TODAY’S STUDY: U.S. ENERGY AND RISK

Helen Keller should have gone into the energy business.

Based on one of her most widely quoted observations, the blind and deaf heroine of the first half of the last century had a natural feel for the energy sector.

“Security is mostly a superstition. It does not exist in nature,” she wrote. “nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing.”

Keller was a brilliant and courageous woman and could have easily digested the two fundamental facts of energy: (1) It is essential; and, (2) getting it always has some kind of downside.

As detailed in the report below, U.S. energy keeps getting more vulnerable, especially as the result of its reliance on oil and oil products. Oil’s bloody history – punctuated by greed, killing, fire, destruction and devastation – has not remitted in the 21st century but goes on its mad way.

The world’s struggle for petroleum resources continues to fuel violence in the Middle East, West Africa and Central Asia and ecological blight in Western Canada and the Gulf of Mexico.

As climate change, induced by the excessive burning of petroleum products and other fossil fuels, melts the Arctic, the world’s oil powers are preparing to perpetrate oil’s signature blight on the undiscovered world deep beneath the Arctic Sea.

The energy security assessment below laughably found that the most secure U.S. energy choice is coal. That conclusion relies on a very narrow definition of "security" that surely does not include respiratory health risk factors.

It also found that environmental risk associated with energy continues to rise as the result of the failure to adequately invest in research on and development of alternative, pollutant-free technologies.

The alternative to reliance on environmentally ruinous and war-spawning Old Energies is to build New Energy infrastructure and learn to harvest this good earth’s sun, wind, deep heat and flowing waters. That too is not without risk.

Building adequate capacity quickly would be this nation's most ambitious undertaking since it geared up to confront the evils of Naziism. Costs in the near term could threaten the economy. Managing variability would demand the very best of grid operators. Transitioning the transportation system to electricity, compressed natural gas and advanced biofuel sources means unprecedented upheaval.

Keller’s “children of men” have a choice. They can continue pursuing ruinous sources of Old Energy or they can turn to the potential of the New Energies. Either way there will be no “avoiding danger” because energy is an essential principle of nature and security “does not exist in nature.”

What nature offers is choice.

From the darkest depths of the Great Depression, Keller – ever the optimist who believed fervently in the possibility of overcoming adversity because of what she herself had overcome – foresaw the potential for rebuilding. “We can build up a world of beauty and humanity,” she wrote, “or we can let the politicians and profiteers plunge us into another world cataclysm. Let all of us reflect earnestly on this choice.”

The choice today is no different. There are the sooner-or-later exhausted sources of energy that bring with them war and catastrophe and there are the ever-renewable sources of energy provided from the earth’s natural bounty. The magnificent adventure lies ahead. Reflect on it.

Index of U.S. Energy Security Risk; Assessing America’s Vulnerabilities in a Global Energy Market
2011 (Institute for 21st Century Energy/U.S. Chamber of Commerce)

Highlights

U.S. energy security risks worsened in 2010, and future risks are expected to be much higher than projected just one year ago. Last year’s dip in energy security risks highlighted in the Institute for 21st Century Energy’s inaugural edition of the Index of U.S. Energy Security Risk (Index) provided a brief if temporary respite because of the economic downturn. As the economy has picked up both domestically and globally, the underlying weaknesses in our energy security posture have reasserted themselves in 2011 and, unless things change, will continue to hamper the United States for decades into the future.

This 2011 edition of the Index incorporates the most current energy data, including the Energy Information Administration’s (EIA) Annual Energy Outlook 2011 (AEO 2011), to provide an up-to-date assessment of the trends having the greatest impact on energy security since the first Index was issued in May 2010. The Index is based on a combination of 37 different energy security metrics covering the years 1970 to 2035. Highlights include the following:

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Energy security worsened considerably in 2010.

Energy security risks rose sharply in 2010, jumping 6.5 points from a revised 91.5 in 2009 to 98.0 in 2010, much higher than anticipated in last year’s edition. It turns out that revised data now show much less of a decline in risk in 2009, and that a resurgence of high energy prices hit more quickly than expected by EIA in its AEO 2009. As a result, the overall energy security risk in 2010 was much higher, with the score of 98.0 being the fourth highest risk score since 1970.

Increasing risks were concentrated in measures related to higher energy prices and price volatility, particularly in crude oil.

Of the 37 metrics, 20 showed increased risk in 2010, 11 showed improvement, and six were unchanged from the previous year. Eight of the top 10 metrics showing the largest numerical changes in score from 2009 to 2010 were related to energy prices, price volatility, and expenditures. In addition, federal funding for research and development fell closer to pre-stimulus levels, and energy-related carbon dioxide emissions also rose as the economy picked up.

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Improvements in a number of energy efficiency and power sector risk measures plus a large decrease in risk from natural gas imports helped moderate the rise in the overall Index.

Greater energy efficiency in the commercial and industrial sectors, increased fuel economy and greater productivity per mile traveled in the transportation sector, and lower electricity costs and greater capacity diversity and margins in the power sector all helped to lower risk.

The potential of shale gas to improve the security of natural gas supplies and lower energy costs and expenditures is beginning to emerge.

Recent estimates double the volume of recoverable shale gas resources assumed in past estimates, leading to greater domestic and global supplies and lower gas imports. Increasing shale gas supplies and further improvements in natural gas extraction technologies will further delink the prices of crude oil and natural gas. Greater supplies of natural gas are expected to lower the costs of producing electricity and residential heating and other uses.

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Revised data indicate that energy security risks reached a record-high level in 2008. A U.S. energy security risk measured at 100.9 in 2008 slightly breached the previous high-water risk mark of 100 set in 1980. The Index is expected to remain very high for the foreseeable future.

Based on EIA’s latest AEO 2011, the Index is projected to average 94 over the entire 25-year forecast period to 2035. These high risk levels stem from many factors, chief among these being higher energy prices and expenditures. Risks would be higher still if it were not for steady gains in energy intensity and efficiency across all sectors moderating their impact.

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EIA projects that secure domestic coal will remain a mainstay of the U.S. energy mix and contribute to relatively stable retail electricity prices.

In addition, U.S. coal exports are expected to increase, especially to Asia. EIA’s AEO 2011 forecast shows that by 2030, coal exports could be more than 85% greater than projected just two years ago and could contribute to the greater security of worldwide coal supplies.

Geopolitical energy security risks rose to 97, 13.5 points above the 30-year average of 83.5.

Most of the increase in risks seen in this sub-index since the early 2000s is linked to higher crude oil prices and volatility and greater import expenditures. The metrics measuring security of global fossil fuel reserves and production were essentially unchanged from 2009.

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Economic energy security risks increased by 9.3 points in 2010 to 94.0, offsetting a large portion of the 17.1 point drop experienced in 2009.

This level of risk is well above the 30-year average of 73.7 for this sub-index and has been exceeded only in 1980, 1981, and 2008. Higher import expenditures and household energy expenditures help propel economic risks higher through at least 2029.

Reliability energy security risks increased 5.4 points to 111.0 in 2010, the highest recorded for this sub-index, with crude oil price volatility being responsible for much of the increase.

The score for this sub-index has hit 100 points or more every year since 2005, and projections indicate that levels of risk above 95 will be maintained through 2035, even after assuming that crude oil energy price volatility will return to historical averages.

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Environmental energy security risks, after falling for two years, climbed 3.5 points in 2010 to 92.7, primarily due to lower federal research and development (R&D) spending and rising carbon dioxide emissions reflecting economic recovery.

Despite this year’s increase, this is still the fourth lowest score in the sub-index record. Estimated future risks based on EIA’s AEO 2011 indicate steady improvement through the mid-2020s, driven largely by gains in efficiency and fuel economy and continued decarbonization of energy aided by large supplies of shale gas and increasing power production from renewables. U.S. carbon dioxide emissions from energy are still projected to rise, but at a rate of increase of less than 0.5% per year, much lower than the 1.0% to 1.5% annual rates of increase projected in the AEOs of just a few years ago.

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Introduction

This 2011 edition of the Institute for 21st Century Energy’s (Energy Institute) Index of U.S. Energy Security Risk (Index) provides an updated look at U.S. energy security since the 2010 edition was issued in May 2010. The Index incorporates 37 different measures of energy security risk that include: global fuels; fuel imports; energy expenditures; price and market volatility; energy use intensity; electric power sector; transportation sector; environmental; and basic science and energy research & development…

The Index stretches back in time to 1970 and uses the Energy Information Administration’s (EIA) Annual Energy Outlook 2011 (AEO 2011) to project forward in time to 2035.

The Energy Institute’s Index combines the 37 metrics into Sub-Indexes that identify the major areas of risk to our energy security: geopolitical, economic, reliability, and environmental. Depending on its relevance, each of the individual metrics was used to calculate one or more of the energy security risk sub-indexes.2 These four Sub-Indexes were then merged into an overall Index based on the following weightings:

• Geopolitical 30%
• Economic 30%
• Reliability 20%
• Environmental 20%

The weighted average of the four sub-indexes constitutes the overall Index of U.S. Energy Security Risk…

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This latest edition of the Index takes advantage of two primary sets of changes. First, the historical data have been updated to reflect the latest available information, including in some cases revisions to earlier preliminary data. Future editions of the Index will benefit from using more timely data reported monthly instead of annually. Second, forecasted data have been updated to reflect the EIA AEO 2011 published in April 2011.

In addition, based on feedback received from energy experts and users of last year’s inaugural edition of the Index, the Energy Institute has refined the definition and measurement of a few metrics and adjusted the distribution of the individual metrics and their weightings across the four sub-indexes. Although the changes have little impact on the overall Index, the risk trends within each of the four sub-indexes have been thrown into sharper relief as a result. These changes are discussed in greater detail later in the document in the section, “What Is Different in the 2011 Edition.”

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The Index is designed to convey the notion of risk, in which a lower Index number equates to a lower risk to energy security and a higher Index number relates to a higher risk. When evaluating the results, it is important to recognize that the Index moves along an open-ended scale. When the Index was developed, the score for 1980, a particularly bad year for U.S. energy security risks, was set at 100 to convey a relative sense of potential hazard. The historical average for the Index over the 30-year period 1970 to 1999, a period that includes times with very high (100) and very low (74.2) energy security risk scores, is 83.9. The 1980 baseline score of 100 and the 30-average scores found in table 1 can be used as historical reference points against which to assess current and future risk scores for the Index and the four sub-indexes.

One final point: Unless otherwise noted, all dollar figures are in real 2000 dollars…

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Index of U.S. Energy Security Risk: Outlook to 2035

Looking over the next 25 years to 2035, there is no reprieve from relatively high risks. Unlike the 2009 outlook, which suggested that risks would rise and level off sometime between 2015 and 2020, calculations based on EIA’s latest projection show future risks starting high and remaining high. Indeed, our energy security situation is forecast to remain exceedingly risky, with the high risk levels experienced in the 1970s, early 1980s, and late 2000s forecasted to be the norm.

The current Index calculates a future overall risk averaging 93.9 over the entire 25-year forecast period from 2011 to 2035, a level exceeded only eight times in the historical record. Changing expectations about economic, technological, market, and regulatory conditions between EIA’s AEO 2009 forecast, which was the basis of the forecasted Index results in the 2010 edition, and its AEO 2011 forecast, which is used in this edition of the Index, explain much of the difference in outlook.

The principal metrics contributing to high future energy security risks are those connected to crude oil prices, expenditures, and stock levels, despite the fact that EIA’s AEO 2011 projects lower crude oil prices in the out-years than it did two years ago. Unlike that earlier forecast, however, EIA now shows no near-term decline in prices. Keep in mind that the AEO 2009 was done at a time of a falling world price of crude oil and a contracting economy, so in the near term it forecast a sharp drop in price followed by several years of gradually rising prices.

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Two years later in 2011, it was clear that the world price of crude oil had recovered more quickly than anticipated, and thus the resulting outlook for prices over the near term was higher than had been projected in 2009. In other words, that breathing spell of lower crude oil prices in the AEO 2009 never materialized. Instead of a gradual increase in costs, they recovered almost immediately after 2009 and are not expected to let up for the foreseeable future. Over the longer term, the price of crude oil still is projected to be subject to continued upward pressure as global demand rises, particularly in large emerging markets.

EIA’s AEO 2011 forecast also indicates somewhat greater domestic oil production in the short term than it did in its AEO 2009. But by 2025, EIA forecasts that lower output from the Gulf of Mexico and Alaska will push domestic crude oil production about 1 million barrels per day lower, and by 2030 more than 1.3 million barrels per day lower, than EIA’s AEO 2009 forecast, adding to the insecurity of future oil supplies.

U.S. carbon dioxide emissions from energy also are expected to rise over the period, with population change being the primary reason for the increase. As a result of increasing energy efficiencies and use of lower-carbon fuels, however, projections in the AEO 2011 show a future rate of increase substantially below AEO projections made just a few years ago. Factors dampening future risks include: increased natural gas supplies primarily from shale gas; greater energy efficiency; a marked decrease in the energy and petroleum intensity of the economy; a decline in energy expenditures as a share of gross domestic product (GDP); and ongoing decarbonization of energy supplies.

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In addition to the changed outlook for crude oil, the AEO 2011 includes significant updates related to technically recoverable U.S. shale gas resources. It forecasts more than double the volume of shale gas resources compared to past estimates and lowers the volume of natural gas imports. EIA’s 2011 forecast also goes further in delinking crude oil and natural gas prices, in part because of the increase in shale gas supply and improvements in natural gas extraction technologies. More and more, natural gas prices in the United States are being set on the basis of domestic supply and demand fundamentals, coal prices, and other factors, rather than on the global price of crude oil.

Greater supplies of natural gas are expected to lower the costs of producing electricity. Whereas in the 2010 edition of the Index rising natural gas prices were expected to push future electricity prices higher, EIA’s latest outlook has less costly natural gas being used to a much greater extent in the generation mix. EIA also shows that coal continues to be a mainstay in the power sector, generating over 40% of the nation’s electricity. As a result of these two factors, EIA’s AEO 2011 projection shows lower retail electricity prices overall than it did two years ago.

Moreover, the improvement in the 2010 Index related to the security of natural gas appears to be part of a longer term trend that began in 2008 and based on EIA forecasts should continue out to 2035 when this risk, now scored at 127, will fall below 10. What we are seeing in these data are the first indications of the shale gas revolution and the potentially large contribution it could make, if allowed, to improving U.S. energy security.

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The moderating influence of lower energy intensity owes much to the steady improvements in the energy efficiency metrics for the residential, commercial, and industrial sectors. Transportation metrics also display accelerating trends in higher vehicle miles for each gallon of fuel and greater use of biofuels. The decoupling of economic growth and vehicle miles traveled noted in last year’s edition (which may signal more telecommuting and on-line activity) also is forecast to continue unabated.

These efficiency trends have helped drive down energy expenditures in general, and petroleum use in particular, as a share of GDP, thereby increasing the resilience of the economy by decreasing the impact of higher energy costs. Greater efficiency and use of natural gas also are helping offset rising risks associated with the increase in carbon dioxide emissions from energy noted above.

No Index can capture and reflect all of the factors that affect our energy security. EIA does not forecast wars, revolutions, new discoveries, or new or re-aligned economic and political alliances, but each of these things can and do occur with little or no warning. Since the 2010 edition of the Index was released a year ago, unpredictable events in the Gulf of Mexico, Japan, and the Middle East have created challenges for our energy security. Nevertheless, if the trends in EIA AEO 2011 hold, by 2035 the Index of U.S. energy security will, at 93.9, sit 10.0 points above the 30-year average, portending decades of high risk.