will be the last word in measuring our energy security.

The Energy Institute will continue its efforts to revise and improve its metrics, and we welcome a constructive and active dialogue. By developing a transparent and objective means for measuring the once elusive concept of energy security, the Energy Institute is working to ensure that energy security considerations are more directly incorporated into the policy debates.

Institute for 21st Century Energy 

By | 2018-06-22T21:41:02+00:00 August 13th, 2010|Categories: Uncategorized|Comments Off on Index of U.S. Energy Security Risk