Energy Security by the Numbers

Last spring the Institute for 21st Century Energy, a U.S. Chamber of Commerce affiliate, released The Index of U.S. Energy Security Risk, a report aimed at clarifying one of the most ambiguous buzz terms of the last several years: energy security.  Thrown around ad nauseam by politicians, the media, and scholars alike, any advancement in securing our energy sector has been overshadowed by an inability to determine what is meant by this vague, but important objective – begging the question, how can we protect something we have failed to define?

Our understanding of energy security has lacked clarity in part due to its conceptual complexity. All part of the popular lexicon, none of the descriptive terms often evoked in conversation (reliable, green, affordable, resilient, domestic, etc.) suffice as exhaustive definitions.  While it might be tempting to parse out favored adjectives and champion them as the most critical, promoting an oversimplified understanding of energy security only prohibits real progress toward achieving it, simultaneously condoning a public lack of awareness about energy and its global importance.  Toward the goal of influencing policy decisions to mitigate current risks and meet future energy needs, the Institute for 21st Century Energy constructed the most expansive attempt at quantifying energy security to date.

The Index of U.S. Energy Security Risk

The report attempts to answer the question, “Is our energy security getting better or worse, and importantly, why?”  The Index covers each year from 1970-2009 and provides a forecast for the years 2010-2030 based on past trends and potential policy initiatives.  Contingent on the events of any given year and additional inputs, the Institute provides an assessment of risk and assigns the year a number ranging from 1 to 100, with 1 exemplifying the lowest risk to U.S. energy security and 100 the highest. The year 1980 is assigned an index of 100 and is benchmarked as the worst year for energy security risk in the presented data, largely due to major international events and general market volatility in the 1970’s.  Registering a score of 72.6, the year 1994 marks a historical low in U.S. energy security risk.

The Institute for 21st Century Energy selected 37 metrics identified as critical components to the health of energy security and weighted them based on their individual inputs.  For example, the metric “Security of World Oil Reserves” is weighed by a diversity index and each applicable country’s Freedom House rank.  Intended to illustrate the most pressing influences on energy security, the metrics were organized into 9 categories (Global Fuels Metrics, Transportation Sector Metrics, etc.) allowing the researchers to view singular dimensions of similar data and analyze why related metrics occasionally diverged.  The 37 metrics and 9 categories were then divided between 4 sub-indexes, weighted based on their components and the consideration that some metrics are applicable across categories (Geopolitical: 30%, Economic: 30%, Reliability: 20%, Environment: 20%.).  The combination of the 4 sub-indexes influences the index of risk assigned to any given year.  A more detailed explanation of this process can be found here (within Data Tables).

Historically, the metrics for economic and reliability risk have experienced parallel peaks and troughs.  On average, geopolitical risk measures higher than either of the aforementioned but the environmental sub-index has experienced higher peaks in risk than any of the others.  With a movement toward clean technology, the Institute for 21st Century Energy forecasts that between now and 2030, the environmental index (followed by reliability and geopolitical) will experience much lower risk levels until about 2020, after which they will plateau due to energy and climate change legislation, likely altering CO2 emissions projections.  Economic risk is expected to continue to increase and will eventually break the 100 point ceiling.

The remainder of the report provides an interesting chronology of the events impacting energy security and policy between 1970 and 2009, illustrating that the entanglement of geopolitical, reliability, economic and environmental events cannot be ignored.  The historical account reminds us that the positive and negative repercussions of the past reach farther into the future than we may realize.  While not to suggest any policy single-handedly causes a crisis, or vice versa, our ability to assess the magnitude of our decisions within the energy sector will ideally augment legislative accuracy in the future.

Revisiting the Past

Reviewing past geopolitical events, economic crises and policy changes through the lens of the Index clearly illustrates the magnitude of impact that our choices have on energy security.  The promotion of fossil fuels in the 1960’s, 70’s and 80’s influenced infrastructure projects and research and development (R&D) investments with long-term consequences.

In the 1960’s oil-fired electricity generation was not only common, but also encouraged as a means of decreasing air pollution and minimizing health impacts. As domestic demand outpaced supply, the U.S. began relying more heavily on imports increasing U.S. vulnerability to the geopolitical turmoil during the Yom Kippur War.  The subsequent Arab Oil Embargo (1973) led to skyrocketing oil prices and encouraged policymakers to look toward a heavily regulated resource, natural gas.

Long-standing state and federal regulation mandated that residences and industry use natural gas for heat instead of allowing utilities access for power generation.  Wellhead price controls were a disincentive to exploration and production and by the early 1970’s the natural gas reserve base was shrinking.  Regulators could not align prices with the rapid movement of oil prices and policymakers considered natural gas too valuable for power generation, further exacerbating the crisis.

Despite decreased government regulation and increased exploration incentives for natural gas, prominent federal legislation continued to inhibit progress in the 1970’s.  The Energy Supply and Environmental Coordination Act (1974) sought to convert oil and natural gas-fired power plants to coal and the Powerplant Industrial Fuels Use Act (1978) banned the construction of new oil and natural gas-fired electricity generating plants and industrial boilers, quickly extinguishing momentum.  Moreover, India’s 1974 atomic weapon test and the Three Mile Island reactor incident ended U.S. nuclear waste recycling altogether, reinvigorating substantial public concern regarding nuclear technology.  Once again, new capacity encouraged the use of coal.

While the events of the 1970’s were significant, policymakers failed to heed the message.  In 1980, President Carter signed the Crude Oil Windfall Profit Tax, intending to commandeer the surplus revenue oil producers received during the price spikes of the previous decade.  Greater supply and government deregulation resulted in lower than anticipated energy prices and by 1988 there were no windfalls to tax.  It became clear that refiners were able to replace domestically produced product with foreign crude (which bypassed taxation), promoting reliance on foreign suppliers.  Eight years later, President Reagan signed the Omnibus Trade and Competitiveness Act repealing the tax.

During the late 1960’s and throughout the 1970’s, domestic and international events influenced U.S. government policy serving to directly or indirectly increase U.S. reliance on coal.  The larger role of coal in the U.S. energy mix was a contributor to keeping the Environmental Sub-Index at 100 points or above during the 1970’s.  Over the course of the 1980’s, lower energy prices discouraged publicly and privately funded investments in R&D allowing overall investment to fall over the first half of the decade.  Investment levels rebounded in the mid 1980’s but by the end of the decade they failed to reach levels seen in the early 1970’s.  Despite the fact that low energy prices contributed to lowering energy security risk in the short-term, the perception of stability served as a disincentive to increase efficiency and develop new technologies, in turn increasing long-term energy security risk.

This index not only quantifies our risk based on the culmination of statistics, it provides much needed perspective. For example, geopolitical events affecting the price of oil in the 1970’s would not have the same impact on electricity prices now, as we use about 88% less oil to produce electricity today than in 1978.  Employing metrics allows us to revisit past policy decisions and ascertain impact based on magnitude and more complex assessments. While it is easy to read such a chronology and decry historical choices, a more nuanced understanding of the past will better serve our future policy decisions.

Guiding the Future

Becoming accountable also means we must be willing to acknowledge when the policies we support do not actively advance our goals.  Shortly after publication, Michael A. Levi of the Council on Foreign Relations and Trevor Houser of the Rhodium Group, inquired how the findings of the Institute for 21st Century Energy measured up against the energy policy voting history of the Chamber of Commerce.  Ardently against cap-and-trade legislation, the Chamber of Commerce often laments the policy arguing it will harm U.S. energy security.

After recreating the findings of the Institute for 21st Century Energy using the original data and methods, Levi and Houser stacked it up against the American Power Act, a cap-and-trade clean energy and climate change bill proposed by Senators Kerry and Lieberman in the middle of 2010.  Under the Chamber’s definition of energy security risk and using the same modeling system employed by the U.S. government to produce the Annual Energy Outlook, Levi and Houser’s results suggest that the American Power Act would in fact significantly decrease U.S. energy security risk across the board.

While the Institute for 21st Century Energy suggests that energy security risk index in the U.S. will rise by 18% (from 83.7 to 98.8) between now and 2020 (barring new domestic legislation), Levi and Houser found that the American Power Act would have slowed this increase, resulting in at least an 8% lower (than predicted) index by 2030.  Overall, the legislation would decrease risk for 19 of the 37 metrics and each major sub-index (geopolitical -7%, economic and reliability -5% each, and environmental -19%).  Only 4 out of the 37 metrics increase in risk under the bill, predominantly due to the cost of cap-and-trade and declining natural gas production.  Moreover, the authors contend that their estimates were conservative given their lack of access to confidential data and the exclusion of a bill provision intended to increase R&D and improve vehicle efficiency standards.

During the recent State of the Union, President Obama made a significant declaration, calling for 80% of the nation’s electricity to come from renewable sources by 2035.  Currently, the U.S. generates 40% of its electricity from clean sources and it was previously expected that by 2035, clean sources would account for 55% of electricity generation. This new goal pushes our percentage of clean source electricity generation from 55% to 80%, leaving some to wonder what would have happened if the Kerry-Lieberman bill had passed.  Michael A. Levi revisited the projected numbers in an article, “A New Twist on Obama’s Clean Energy Goal”, discovering that under the bill, 74% of electricity would have come from clean sources by 2035.

Not only does this make President Obama’s newly stated target more ambitious, this goal will force the reconsideration of consistently rejected policy on the part of the Chamber of Commerce. Levi and Houser conclude by suggesting that while this index is not the only way to measure energy security, the Chamber of Commerce ought to revise its energy policy strategy if it intends to stand behind its research.

“Based on the EIA forecast our analysis suggests that by 2015 the U.S. energy security Index will once again top 95 and remain there through to 2030.”

Energy Security Risk Timeline and Forecast

In the future, the Institute for 21st Century Energy sees rising energy costs and expenditures (from increasing oil and natural gas costs) driven by geopolitical and economic factors as the largest components of increasing energy security risk. Forecasts suggest that global demand for oil will increase and crude prices will clear the highs seen in 2008, while the integration of natural gas and renewables could drive up electricity costs.  Conversely, it is suggested that decreasing energy security risk will likely be attributed to the overhaul of transportation fuels and electricity sources, greater energy efficiency, stability, supply diversification and decarbonization.  Domestic policy developments and capricious international events are obvious wildcards in any market forecast.

Call to Action

Considering that the protection of U.S. energy security will continue to serve as justification for policy decisions, individual statistics about grid reliability, price volatility, and fuel diversity do not provide an adequate picture of the vigor of our energy sector.  Given current forecasts, it is unarguably important to be able to identify and quantify energy security risks, note the data trends, and assuage problems using the most viable resources.

Revisiting fossil fuel policy in the U.S. allows one to gain a strong sense of the difficulty in linking policy to progress.  Unintended and damaging long-term consequences further underscore the importance of using a high quality metric system as the foundation for decision-making.  Ideally, measuring current legislation against index metrics would provide insight, making it more difficult for expedient legislation to be neglected.

Although there is no silver bullet, capitalizing on the most beneficial policy options for deploying clean, renewable energy while maintaining adequate defense against disruption will allow the U.S. to diminish risks to energy security and appropriately balance the individual components vital to the energy sector.  Hats off to the Institute for 21st Century Energy; we have the numbers, now we need the action.

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Elspeth Montgomery is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website.   The views expressed are those of the author and do not necessarily reflect the position of AEL.

2 Responses to “Energy Security by the Numbers”

  1. R Margolis says:

    One interesting insight I noticed in the report was the increased risks from natural gas despite the increase in supplies. The Institute found that having most of the resources in just a few countries (e.g., Russia, Qatar, and Iran) brought a greater risk due to the potential of cartels in gas sales. Thanks for posting this report.

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