May 9, 2012
Energy use—for electricity, transportation, and heating and air conditioning—is pervasive throughout the U.S. economy, representing 8.4 percent of U.S. gross domestic product in 2010. About 80 percent of the energy used by households and businesses comes from oil, natural gas, and coal; the rest comes from nuclear power and renewable sources, such as wind and the sun. Disruptions in the supply of commodities used to produce energy tend to raise energy prices, imposing an increased burden on households and businesses.
Today CBO released a report that examines energy security in the United States—that is, the ability of U.S. households and businesses to accommodate disruptions of supply in energy markets—and actions that the government could take to reduce the effects of such disruptions. CBO also released an infographic on energy security that highlights the key points of the paper.
Disruptions in the Oil Supply Have a Larger Effect on Energy Prices Than Interruptions in Other Energy Sources
The extensive network of pipelines, shipping, and other options for transporting oil around the world means that a single world price for oil prevails (after accounting for the quality of that oil and the cost of transporting it to the marketplace). Except for countries where the price of oil is regulated or subsidized in certain ways, disruptions related to oil production that occur anywhere in the world raise the price of oil for every consumer of oil, regardless of the amount of oil imported or exported by that consumer’s country.
In contrast, the high cost of moving natural gas, coal, nuclear power, and renewable energy limits their markets to geographically bounded regions, such as North America. Consequently, foreign disruptions have had little or no effect on the price of those fuels in the United States.
Although the global nature of the market for oil makes U.S. consumers vulnerable to price fluctuations caused by events elsewhere in the world, it also benefits those consumers by lowering the price of oil relative to what it would be in a regional market. That benefit would be greater, however, if the global market was less prone to disruptions or if oil producers and consumers were better able to adjust to such disruptions.
Few Oil-Producing Countries Have Much Spare Production Capacity to Offset Such Disruptions
When a disruption occurs, those countries with spare production capacity can determine whether to partially or fully offset the disruption. Few countries other than Saudi Arabia have much spare production capacity in the near term to offset such disruptions. In contrast, the U.S. markets for natural gas, coal, nuclear power, and renewable energy either are less prone to long-term disruptions or have significant spare production and storage capacity. For example, U.S. producers and consumers of natural gas maintain a significant reserve in storage (30 percent of annual consumption in 2010). Similarly, stocks of coal in 2010 represented 9 weeks of U.S. consumption. Much of the limited potential for disruptions in the supply of those fuels involves their transport across the United States (via pipeline, railcar, river barge, or truck), for which redundancy and spare transport capacity exist.
Consumers and the Economy Are Vulnerable to Disruptions in the Oil Market Because There Are Few Easy and Inexpensive Substitutes for Transportation Fuels
Transportation is almost exclusively dependent on oil supplied in a global market in which disruptions can cause large price changes. The United States has no alternatives that can be readily substituted in large quantities for oil in providing fuel for transportation. Moreover, consumers have less flexibility in the near term in how they use transportation, and changes in transportation use tend to be more expensive over the long term than changes in electricity use.
In contrast, in the United States electricity can be produced from several sources of energy and the electricity system operates with significant spare capacity. That spare capacity means that when western coal is not available to electricity providers in the East, for example, they can shift generation to facilities that rely on coal from Illinois or Appalachia or increase generation from natural gas or renewable sources. Thus, when the price of one commodity used to generate electricity rises, another commodity can be substituted, keeping electricity prices relatively stable.
Policy Options to Improve Energy Security in Transportation
Addressing concerns about U.S. energy security requires considering policies related to the nation’s supply of and demand for oil. Because of the global nature of the oil market, no policy could eliminate the costs borne by consumers as a result of disruptions, but some policies could reduce those costs.
Policies to Address Temporary Disruptions. Policies targeting temporary disruptions in the supply of oil take two general forms:
- Reducing the exposure of consumers to high prices by, for example, making oil from the Strategic Petroleum Reserve available to the world oil market or encouraging the development of insurance markets. The beneficial effects of such policies could be neutralized if releases were not implemented in coordination with other oil-producing countries or the insurance did not transfer risk to those better able to bear it.
- Providing U.S. households and businesses with more choices in the near term for reducing the use of personal vehicles when oil prices rise.
Policies that enabled consumers to use their vehicles less during periods of high gasoline prices would be more likely to lower costs for households and businesses.
Policies to Address Persistent Disruptions. Policies to address permanent changes in oil prices could take two broad approaches parallel to those above:
- Increasing domestic production of oil or oil substitutes or
- Reducing the consumption of oil by, for example, increasing fuel-efficiency standards or encouraging the development of alternative transportation options that use less, or no, oil.
Policies that promoted greater production of oil in the United States would probably not protect U.S. consumers from sudden worldwide increases in oil prices, even if increased production lowered the world price of oil on an ongoing basis. In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices. Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world.
In contrast, policies that reduced the use of oil and its products would create an incentive for consumers to use less oil or make decisions that reduced their exposure to higher oil prices in the future, such as purchasing more fuel-efficient vehicles or living closer to work. Such policies, however, would impose costs on vehicle users (in the case of fuel taxes or fuel-efficiency requirements), or taxpayers (in the case of subsidies for alternative fuels or for new vehicle technologies). But the resulting decisions would make consumers less vulnerable to increases in oil prices.
This study was prepared by Andrew Stocking of CBO’s Microeconomic Studies Division.