What is Energy Security? – Definitions & Scenarios

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Energy, Economic Growth, and Geopolitical FuturesWhat is energy security? For decades, presidents and pundits have talked about the importance of energy security as a vital national goal. But very few bother to define what the term really means and what achieving it would actually entail.

That’s because energy security is complicated, and multi-dimensional.  It goes beyond over-simplified notions of energy self-sufficiency or energy independence. It’s about where our energy comes from, but it’s also about the cost, reliability, sustainability, and scale of our energy use. Technical, economic, geopolitical and other factors all play a role, and one needs to understand how they interact.

We’ll take a critical look at practical definitions of energy security and how they inform actions and strategies to enhance America’s energy security—now and into the future. We’ll focus in particular on oil, given both its unique role in our economy and the fact that the United States still imports large amounts of oil despite the recent boom in domestic production.

Guests:

 

Key Questions:

  • What is the most useful definition of energy security? How does such a definition inform near-term and long-term goals to increase energy security? How energy secure is America today—what trends, opportunities, and risks do we face going forward?
  • Timeframe: How far into the future should we be considering when defining and planning for energy security? What are the connections between energy security and sustainability?
  • Physical Self-Sufficiency: how much does where our energy comes from matter—how important is energy “independence”/self-sufficiency ? Is it possible? (especially for oil).
  • Economy: What are the connections between energy security and the health of the economy? How do issues regarding cost, price, and affordability factor into energy security strategies? What kind of investments should we be making to protect and enhance America’s energy security.


 

Transcript:

Jan Mueller:

This is the Energy Xchange, conversations about how energy connects to the economy, national security, and sustainability. Helping you to understand a changing world. Thanks for joining us. I’m Jan Mueller. On today’s show, energy security. For decades, presidents and pundits have talked about the importance of energy security as a vital national goal. Very few have bothered to define what the term really means and what achieving it would actually entail.

That’s because energy security is complicated and multidimensional. It goes beyond oversimplified notions of energy self-sufficiency or energy independence. It’s about where energy comes from, but it’s also about the cost, reliability, sustainability, and scale of our energy use. Technical, economic, geopolitical, and other factors all play a role and one needs to understand how they interact.

Today, we’ll explore practical definitions of energy security and how they inform strategies to enhance America’s energy security, now and into the future. We’ll focus in particular on oil, given both its unique role in our economy and the fact that the United States still imports large amounts of oil despite the recent boom in domestic production.

Joining me to discuss these issues, we have three outstanding guests that I’m very pleased to have on the program today.

Charles Ebinger is a senior fellow and former director of the Energy Security and Climate Initiative at the Brookings Institution in Washington, DC.

Guy Caruso is a senior fellow at the Center for Strategic and International Studies, also in Washington, and former administrator of the US Energy Information Administration.

Evan Hillebrand is a professor of international economics recently retired from the Patterson School of Diplomacy and International Commerce at the University of Kentucky, and co-author with Stacy Closson of “Energy, Economic Growth, and Geopolitical Futures,” published by MIT Press.

Guy, if I could, I’d like to start with you. How would you characterize the current state of understanding regarding energy security, and is there a consensus definition? Do we need one, and how valuable would that be? What are your thoughts?

Guy Caruso:

I think it’s useful to start with a definition from the perspective that you bring. In my case, it’s that of a former US official in the energy area. For me, it’s access to energy supplies on a timely, affordable, and sustainable basis. That also includes the ability to respond to emergencies or disruptions, whether they be political or natural causes, in sustaining the ability to respond to energy shortages in whatever form they may occur.

Jan Mueller:

That’s an interesting way to look at it. We’re really looking at resilience, almost, as “are we ready for the unexpected?”

Guy Caruso:

Exactly. I think you have to make that distinction between being resilient and prepared to deal in both the short and longer term, which is I think where we often get misunderstandings when you hear political slogans such as “energy independence,” which, in the world we live in, is relatively meaningless.

Jan Mueller:

Understood. Charles Ebinger, how are things looking from your desk? Are people still talking about energy security, trying to define it, or is that just, in DC circles, assumed everyone knows what it means and no one really bothers to define it?

Charles Ebinger:

I think the problem is that different people have different perceptions of what it means for energy security. The kinds of things Guy was just talking about are what happens to a society at a macroeconomic level if there’s something like a major oil supply disruption that includes issues relating to inflationary impact, currency fluctuations, potential for loss of jobs in energy-intensive industries, that they aren’t competitive with the rise in the price, and changing patterns of global competitiveness brought on by a crisis.

My professional background has been primarily working in the underdeveloped world, where you have issues that … Not only do you have 1.2 billion people in the world that don’t even have access to a light bulb, needless any other form of commercial energy, it’s overwhelmingly important. Many of these people are farmers, and when they need to irrigate crops, they need electricity that will run two wells at the time they’re planting the crops or harvesting the crops. They need to make sure there’s energy available in the country to produce sufficient fertilizer supplies for these agricultural economies.

They really live at the edge, and while that isn’t the broad macroeconomic issues that countries deal with, I think it’s a part of energy security for a lot of people in the world that we often forget.

Jan Mueller:

It’s a good point. I guess, in our heart of hearts, we would like to see less developed countries get the access to energy to develop economically. What’s your perspective on how that might affect our energy security, whether it’s China, India, or Africa, or any other developing nation or region of the world that is increasing the demand for potentially a slowing supply?

Charles Ebinger:

Clearly, if we take the billion two, and many more who are what we call underserved, meaning they may have a lightbulb or two but not much else, clearly it’s extremely important, as we try to expand energy access, to all the world as the Secretary-General of the UN has called for, that how this energy is created is extremely important.

Obviously, to the extent that we can expand energy usage by renewable energy sources, such as solar, wind, renewables, do everything we can with advanced energy conservation technologies, and policies like demand-side management in the utility sector, this is vital, because were all these people to overwhelmingly move towards oil- and gas-based economies, that would of course have a dramatic impact over time on energy supply and demand and would very likely lead to high prices for both those fuels that, while they currently aren’t occurring, would be not very good for anyone in the global economy, except for, of course, producers of gas and oil.

Jan Mueller:

Okay, I’m glad we quickly got into the economic dimension of this whole thing, because energy security is normally thought of in terms of how much energy, but we all know it’s equally important is how much it costs. Evan Hillebrand, economics is your bailiwick. What’s your perspective? What’s an economic-focused definition of energy security, or just give me your general perspective.

Evan Hillebrand:

Okay, and my perspective is a little bit different from the others, because I’ve always been a quantitative modeler, and Guy and I have gone around with this for 40 years. My book really isn’t about energy security per se, it’s about the interaction of energy, economic growth, and international relations. I rely on a quantitative model. The international futures model that tracks five different kinds of energy for 180 countries for 40 years.

I start with projections from the EIA, Guy’s former shop, and I go on from there and change different assumptions as the analysis proceeds. I wanted a quantitative definition of energy security to facilitate my discussion. All the things Guy said about energy security and Charles, that I agree with, but they’re not really quantifiable, and with a model you need something quantifiable.

First idea was to say energy exports less energy imports over energy demand. That gives you a simple ratio that goes up or down. It changes a lot, given the assumptions you make about production and demand for all these countries. That really wasn’t complete, so I like the second definition better. Net nominal energy imports over nominal GDP.

The first used tons, it used quantitative measures of energy supply. This is using nominal, so prices get into it, but also, when you think about the long term, changes in energy efficiency change the level of security, as well. It doesn’t make too much difference in short-term analysis, but going out 10, 20, 40 years, changes in energy efficiency throughout the economy are terribly important to how we end up energy security-wise.

It gives me quantitative measures for all countries for all years, but energy security can’t be considered in terms of energy alone, because economic growth at home and abroad and geopolitical policies and domestic affairs elsewhere affect US energy security and again, you need, I think, a model and a framework for putting this all together. That’s what I tried to do in the book, although it’s just scenarios. It’s not a forecast. It’s making certain assumptions about futures in different areas and see how they work together to provide energy security or not.

Jan Mueller:

I think that’s extremely helpful, and to the point that I’m almost … I’ll admit, I’m most interested in. What you’re trying to say is that there’s not just how much energy you have, but how economically productive is the energy you do have. Is that a fair assessment?

Evan Hillebrand:

Of course. If energy production is flat, GDP is 1% year growth, but you’re becoming 1% a year more efficient in your energy use, you don’t need to produce any more energy to be in the same position you are. There’s been enormous gains in energy efficiency for almost all countries for the last 20 or 30 years. I expect that to continue. It might improve or it might slow down, but you have to have an idea what’s going to happen in energy efficiency as well as energy production.

Jan Mueller:

Sometimes people talk about energy productivity in terms of dollars per unit energy. Is that the right way to look at it, or should it be the amount that we pay for energy versus the economic productivity that we get from that dollar invested in energy?

Evan Hillebrand:

Both are important, but when I use nominal, that means if there’s a price spike, the amount of resources in your economy going to energy are much different than if there’s a price decline. You’re much less energy secure in a price spike situation, if you’re an energy importer, than otherwise. You have to account for prices as well as quantities.

Jan Mueller:

Oil, as an example, has done some interesting things recently. We’ve seen sustained high oil prices in the $90 to $100 a barrel range, and then in the past year we’ve seen, unexpectedly by most accounts, incredibly low oil prices back below $40 a barrel, and hovering in that range now. What do your scenarios say about the economic … If we stay low or if we go back to high or if we have bouncing back and forth in between, what is the economic implications of that, and what does it suggest that we might do to mitigate those impacts?

Evan Hillebrand:

That’s an interesting question and again, when Guy and I were young people, 40 years ago, in the first energy crisis, this was the issue. We saw how high energy prices really hurt the American economy. Then for the next 40 years, we’ve been thinking in those terms. What’s the macro impact? In the ’70s, we thought there was a tremendous impact.

The sensitivity of the economy, US economy, to high prices was quite large. Then in the next decade and the next decade and the next decade there were increases in energy efficiency and changes in the structured economy … That multiplier, that impact coefficient, kept getting smaller and smaller. It’s still positive, higher prices overall hurt the US economy, but it’s much less than it was in the old days, because of the structural transformation.

Charles Ebinger:

This is Charlie. If I could pick up on that, one of the areas of our country that was most decimated by the first oil shock was, of course, New England, because it was overwhelmingly heavily dependent on imported oil, and particularly in the electric power sector. Not only did New England industry get socked because all of a sudden its input costs were so high, that’s when you had the mass migration of industry from the upper Midwest, which also got hit hard, and New England, to the Sun Belt. You lost a lot of industrial activity in New England that’s really never, ever recovered.

It had a dramatic impact, but on the other hand, it changed the way we use oil to the extent that whereas we used to have a huge concentration of oil use in the power sector, today we use almost no oil in the electric power sector throughout the continental United States. It has created a structural change, that we now see the power sector moving towards cleaner sources of energy like renewables. Some of these changes, while they’re painful while you go through them, in the long run they have some social benefits.

Guy Caruso:

If I could just pick up on Charlie’s point, the long-term nature of these solutions that are implicit in Ev’s scenarios and his quantitative modeling have been difficult in the subject we’re talking about today, energy security, because the energy industry requires a long-term horizon.

That doesn’t square up with our energy politics. What we’ve had is a very much of a roller-coaster ride in the politics of energy in this country, with inconsistency in the amount of money we’ve devoted or resources we’ve devoted to research and development, and in some of the policies. As Charlie pointed out, economics and some policy led to removal of a lot of oil being burned under boilers, electric power in other sectors, and now we’re overwhelmingly focused on the transportation sector.

I think when you think about 30, 40 years out, which you asked in your question, Jan, we really need to focus on the mobility in the case of oil, and improvement in the ratio of how much oil we need to promote the mobility that our citizens want in this country, and in most countries.

Jan Mueller:

I’m still curious about some of Evan’s scenarios. I’m not sure if they’re scenarios where suddenly a large volume of oil coming out of the Middle East, for example, either goes offline or comes under extreme threat. With increasing friction, just this past week with Saudi Arabia and Iran, what are scenarios around that fit in your model and again, if that was a chronic issue, how our economy would respond and how we as a nation might respond?

What is our contingency for that kind of an event? That’s the easy one. We’re interested in also the longer-term economic costs of this economy of maintaining your dependence on oil, but if you … The easier scenario is where something very specific happens. What are your thoughts on that, Evan?

Evan Hillebrand:

First, I disagree with “easy” and “hard.” The model I used is a long-term model. It doesn’t really help much on a short-term cutoff in oil supply. I wouldn’t use it for that way. It’s not built to be used that way. My scenarios involve either long-term growth in energy supplies …

There are four scenarios with high growth and energy production. Actually five in which the US production goes very well, and four scenarios with lower energy production. Peak oil in the ’20s in the Middle East, peak gas in the world in the ’30s, the US doing somewhat better in most of the scenarios. That’s the kind of scenarios I work with, not the cutoffs. Not the intermediate cutoffs.

Charles Ebinger:

Yeah, this is Charlie. Obviously on the short term, price shock for whatever reason it might occur, because of turmoil in the Middle East or elsewhere. I guess our first line of defense, and that of our allies, is our own strategic petroleum reserve that we have built up to be available to help deal with an emergency, and also the oil sharing mechanism and arrangements we have with our major allies and the International Energy Agency that Guy knows a lot more about than I do.

That’s our first level of effort. Then depending on the size and duration of the crisis, you go to other policies, if you really were talking about a shortage of fuels for the American consumer. I just want to remind people that unfortunately, it’s only with the advantage of hindsight that we now know, those of us old enough to remember ’73, ’74, and the gasoline lines, that they were artificially created because of the price and allocation controls we had in effect and in point of fact we really didn’t have a serious disruption.

That’s not solace for somebody that stood in line in ten-degree weather, and to be able to buy ten gallons for their gas-guzzling car, but I think we have learned a lot from the past, and hopefully one of the things I think we’ve learned is, although it can be politically difficult in the middle of an emergency, is the best thing you can do is to do as little as possible in terms of trying to interfere with the operation of the market. The market is probably the best steering force to bring the crisis back into balance than any series of policies we might think make sense at the time, but sometimes create more problems than they’re designed to help with.

Guy Caruso:

This is Guy again. I think we’ve learned that as Charlie has correctly pointed out that there’s this inherent conflict that perhaps the best solution for most emergencies, whether they’re politically driven or even natural disasters, is the market. Let the market sort it out. However, that’s politically difficult.

Ideally, we would like to have redundancy in terms of strategic petroleum reserves, to be able to bring them on during disruptions, or even excess productive capacity, but no company- no commercial operation- wants to carry any excess inventories or any excess productive capacity. Therein lies that inherent conflict between dealing with disruptions and in trying to mitigate the crisis effect on the economy that you refer to.

It’s been a real struggle, and we’re once again taking another look at what should the size of our strategic petroleum reserve be, and that’s been included in the latest Department of Energy Quadrennial Energy Review.

Jan Mueller:

Okay, thanks very much, Guy. We’re going to take a short break, and when we come back we’re going to look specifically at how is the United States doing in terms of energy security. We have a panel who’s had the benefit of many decades of experience, so we’re interested to talk about what the trend is. Are we getting more or less energy secure and are we secure enough? We’ll be right back.

Jan Mueller:

And we’re back, talking about energy security with Charles Ebinger, senior fellow with the Energy Security and Climate Initiative at the Brookings Institution, Guy Caruso, a senior fellow at the Center for Strategic and International Studies, and Evan Hillebrand, a retired professor of international economics at the Patterson School of Diplomacy and International Commerce at the University of Kentucky.

During the break, when we were talking about how the United States is doing, we took a look back. We haven’t had many decades of experience of volatility in the oil markets. How did that affect US policy? It’s no secret that there’s been a lack of consistency in US energy policy. It seems to go with what the price of oil is, up or down. Guy, what’s your perspective on that?

Guy Caruso:

Indeed, Jan, the energy politics often does conflict with good energy policy. That’s what happened in this country with a lot of attention being given to energy policy and energy legislation after the Arab oil embargo of 1973.

It’s been very inconsistent policy, with some good legislation on both the demand and on the contingency planning side in mid-’70s, and then in the ’80s and even most of the ’90s, energy prices were lower and we’ve had a reduction in money spent, for example, on research and development and lack of consistent energy policy. Then became popular again to deal with energy in the middle part of last decade, with some legislation passed. In an industry that requires long-term thinking and consistency, it’s conflicted with the short-term nature of the politics of energy in this country.

Jan Mueller:

Right now, we’re in a low oil price environment, and from your average consumer looking at gas prices, they may be forgiven for thinking that oil is cheap and plentiful and we don’t have an energy security problem. Evan Hillebrand, according to your model, low oil prices can lead to increased or decreasing energy security, depending on a bunch of other factors. Can you tell me a little more about that?

Evan Hillebrand:

Sure. It’s not the model, this is the logic that we’ve worked at … The University of Kentucky, we came up with this kind of analysis. The theory is, more US and global energy production, lower prices, should be good for energy security. It means less monopoly power on OPEC, less vulnerability to choke points, Straits of Hormuz, and those are good things. Okay.

You can call this a move towards rebalancing global energy security system. I’m using a term from Dan Eberhart’s book “The Switch.” US moved from a global policeman to US becoming a supplier of energy as a last resort. The global system relies more on market forces, not monopoly power. That’s a nice world. Some of our scenarios, that works out to really enhance US energy security, but we’re assuming then that energy production is growing everywhere. GDP growth is strong everywhere, or almost everywhere.

China’s energy production is good, and it’s transforming its energy, moving away from coal, and it does well in some of the fracking technologies too, even though it doesn’t look like that right now. In this world, you assume geopolitics are moving a benign production too, and I use Robert Zoellick’s term, China becomes a responsible stakeholder and goes along with the international order as it is now so we have peace and harmony, low energy prices, everything is an improvement from the current situation. That’s a nice scenario.

Even if you assume energy does well in the US, if it doesn’t do as well in the rest of the world, and especially if China doesn’t make this transformation we’re talking about, and if China doesn’t become a responsible stakeholder, it still becomes a fairly aggressive revanchist state, at the same time the US, because it’s become more self-sufficient, disengages to a certain extent from the rest of the world. It reduces its military expenditure, its military footprint. It’s not a global policeman in a world that’s not becoming any less hostile. It’s not clear that that’s a more energy secure position for the US.

You could have more aggression by China in East Asia, you could have more turmoil in the Middle East, especially a possibility of Iran becoming a regional hegemon through violent means. Just having US good energy production, the way we worked the logic in these scenarios, doesn’t necessarily leave the US in an enviable security position, depending how other partners play out both politically and with their energy situation.

Jan Mueller:

I’m also curious, though, about just the economic … What you’re saying is that the geopolitical scenarios may vary based on oil price. Just the economic, both domestic and internationally, of low oil prices … We’re seeing [economic] slowdown at the same time that we’ve been seeing low oil prices, both. The United States seems to be on a slow but steady economic recovery. There’s slowdown in China and elsewhere. Is that what we would have expected? Other people, like Daniel Yergin, are saying that we’re not seeing the boost that we would’ve expected.

Evan Hillebrand:

In a long-term situation, I don’t think energy prices have a tremendous impact. Economic growth is a function of technology and growth of the labor supply. Labor supply is not growing in Europe and the US. Long-term growth only comes from increases in productivity and technology. Fluctuations in energy price affect variability in economic growth, but unless you have sustained extremely high energy prices, I wouldn’t expect that to affect long-term economic growth significantly.

Charles Ebinger:

I have a little different take on that. Right now, if we look at how much oil is consumed in the world every year, we need to replace about the equivalent of 4 million barrels a day of new production. We’re about a 95 million barrel-a-day market. That’s just to replace the oil that we use. The difficulty is that these prices, and with the current glut, are likely in my view to drive prices potentially down even more in the short run.

We’re seeing major cutbacks in capital expenditures by the oil companies. The most recent figures I’ve seen that as well have historically invested around $650 billion a year looking for new oil. They’ve announced cuts of $200 billion. The other problem is when we were above $100 a barrel, people were looking for oil in challenging areas like the deep offshore and the high Arctic.

Again, you come up against the dichotomy that we still have these scenarios showing huge projected oil growth over the next 15, 20 years, in the world, and yet we don’t have prices anywhere near the level that would justify going into areas where some of the oil that we might need is likely or potentially, hopefully will be.

Rather, to place that most of the remaining oil will be is likely to be right square in the Middle East, in the volatile area we see right now. Most people believe that if Iraq could politically stabilize, that it could be a very significant producer. Some people say as high as 10 million barrels a day. Some even say higher. We know that Iran probably … If it could open up and over 10 or 15 years change its policies and invite western technology in, that it might resume being a significant producer. The Saudis, probably, could be an even larger producer.

If we have this politically volatile area that no one’s going to take the risk to invest in, and we’ve closed off because prices are too low to justify it, the higher cost areas where we might not have the geopolitics as creative as they are in the Middle East, I don’t see how we don’t run the risk, if we have these sustained prices say for two or three years, and further fall off in capital expenditures, that we don’t set ourselves up down the road for a dramatic increase in price to bring on the new supplies that most of the energy companies’ models are saying are going to be needed, primarily in Asia.

Jan Mueller:

Evan, how would you respond to that?

Evan Hillebrand:

I don’t see why Charles would expect companies should invest heavily right now at low prices. They have a glut, so you defer capital investment until prices start rising and you need additional production. I don’t see that’s a problem at all.

Charles Ebinger:

I’m saying they’re not investing because of the low price, not that they should invest, and that if they don’t continue to invest because prices remain low, perfectly logical from their point of view, but it means that we aren’t replacing the oil that we’re using up globally every year, and down the road that would seem to me that we would eat into the overhang, the 2 million barrels overhang now, and that this could set the stage for significant price rises down the road.

Evan Hillebrand:

I don’t understand why you’re worried about not using up immediately the oil … To replace the oil that you’ve used. If prices are low, there’s plenty of oil available. There’s no reason to rush into new production when you don’t need the oil at the low price.

Charles Ebinger:

The Exxon and Shell forecasts, Evan, are showing that by 2035, 2040, that the world will need another 15 million barrels a day. That will go from something like a 95 million barrel-a-day market to 110 million barrel-a-day market. Where is that new oil supply going to come from if investments aren’t made because of low prices? That’s what I’m trying to argue.

Evan Hillebrand:

Investment doesn’t have to be made in 2016 for the …

Charles Ebinger:

No, they don’t have to be made in 2016, but if we kept these prices through 2018, 2019, at some point there might be a problem.

Evan Hillebrand:

There might be, but again, it seems like the market is in a better position to make that determination. The people who make a living doing that can choose to increase production when it makes sense to do so. I wouldn’t, as a desk-bound analyst, have the presumption to think I know when they should invest or not.

Jan Mueller:

Guy Caruso, what happened in the industry when prices were really low again back in the early ’90s and people forgot about the [Arab] oil embargo and the Iran oil crisis?

Guy Caruso:

It did stimulate increased demand, the lower prices, and as both Charlie and Ev pointed out, the higher cost sources, investment, did decline. What has changed a bit now is the technological change in the upstream part of the oil and natural gas business, through horizontal drilling and hydraulic fracturing.

Some of those high-cost areas were made profitable by improvements in technology, however, there is a limit, and right now that seems to be somewhere in the $40 to $50 range, whereas the companies now see that they can’t make money at those prices. They are cutting back capital expenditures, as Charlie pointed out. We’ll probably have, over time, some recovery in price.

The question many economists and analysts are debating now is how long will it take for that recovery to take place. You have some that think it won’t happen until 2017, but there will be a response. The technological change that we’ve witnessed has done at least one thing that’s informed this debate, and that is it’s shortened the investment cycle a bit in that the response to high or low prices is shorter because of this new technology.

We can develop some of these supplies in a shorter time frame than we would have done in the ’80s or ’90s when we had lower oil prices. That’s one thing that has changed. There has been a structural change in the oil and gas industry that we can maybe take 3 to 5 years now to bring on a new frontier of investment, such as Bakken, North Dakota, whereas 20 years ago it may have taken 5 to 7 years.

It does make somewhat of a difference, and consumers clearly respond to the lower prices. We’ve seen new car sales being very strong in 2015 and the average miles per gallon of new cars has actually gone down in the last six months, which after having gone steadily upwards in response to the higher oil prices. That’s some of the changes that have taken place.

Jan Mueller:

If low oil prices just have the effect of basically increasing our dependence on oil and deferring investments that we might make to diversify our transportation system and maybe decrease our vulnerability to oil shocks, whether they’re geopolitical or economic or other. Let’s get to the heart of the question. Is volatility, the external risks and threats, increasing? Is our own vulnerability to those threats increasing or decreasing? The sum total of putting those two together is what really makes for energy security. Charles, what’s your overall assessment of where the United States is and where we’re heading?

Charles Ebinger:

We have seen a bump in gasoline consumption, probably because of the low prices and as Guy pointed out, we’re seeing people going back to less fuel-efficient cars, and we seem to be on a continuous track before. I wouldn’t get too alarmed by that, but if it became a long-term trend and we started seeing gasoline consumption rising to 250,000 barrels a day a year for a few years, then I think I’d put out some alarm bells that we need some policies to curtail that one way or the other.

Jan Mueller:

Guy, would you agree with that? Let’s look a little bit further down the road, 10, 20 years and beyond.

Guy Caruso:

In terms of vulnerability, it’s clearly … If our domestic production declines and we’re importing more, that does harm vulnerability. The other part of it is how are we prepared to deal with this in terms of our strategic petroleum reserves? It’s already mentioned our membership in multilateral organizations like the IEA, to keep our contingency planning for disruption, I think, strengthened.

I think what we’ve seen in the Obama administration has been recognition that it would be difficult to really deal with this on a … Either tax increases or legislation that would reduce carbon emissions in the case of the climate change issues. There are now in place pretty strict targets for energy efficiency improvements in the transportation sector, in the electric power industry.

It seems as though that, regardless of who wins in 2016, that’s probably the direction we will continue to go because of a lack of interest or political willingness to deal with this from a tax or carbon restriction point of view. I think it presents a challenge for those who are really thinking of this in 20, 30-year time frame, from an energy policy point of view.

Jan Mueller:

Okay, and Evan, despite referring to yourself as a “desk-bound analyst,” let’s say you’re the president of a major shipping company that runs on trucks and planes and boats. After looking at all your different scenarios, how does that affect your calculation about how you should be planning your business plan for the long haul?

Evan Hillebrand:

How about if I answer from the point of view of a retired investor. I guess I’m still investing in oil stocks. I think that we have a short-term decline in prices. I think they’ll rise again for the reasons Charles is saying about in the long-term. I just don’t want my companies to go invest inefficiently right now.

Jan Mueller:

Okay. I think that’s a good perspective. Guy or Charlie, you want to imagine yourself as an investor right now? There are a lot of people getting out of oil, not so much because they can’t make money, but they just can’t make sense of it anymore. It’s just too unpredictable. It’s always been unpredictable, and it’s even gotten worse. In that case, what is a business or a policy perspective? This is not predicting the future, it’s preparing for the unexpected.

Charles Ebinger:

I would certainly begin to nibble at some of the better energy and oil service companies. Because I do believe that we haven’t seen the bottom of the crude market and I would be nibbling, not buying heavily, but for the reasons I said earlier, I see no scenario where demand for oil, if you’re a long-term investor, will not lead to higher prices. I think getting in at this level or nearly this level will prove to be a good investment for someone that particularly has a three, five year horizon or even longer.

Guy Caruso:

I think I would make a distinction between a company that is heavily … Their portfolio is heavily focused on oil versus gas, for example. I’m pretty convinced that the supply of natural gas, because of the developments, because of the technological developments with shale gas, is going to be with us for a long time, and to me that means low natural gas prices.

I think I’d probably be a little bit bearish on a company that’s heavily invested in gas, but I would be very bullish on companies that have products that use natural gas as a feed stock. If they could count on low natural gas prices for their production of whatever their product is, chemicals or petrochemicals using gas, so that’s a positive on the industries that will be using natural gas, especially in North America.

On oil, I think the jury’s still out because we really don’t know whether those same technologies that are being applied to shale gas are going to follow the same path in their success rates in terms of productivity gains and recoverability gains on oil. We’ll hear from one CFO after another, We’re so early in this technological development on the oil side that we just don’t know.

I’m less confident on the price of oil staying low than I am on natural gas. I agree with Charlie and Ev that in the longer term, it’s likely we’re going to see an increase in the price of oil, but how high, it’s pretty difficult to say. My own view is the $70 to $80 barrel long-term real price range.

Jan Mueller:

Okay, thanks very much. We’re going to take another short break, and we’ll be right back.

Jan Mueller:

We’re back again, talking about energy security with Charles Ebinger of the Brookings Institution, Guy Caruso of the Center for Strategic and International Studies, and Evan Hillebrand, a recently retired professor of international economics at the University of Kentucky.

We were talking at the end of the last segment about whether or not our energy security is increasing or decreasing. That’s an important question, but we’re just a few weeks after the climate talks in Paris where nations did commit to both goals, but also money, making investments in greenhouse gas reductions, but also measures that may affect our energy security and effect an energy transition for both developed and developing countries.

I guess the question is, there’s been resistance to climate action on economic grounds, but there’s also going to be a case made for economic benefits. Will the United States and the rest of the world get galvanized behind that idea, or is it going to be more of the same? Charlie, what are your thoughts coming out of Paris?

Charles Ebinger:

I think, coming out of Paris, I’m probably as confused as I’ve ever been on the long-term direction of markets. If you believe that these commitments are real, or even are substantially real, it means that we’re going to see a dramatic move over time, going to be a long time, probably, away from fossil fuels.

Keep in mind that at the same time the global community at Paris is saying we can’t continue business as usual with fossil fuels. We’ve already in our country had major pension funds come under attack, like shareholders on why they aren’t divesting out of fossil fuel stocks, principally coal to date but oil and gas are also getting looked at.

We also have some Wall Street analysts, embryonic,  a small number, that are saying energy stocks, including some of the big oil company stocks, should be downgraded because the prices are reflective of their reserve base and a lot of those reserves can never be burned because of concerns about climate change.

We certainly have a lot of student groups on campuses joining the choir. All embryonic, the reality is we continue to run apace of the world burning the oil, gas, and coal at very high rates. Coal is coming down in terms of percentages, but we still volumetrically see coal planning to double in the Indian subcontinent within the next decade, where it’s already creating terrible environmental havoc.

It’s just hard to know, but I think these trends are going to become sources of major political conflict. I think it’ll become a big issue in the US elections in terms of what we do in our home energy policies. It’s going to be an interesting ride until this all sorts itself out.

Jan Mueller:

During the break, Guy, you made some comments about how, for example, the $100 billion fund that came out of Paris, investments there might actually enhance energy security, both globally and in specific nations. Can you talk a little bit more about that?

Guy Caruso:

Sure. I think the key to both improvement in greenhouse gas emission reductions that were promised in Paris and in energy security, is the emerging economies, as Charlie mentioned earlier. That’s where 85 to even 95% of all growth in energy demand is projected to come from in the next 20 to 30 years.

How that money is spend, if its 100 billion, hopefully, is really actualized. We can do … We as a set of nations can do a lot of good, not only to the climate but also for energy security, if that money is spent in a way that improves the efficiency, the way all of us use energy, especially those emerging economies.

I think that’s going to be the key indicator, is watch whether that 100 billion actually comes forward, as was promised, and how it’s spent. That’s my view on that one.

Jan Mueller:

Okay, thanks. Evan, you said you actually had an IPCC scenario in some of the models that you worked on.

Evan Hillebrand:

Yeah, I do. First I want to say that I’m skeptical of the catastrophic anthropogenic climate change predicted by the IPCC computer models. That’s based on my years of experience working with models. The IPCC models are not validated in any meaningful sense. They can’t predict the recent past without significant atheoretical add factors. They have not forecast the near future for 1995 to 2015 at all well. They never even attempted to explain the long-range climate change over the past 1,000 or even 500 years.

I don’t think they’re credible, and it’s amazing to me that so many people put so much faith in them. My views are similar to those expressed by extremely eminent climate scientists such as Richard Linzen or Judith Curry or Roger Pilkie. We do have an IPCC scenario in our book. It’s put there because some people that helped us put this together believe in catastrophic anthropogenic climate change and think it’s reasonable to take this seriously. Many people do.

All I can say about the scenario, when we market our book and we talk to audiences and we present to them the scenario based on assumptions about people’s behavior to follow through on these IPCC commitments, this scenario is always rated the least likely, the least probable of any of the things we’ve done, because people don’t believe these assumptions are really very realistic.

Jan Mueller:

Evan, I just want to understand you, that if the world goes along in the direction implied by the outcome of the Paris talks, at least moves, makes investments in renewable and energy efficiency and renewable technologies to replace fossil fuels, is that a net gain for energy security? Is there a case where those investments are counterproductive to energy security in any of your scenarios?

Evan Hillebrand:

In the scenarios where you reduce carbon fuel use, certainly CO2 goes down, temperature is slightly down, but this is only a 40-year projection, so it’s not dramatically different. Does that produce energy security? I don’t know. It’s hard to say what the political reactions will be in this country. We have to assume in this scenario that India really makes a dramatic change in its behavior, but we assume they want to, they want to assume a Gandhi-like low growth status.

$100 billion a year divided among the countries, you’d have to … The assumption is that that would be used productively. Guy acknowledges that. The experience of foreign aid to any country has been extremely poor. Angus Deaton just got the Nobel Prize for pointing that out. To think this $100 billion handout to leaders in these countries is going to magically transform their economies, I think it’s very unrealistic.

Jan Mueller:

It’s certainly not a lot of money. It’s something. It’s more than I have in my bank account, but it’s …

Charles Ebinger:

Just to put that in context, I’m actually working on a paper on India post Paris, and the numbers to really transform the Indian energy economy come in at $2.3 trillion over 15 years. Even for the $100 billion, how much of that’s going to go to India? We’re talking about a level of capitalization to deal with this problem that’s got to find a way to bring the private sector in, in ways to help finance the transition. That’s never going to happen through the transfer of public funds.

Jan Mueller:

Right. We wanted to focus on energy security, but obviously we’re living in a world where climate’s a big issue, so what are the other mechanisms that direct some of that capital? Is the price of carbon the best and only way to do that, or are there other ways of moving in that direction? I guess Evan, despite your comments about climate science, that there are better and worse economic ways of doing this. Do you have thoughts on the macroeconomic pros and cons of just a price on carbon? Is there something else that we need to be thinking about?

Evan Hillebrand:

My scenario is mostly motivated by price on carbon. Economists like Nordhaus suggest that’s the most efficient way to do it, and I think he’s probably correct.

Jan Mueller:

Looking domestically, Guy or Charlie, in terms of the United States, what else do we need to be doing? Do we pass the price on carbon as a carbon tax or something else, and then sit back and watch the market work, or do we need to be thinking about ways of reducing the cost of compliance with any commitments that we make?

Guy Caruso:

I think it’s to the extent that we can, use a market-based solution. That’s by far the most preferable, but the politics of energy are going to make that very difficult no matter who wins in 2016. I think my own view goes back to the inconsistency is that we should have a consistent long-term research and development effort to try to deal with this from a technological point of view but from energy efficiency and perhaps carbon capture and sequestration has been extremely expensive but maybe spending enough money will bring the cost down at the scale that’s required. That’s my focus, would be more on the technological side, given the political realities of energy politics in this country.

Charles Ebinger:

On that note, while it’s very unpopular to say anything about atomic energy, I would argue that we ought to be doing much more in R&D on smaller scale modular reactors, because whatever you think about nuclear, and whatever concerns you have, they at least don’t emit CO2. I hear people say, “It’s too costly.” I say on one level I hear this as an existential threat. It’s an existential threat. What are we talking about costs as long as it is in some reasonable continuum?

I believe just like carbon capture and sequestration, if we had done more pilot plants around the world, maybe we would have brought down the cost, and I think the same thing might prove true down the road with small modular reactors. That certainly isn’t in the vanguard of what most people are talking about these days.

Jan Mueller:

What you’re getting at there, Charlie, is that there’s … And Guy as well, and for that matter, Evan, that innovation, when it happens early and often, is a good thing, and we’re in a better position and energy security is enhanced. The idea that whether it’s not just policies, but how do we create fertile conditions for a more rapid innovation in the energy sector in the private sector?

Maybe just as a closing round of discussion, what are your thoughts on how … Besides the price of carbon. It would be very important to have a price of carbon, but there’s other things, where there’s R&D or that government does to not choose winners and losers, but just having more participation in the industry. Guy, what has been the history of the US government trying to stimulate innovation on this level? Like you said, it’s been very inconsistent, but if we wanted to be more directed about it, what might we be looking at?

Guy Caruso:

I think the national labs in the last 30 or 40 years, have done a lot of good work. The problem, as has been pointed out several times, is it’s been a roller coaster ride in terms of funding and some of those success that they’ve had has been commercialized. They’ve played some role in the horizontal drilling technology and metallurgy that we’re now using commercially.

I think the most important thing would be to recognize that most of these technologies have been 20, 30, and even 40-year time horizons. That is, I think, where the US government can play the best role in not as you say, picking winners and losers doesn’t seem to have worked very well.

Jan Mueller:

Charlie, what are your thoughts?

Charles Ebinger:

It’s never popular, but if we’re talking globally here, but the US is a big part of this too, we really have to get rid of, in my belief, energy subsidies. The International Monetary Fund came out with a report in the last year saying that subsidies for energy of all kinds totaled over $1.2 trillion.

You put that in the context of talking about $100 billion for climate change, and the fact that these subsidies are adding to the problem by keeping fossil fuels below the real total cost, it’s just silly, and it’s an easy thing to say but the minute you start talking about eliminating subsidies and everybody comes out, people say, “Oh, but the only gas industry gets more than you do, and you should have that.”

It’s politically probably totally impossible, but I think on a global basis, if it’s in the context of future discussions about global climate change coming out of Paris, we could at least begin on a global basis with hopefully the US taking the lead in some areas, chip away at this, I think it would have a very positive impact.

Jan Mueller:

Evan, as a macroeconomist, what are your thoughts on subsidies or anything else on that topic?

Evan Hillebrand:

I don’t have anything to add to either of the previous two speakers. Subsidies are bad. Production subsidies trying to choose the right technology for a new car, obviously is more a matter of, I think, graft and corruption rather than efficient use of money. Broad-based support for research on new energies and use of energies, I think, is good, and national labs are surely a big part of that. More broad-based effort in the universities would also be useful.

Jan Mueller:

Gentlemen, thank you all very much for your thoughtful comments and a great discussion. We’ve been talking with Charles Ebinger, senior fellow and former director of the Energy Security and Climate Initiative at the Brookings Institution, Guy Caruso, senior fellow with the Center for Strategic and International Studies, and also the former administrator of the US Energy Information Administration, and Evan Hillebrand, recently retired professor of international economics at the Patterson School of Diplomacy and International Commerce at the University of Kentucky, and also co-author with Stacy Closson, of “Energy, Economic Growth, and Geopolitical Futures,” published by MIT Press.

[End]

1 Comment

  1. I have always equated this issue to energy security on a personal level. Starting with that thought in mind some years back, I outfitted my home with enough solar power to cover our entire annual electric consumption. This includes coverage for not only cooling and lighting but heating -essentially eliminating gas and/or fuel oil costs, and 2 plug-in cars bringing annual gasoline consumption to negligible levels. I feel I am protected from the (apparently) fast approaching day when the petrol-dollar arraignment ends and the cost of energy in US Dollar terms rises significantly. Note that this solar effort was successfully done for reasonable cost in New York state at 42 degrees north latitude. Imagine what could be done in sunny “red” states such as Florida, Arizona, etc?

    If a larger percentage of the population followed this path the US government would not have nearly the current level of interest in stationing US troops in the middle east to protect oil sources that we no longer required. I might be able to watch evening TV without being subjected to wounded warrior pleas for money.

    I am saddened that the American public is so clueless in this area. Even stripping away all of the potential / future benefits outlined above, any homeowner who installed solar on an existing home receives a guaranteed savings for all the years spent living in that structure.

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