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Review of Index of U.S. Energy Security Risk (U.S. Chamber of Commerce, 2011)

The U.S. Chamber of Commerce recently released its Index of U.S. Energy Security Risk: Assessing America’s Vulnerabilities in a Global Energy Market, 2011 Edition (80 pgs). This is an update of last year’s inaugural edition and is published by the Chamber’s Institute for 21st Century Energy.

The August 4th press release states, “The Index of Energy Security Risk is a valuable tool which allows policymakers and the public to track our energy security based on objective, factual criteria,” said Karen Harbert, president and CEO of the Energy Institute. “Given the significant increase in energy security risk, the 2011 edition of the Index should send alarm bells through the halls of Congress and in the White House. Unless we take dramatic action to change the trajectory, America is headed toward an unprecedented level of sustained risk.”

This reviewer will argue that the Index would provide an even more valuable tool if it included background information which was more complete, particularly with regard to the risks surrounding future oil supply. The Index states, “Increasing risks were concentrated in measures related to higher energy prices and price volatility, particularly in crude oil” (p. 5, emphasis in original). This review is confined to the Institute’s analysis of the risks surrounding petroleum and does not address its treatment of natural gas, coal or electricity.

1. Security of World Oil Reserves
This reviewer has found no acknowledgement of specific concerns raised by “peak oil” analysts by the Chamber, its Institute, nor among the oral statements of Ms. Harbert. Indeed, the latter has testified, “We are not running out of resources: that’s simply untrue. We are running out of access to the resources. The International Energy Agency estimates we have 6-7 trillion barrels of conventional oil in place around the world” (June 11, 2008 at 0:51:00):
The Future of Oil: Peak Prices, Peak Production, Piqued Consumers

The Institute’s Energy Security in the 21st Century: Facts, Choices and Challenges (undated, 35 pgs) asserts, “Contrary to popular belief, the world is nowhere close to running out of oil” (p. 20).

The Institute’s neglect of certain data and trends may explain its projection of a dead-flat and historically low risk regarding oil reserves out to 2035 (Index, p. 34). This optimistic projection seems unfounded in view of the marked decline in the volume of oil discovered during recent decades, the recent IEA data on oil-field depletion rates, and the growing list of post-peak producers. If the Institute has information which refutes the warning from the IEA to “leave oil before it leaves us,” it would be helpful if it provided that data.

Another important aspect which is absent from the Index is any consideration of net energy/EROEI. The Institute credits Canada’s oil sands and American shale gas with ameliorating risks on several metrics but neglects to mention that the net energy from these energy sources (along with that of biofuels and oil shale) is much lower than the net return from the conventional oil & gas which the world has enjoyed for over a century.

Reserve estimates are one thing, but the net energy which may be realized from those reserves will be another figure entirely. As the world moves increasingly toward less accessible and lower-grade sources of energy, net energy/EROEI becomes a factor of greater significance. However, it is routinely disregarded in estimates of future energy supply.

2. Security of World Oil Production
This metric predicts “a continuing but modest worsening of risks associated with the security of world oil” (p. 35). The Institute acknowledges, “Oil production in the U.S., UK, Norway and Mexico has been declining in recent years…” (correction: U. S. production has been increasing since 2008). Indeed, what the Institute might have noted is that the marked reduction in risks during the 1990-2000 time-frame was due in no small measure to surging oil production from secure suppliers such as the North Sea and Mexico. Furthermore, the ongoing decline in production from these important regions appears to be terminal, which is surely noteworthy in any analysis of future oil supply risks.

Most puzzling is this statement: “The biggest change has been in the diversity trend, which has improved markedly since the 1970s. Part of this improvement is tied to the decline in the U.S. share of world production over the years, from over 20% in 1970 to less than 7% today” (p. 35). Why a declining percentage of global production should result in improved security for the USA is not explained.

3. Security of U.S. Petroleum Imports
The Institute projects steadily decreasing risk on this metric (p. 40) reflecting its apparent unawareness of the warnings of Jeffrey Brown , Robert Hirsch, Paul Stevens, Jadwa Investment and others with respect to the threat of declining oil export capacity (references below). The oft-repeated dictum that security of supply lies in diversifying one’s source of imports will become increasingly untenable as the list of post-peak producers grows. Global oil exports will be further constrained if domestic consumption within certain OPEC countries continues its rapid increase.

The Institute’s optimism regarding import supply may be due in no small part to the fact that Canada is the #1 supplier to the USA. If so, then such optimism ignores the fact that the eastern half of Canada’s population is dependent on overseas imports. Furthermore, one can argue that the security of Canada’s oil imports has declined considerably during the past decade:
Review of "Eastern Canadian crude oil supply and its implications for regional energy security"

Should anything interfere with the supply of overseas oil to eastern Canada (which has no Strategic Petroleum Reserve) there would be immediate implications for the vital U.S. supply of imports from western Canada. These factors should be included when assessing the security of U.S. oil imports from Canada.

4. Crude Oil Price Volatility
The Institute projects a very high risk for price volatility (p. 48) which is consistent with concerns expressed by other authorities. The Institute correctly notes the ability of price instability to subvert new energy initiatives (in both the renewable and the fossil fuel sectors). Price volatility constitutes a significant risk in itself and is a recurring threat to efforts to mitigate the looming supply crunch in liquid fuels.

Conclusion
The Institute’s efforts to develop a useful measure of energy security risks are commendable, and the criticisms expressed in this review are offered constructively. It is hoped that subsequent editions of the Index will incorporate the observations of peak oil analysts, the recent expressions of concern from the IEA and military researchers, some consideration of net energy, and a realistic assessment of future oil export capabilities.

The Chamber of Commerce’s press release and the link to the Institute’s 2011 Index are available here:
2011 U.S. Chamber Index of Energy Security Risk Shows America Facing Increased Threats

This link provides an introductory video and additional details:
Index of U.S. Energy Security Risk

References regarding oil export decline:
Jeffrey Brown and Sam Foucher have posted numerous analyses at The Oil Drum.

Robert Hirsch has warned of an “oil exporter withholding scenario” (please note slides 33 & 34):
World Oil Shortage Scenarios for Mitigation Planning

Paul Stevens, Ending Dependence: Hard Choices for oil-Exporting States, Chatham House, July 2008, 40 pgs.

Jadwa Investment, Saudi Arabia’s coming oil and fiscal challenge, July 2011, 26 pgs.

Editorial Notes: Rick Munroe is a frequent contributor to Energy Bulletin.

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