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Is it Worthwhile to Fight for Energy Security?

Clinton Andrews

Rutgers University

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Energy Security

Definition of Energy Security Imperfect Markets for Oil & Electricity Rationales for Governmental Intervention The Special Role of Energy Carriers Energy Security as a Policy Driver

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Focusing on Energy Security

Yergin: “The objective of energy security is to assure adequate, reliable supplies of energy at reasonable prices and in ways that do not jeopardize major national values and objectives.”

Energy is a modern necessity. Energy security is a polarizing issue in U.S. politics.

US Dept of Energy 2000

U.S. Energy Use, 1635-2000 (Quadrillion Btu)

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Energy Security

Definition of Energy Security Imperfect Markets for Oil & Electricity Rationales for Governmental Intervention The Special Role of Energy Carriers Energy Security as a Policy Driver

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Petroleum

Petroleum market suffers from dramatic and persistent price volatility.

Unresponsive demand, lumpy supply, difficult to balance them.

Both consumers and producers seek external interventions that improve price stability.

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5 Price Stabilization Regimes

Standard Oil monopoly (< 1911) Texas Railroad Commission’s internationally

influential pro-rationing of production (>1930s) Seven Sisters cartel (Exxon, Shell, British

Petroleum, Mobil, Chevron, Texaco, and Gulf) (1920s - 1970s)

OPEC (1960 - present) effective only briefly during the 1970s-80s

Saudi-American regime (1970s - present)

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Political Involvement in Oil

Political interest in this economic commodity is not merely cynical—it is also prudent

Interventions for market transparency, stability WW II: “oil not only determined capabilities, but

also defined strategic objectives” Cold War onwards: ballistic missiles and nuclear

weapons diminished oil’s military importance Balance of trade, interdependence

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Security not the only Rationale

<WW I, Pursuing profits, Standard Oil persuaded U.S. government to intervene in the internal affairs of several Middle Eastern oil states.

1917: UK redrew the map of the Middle East in part for administrative convenience.

1950s-60s: France and USA intervened in oil-rich Viet Nam mostly to slow the spread of communism.

1960s: oilfields nationalized to return control to local decision makers. 1973: Western responses to the Arab oil embargo were also a gesture of

solidarity with Israel. 1979: Blockade of Iran in part reflected western disapproval of hostage

taking. 1991: Gulf war a direct response to the invasion of one sovereign nation by

another. 2003: Iraq war also about deposing a dictator who had threatened to use

weapons of mass destruction.

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U.S. Petroleum Balance 1949-2000

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Petroleum Balance of Trade 2001

Importers Exporters

Country Oil Imports as % of Consumption

Country Oil Exports as % of Consumption

Oil as % of Export Earnings

China 31 Canada 41 14

France 96 Iran 176 85

Germany 95 Nigeria 640 98

Haiti 100 Norway 3042 57

Iceland 100 Saudi Arabia 477 90

Japan 98 UK 45 8

Jordan 100 Venezuela 399 73

USA 55 Vietnam 111 20

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Electricity

Supply is capital-intensive, storage is minimal, transmission and distribution are intrusive, price signals have been weak

Industry sought and received regulated public utility status by 1930s

Security = adequate & reliable supply Security also = protect physical &

informational elements

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Energy Security

Definition of Energy Security Imperfect Markets for Oil & Electricity Rationales for Governmental Intervention The Special Role of Energy Carriers Energy Security as a Policy Driver

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U.S Energy Policy Rationales I

August 30, 1954. President Eisenhower signs the Atomic Energy Act of 1954, opening the way for development of a civilian nuclear power program.

July 6, 1962. President Kennedy condones a test in Sedan, Nevada as part of the Plowshare program seeking to develop peaceful uses for nuclear explosives.

January 1, 1969. President Johnson signs the National Environmental Policy Act.

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U.S. Energy Policy Rationales II

November 7, 1973. President Nixon launches Project Independence, with the goal of achieving energy self-sufficiency by 1980.

December 22, 1975. President Ford signs the Energy Policy and Conservation Act, extending oil price controls into 1979, mandating automobile fuel economy standards, and authorizing creation of a strategic petroleum reserve.

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U.S. Energy Policy Rationales III

April 20, 1977. President Carter unveils the first National Energy Plan.

April 5, 1979. President Carter announces gradual decontrol of oil prices and proposes a windfall profits tax. Subsequently announces a program to increase the nation's use of solar energy, establishes temperature restrictions in nonresidential buildings, proposes an $88 billion decade-long effort to enhance production of synthetic fuels from coal and shale oil reserves.

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U.S. Energy Policy Rationales IV

July 17, 1981. President Reagan sets free market emphasis to reduce government regulations and subsidies, decontrol of natural gas, research, and nuclear licensing reform.

April 23, 1985. Beginning Reagan’s second term, he calls for “energy strength” built upon existing “stability and security.”

March 17, 1987. President Reagan's Energy Security Report outlines Nation's increasing dependence on foreign oil.

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U.S. Energy Policy Rationales V

December 21, 1990. President George H.W. Bush develops strategy and legislation on federal appliance efficiency standards, plus electric and gas utility deregulation.

April 1994. President Clinton’s plan focuses on industrial competitiveness, energy resources, national security, environmental quality, and innovation. Acts administratively to continue electricity deregulation, support conservation & renewables.

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U.S. Energy Policy Rationales VI

May 17, 2001. President George W. Bush releases controversial “Cheney” plan, which emphasizes supply-side strategies.

October 1, 2002. Revision to DOE’s mission following September 11, 2001: “we share a common overarching mission: national security.”

January 28, 2003. President Bush says: “With a new national commitment…the first car driven by a child born today could be powered by hydrogen, and pollution-free.”

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U.S. Energy Policy Objectives

Security improvements (reliability of supply, self-sufficiency, non-proliferation)

Environmental improvements (climate change, air pollution, water pollution, land damage)

Economic improvements (reasonable prices, less price volatility, job growth)

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Classical Rationales for Governmental Action

“above all, do no harm” Improve allocational efficiency

(correct market failures like pollution) Improve distributional equity

(correct gross unfairnesses like freezeouts) Improve macro stability

(correct structural imbalances like trade deficits)

Enforce national norms, pursue national objectives, cater to special interests?

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Energy Security

Definition of Energy Security Imperfect Markets for Oil & Electricity Rationales for Governmental Intervention The Special Role of Energy Carriers Energy Security as a Policy Driver

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What are energy carriers?

Electricity made from coal, methane, hydro, nuclear, solar, wind….

Gases (Hydrogen, Methane) made from methane, coal, oil, biofuels, electricity…

Liquids (Biofuels, Gasoline) made from biostocks, oil…

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Full System Efficiencies of Alternative Types of Cars

Current technology car with gasoline fueled internal combustion engine

Fuel cell car operated on gaseous hydrogen from methane steam reformer

Fuel cell car operated on gaseous hydrogen from electrolysis via wind farm

Electric car recharged by wind farm

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Current technology car with gasoline fueled internal combustion engine

12% losses between oil well and filling station: factor 0.88

38% efficiency of engine: factor 0.38 20% losses in the automatic transmission

between engine and wheels: factor 0.80 Full system efficiency = 0.88 x 0.38 x 0.80

= 27%

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Fuel cell car operated on gaseous hydrogen from methane steam reformer

12% losses between gas well and reformer: factor 0.88 30% losses in reformer from methane to hydrogen: factor 0.70 10% losses for compression of hydrogen: factor 0.90 10% losses for distribution of gaseous hydrogen: factor 0.90 3% losses for hydrogen transfer: factor 0.97 50% for conversion to electricity in fuel cells: factor 0.50 10% parasitic losses for the hydrogen fuel cell system: factor 0.90 10% electric losses in the drive train between battery and wheels:

factor 0.90 Full system efficiency = 0.88 x 0.70 x 0.90 x 0.90 x 0.97 x 0.50 x

0.90 x 0.90 = 20%

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Fuel cell car operated on gaseous hydrogen from electrolysis via wind farm

10% losses between power plant and electrolyzer: factor 0.90 30% losses for water make-up and electrolysis: factor 0.70 10% losses for compression of hydrogen: factor 0.90 10% losses for distribution of gaseous hydrogen: factor 0.90 3% losses for hydrogen transfer: factor 0.97 50% for conversion to electricity in fuel cells: factor 0.50 10% parasitic losses for the hydrogen fuel cell system: factor 0.90 10% electric losses in the drive train between battery and wheels:

factor 0.90 Full system efficiency 0.90 x 0.70 x 0.90 x 0.90 x 0.97 x 0.50 x 0.90

x 0.90 = 20%

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Electric car recharged by wind farm

10% losses between power plant and homes: factor 0.90 8% losses in small home-based AC/DC battery

chargers: factor 0.92 20% losses for battery charging and discharging: factor

0.80 10% losses in the drive train between battery and

wheels: factor 0.90 10% bonus for regenerative braking: factor 1.10 Full system efficiency = 0.90 x 0.92 x 0.80 x 0.90 x 1.10

= 66%

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Full System Efficiencies of Alternative Types of Cars

Current technology car with gasoline fueled internal combustion engine = 27%

Fuel cell car operated on gaseous hydrogen from methane steam reformer = 20%

Fuel cell car operated on gaseous hydrogen from electrolysis via wind farm = 20%

Electric car recharged by wind farm = 66% But energy carriers improve economic efficiency

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Valuing H2 Enerrgy Carrier

Hydrogen costs must drop >50% to become competitive Cost of avoided oil war?

Cost of Iraq war is $100 - $2000 billion, say $200 billionSuppose 50% of war rationale was energy security Suppose one war per decadeDecadal cost of U.S. Persian Gulf oil imports is $210 billionSo 50% markup on Persian Gulf oil needed to internalize security costs

Add in avoided health problems from air pollution, say $30 billion per decade, adding about 3% to national oil bill

Suddenly hydrogen sounds more competitive!

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Increased Use of Energy Carriers -- Fit with U.S. Policy Objectives

Objective:

Carrier:

Security Environment Economy

Electricity

Gasoline - -

Natural Gas -

Biofuels +

Hydrogen

Conversion:

Centralized -

Decentralized +

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Increased Use of Energy Carriers -- Fit with U.S. Policy Objectives

Objective:

Carrier:

Security Environment Economy

Reliability

Self-sufficiency

Non-proliferation

Slow Climate Change

Less Air Pollution

Less Water Pollution

Less Land Damage

Reasonable Prices

Low Price Volatility

Job Growth

Electricity - + + - + + +

Gasoline + - + - - - - -

Natural Gas + - + - + + - -

Biofuels + + + + - - - - + +

Hydrogen + + + - + +

Conversion:

Centralized - + + + +

Decentralized + - + +

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Increased Use of Energy Sources -- Fit with U.S. Policy Objectives

Objective:

Source:

Security Environment Economy

Reliability

Self-sufficiency

Non-proliferation

Slow Climate Change

Less Air Pollution

Less Water Pollution

Less Land Damage

Reasonable Prices

Low Price Volatility

Job Growth

Coal + + - - - - + + +

Petroleum + - + - - - - +

Natural Gas + - + - + + - - +

Nuclear Fission

- + - + + + - - + +

Solar Photovoltaics

+ + + + + + + - + +

Wind + + + + + + + - + +

Hydro + + + + - - + + +

Biomass + + + - - - + +

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Energy Security

Definition of Energy Security Imperfect Markets for Oil & Electricity Rationales for Governmental Intervention The Special Role of Energy Carriers Energy Security as a Policy Driver

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So is it worthwhile to fight for energy security?

Energy security is worth something but not everything.

Back to Yergin: “The objective of energy security is to assure adequate, reliable supplies of energy at reasonable prices and in ways that do not jeopardize major national values and objectives.”

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In conclusion….

Security rationale is valid but not very helpful in guiding policy makers to specific choices.

More important are degree of trust in market mechanisms, preferences regarding painful tradeoffs between environmental protection and diversity of energy supplies, and desire for concentrated control over the energy economy.

Needed are energy policies that explicitly balance security, economic, and environmental objectives.

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For more information

http://policy.rutgers.edu/andrews

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