Index of U.S. Energy Security Risk:Assessing America’s Vulnerability in a Global Energy

Market

Stephen EuleVice President for Climate & Technology

Institute for 21st Century Energy

USAEE10 October 2011

U. S. C h a m b e r o f C o m m e r c e

Energy Security: 4 Decades of “It’s a Problem”

U. S. C h a m b e r o f C o m m e r c e

What Do We Mean by “Energy Security”?

Energy security does NOT equal energy independence Energy independence not realistically achievable & may not even be desirable in today’s globalized

economy

It’s not just about oil! Many factors interact to affect energy security—it’s not just about oil!

Reliability & diversity of production and supply Diversity of energy sources & fuels Geopolitical & physical vulnerabilities Price & price volatility Reliability of delivery & transmission systems Consumption patterns & energy efficiency Emissions from energy Intellectual capital and advanced technology & many more . . .

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Need for an Index of U.S. Energy Security

How can we tell from if U.S. energy security is getting better or worse? Where have we been? Where are we now? Where are we headed? What actions would make a difference?

Energy security moves along a spectrum of possibilities ranging from very good to very bad

Indexes are a common way to convey complex economic, social, environmental and other information and trends

An annual index measuring U.S. energy security was long overdue Permits us to answer with precision & regularity: Is our energy security

getting better or worse, and why?

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Goal of Index

Create a means to track energy security over time Update annually with new data & forecasts

Use recently collected and published data to help explain whether our energy security is trending better or worse.

Assess future effects of different policy scenarios Use EIA NEMS output to assess the potential impact of new or

alternative policies on U.S. energy security.

Identify factors that have greatest impact Use various analytical and statistical techniques to measure those

aspects of energy security that have had, or are likely to have, the greatest impact on energy security risks and thus provide insights on where policies should be focused.

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What Makes for a Good Metric?

An ideal metric will reflect: Sensibility – Relates to common-sense expectations Credibility – Data sources are well-recognized Transparency – Derivation & manipulations are clear Completeness – Historical data, preferably back to 1970 Forward-looking – Preferably extends out to 2030; dovetails cleanly with forecasts Updatability – Each year, historical data extended, and new forecast outlooks

prepared But reality sometimes falls short of the ideal

Historical data missing, esp. in the 1970s Forecasts weak, and sometimes impossible Dovetailing of historical and forecast data series

Compromises are sometimes needed between what’s theoretically ideal and what’s realistically achievable

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For Risk, Which Way is Up?

For most metrics, upward trends indicate worsening conditions For a few, upward trend indicates improving conditions.

For compiling risks across metrics, essential that directions have consistent meaning.

Here, we have adopted the convention that we are measuring security risks, and that bigger is not better. Most of the metrics (about 3/4s) naturally lean toward up

being bad, down being good. As “risk” seems open-ended, hard to think about lower

numbers indicating ever-increasing risk, but bounded at zero. A few metrics need transformation into comparable

measures of security risks.

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Building the Index

Complexity demands many metrics: 37 metrics covering 1970 to 2035

Covers all sectors. metrics used to create 4 Sub-Indexes

Geopolitical Economic Reliability Environmental.

Sub-Indexes combined to create overall Index of U.S. Energy Security Risk.

Index designed to convey the notion of risk a lower number, lower risk, higher

number, higher risk.

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U.S. Energy Security Over the Years

Higher risk values and spikes generally coincide with times of fuel shortages, high & volatile prices, & international tensions.

Four clear spikes in Index—1974, 1980/81, 2003 & 2008. 2010: What a difference a year makes

respite from rising energy security risks in 2009 was temporary Index will average 94 from 2011 to 2035.

1970-1999 Average

U.S. Energy Security Risk Index: 1970-2035

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U.S. Energy Security Risk: 2010

Energy security risks worsened in 2010 At 98.0 , 4th highest risk score since

1970 Increased risks in 2010 primarily from

Higher energy prices & price volatility Lower R&D spending

Bright spots Energy efficiency Power sector capacity & diversity Shale gas

Energy security improvements from shale gas are becoming evident

U.S. Energy Security Risk Index: 1970-2035

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U.S. Energy Security Risk: 2011-2035

The Index is expected to remain very high for the foreseeable future

Higher future risks primarily from High energy prices Energy expenditures

However Coal will remain mainstay of power

production (85% increase in US exports) Electricity prices remain relatively flat (w/o

new EPA regs) Future risks moderated by

Improvements in energy intensity/efficiency Greater use of shale gas

U.S. shale gas development has lowered gas import

risks.

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Trends to Watch

Energy security improvements from shale gas are becoming evident

U.S. shale gas development has lowered gas import risks.

Higher crude oil prices will increase economic risks Price volatility harder to predict

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Trends to Watch

Canadian oil sands has lowered global crude oil reserve risks dramatically Development of unconventional U.S.

reserves could lower risks further.

Development of shale gas resources globally could lower gas supply risks.

Decline in risk if EIA global shale gas estimates

are developed.

Reserves risk plunges as

Canadian oil sands come on

line in 2003.

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Trends to Watch

Transmission continues to be a problem NIMBY Hinders deployment of renewables

Power generating capacity diversity set to improve slightly Shale gas? Nuclear builds after Fukushima?

Transmission hasn’t kept up

with changes in peak demand.

How will reaction to

Fukushima and shale gas change

this outlook?

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Trends to Watch

Vehicle miles traveled per GDP continues to decline Trend began in mid-1990s Possible reflection of greater

telecommuting

Telecommuting & on-line shopping?

Federal basic research and energy R&D remains a concern Hydraulic fracturing and horizontal

drilling show value of new technology

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Key Conclusions

Energy Institute’s Index of U.S. Energy Security offers way to accurately & dispassionately assess U.S. energy security Comprehensive source of energy data that tell compelling story Allows policymakers, economists, energy professional & public to understand

how our energy security has evolved & where it might be headed & why Uses combinations of data in ways that increase their relevance Index designed to track energy security over time

Updated annually Use NEMS to

Understand implications of past policy and current policy alternatives Measure their energy security impacts.

Can be used to assess “What if” scenarios What if global resources identified in EIA shale gas study are developed? What if Arab Spring leads to true democratic revolution in Middle East?

Declines in risk during 1980s to mid-1990s remarkable–free markets work!