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REPORT 11.25.19 Security and the : A Classic Framework for a New Challenge

Mark Finley, Fellow in Energy and Global Oil

their political leaders during the oil shocks of SUMMARY the 1970s. While these considerations have Policymakers in the US and around the world historically been motivated by consumers are grappling with how to understand the worried about access to uninterrupted security implications of an supplies of oil, producing countries can in transition—and if they aren’t, they equally raise concerns about shocks to— should be. Recent attacks on Saudi facilities and the security of—demand. show that oil supply remains vulnerable In addition to geopolitical risk, the to disruption. New energy forms can help reliability of energy supplies has recently reduce vulnerability to oil supply outages, been threatened by factors ranging from but they also have the potential to introduce weather events (the frequency and intensity new vulnerabilities and risks. The US and its of which are exacerbated by allies have spent the past 50 years building a change) to terrorist activities, industrial robust domestic and international response accidents, and cyberattacks. The recent system to mitigate risks to oil supplies, but attack on Saudi oil facilities and resulting disruption of oil supplies,1 hurricanes on similar arrangements for other energy forms Policymakers are remain limited. This paper offers a framework the Gulf Coast (which disrupted oil and gas for assessing based on an production and distribution, as well as the grappling with the evaluation of vulnerability, risk, and offsets; ), and high winds in California security implications this approach has been a useful tool for that caused widespread outages of an energy system in assessing oil security for the past 50 years, have brought energy security once again transition—and if they into the global headlines. and it can be relevant for assessing energy aren't, they should be. security in an energy system in transition. Even with the US now on a trajectory to achieve the long-sought goal of energy self- sufficiency, global energy security remains INTRODUCTION a strategic and economic challenge. While self-sufficiency would alleviate some of the Energy security considerations are not traditional concerns about global supply new phenomena. More than a century ago, disruptions, the fact that many energy addressing the risks in switching the Royal forms remain traded commodities means Navy’s main source of from to oil, that foreign disturbances will continue to Winston Churchill famously argued that impact domestic markets. Rapid growth in “safety and certainty in oil lie in variety the use of (and use of and variety alone.” Access to oil supplies batteries for electric vehicles and power was a major strategic consideration for all grid management) may help mitigate the major actors during World War II, and conventional security concerns with regard it became a focus of individual citizens and BAKER INSTITUTE REPORT // 11.25.19

to fossil , although these changes may In addition, risk assesses the chances also reveal new risks. Moreover, the US of a shock. Considerations must include not and its allies have a cooperative system only the probability of a disruption but also for dealing with oil supply disruptions— an assessment of the potential magnitude including both commercial and strategic oil and duration. A large but brief shock (such stockpiles—but the framework for dealing as the one seen recently in ) with risks arising from the growing use of may be less disruptive than a small but other fuels is very limited. long-lasting one. There are many approaches to appraising Finally, offsets include the capacity energy security. As a young energy security and timeline to counter a shock. This could specialist in the US government in the 1980s, include the ability to increase production I learned an approach based on assessing elsewhere, draw supply from inventories, vulnerability, risk, and offsets that I’ve found switch to other energy sources, and/or useful in evaluating oil security. In this paper, reduce demand by conserving energy. I argue that this framework can be useful for The purpose of these interventions is to assessing the security of an energy system cushion the impact of the shock while giving in transition—in particular, a transition away markets—both producers and consumers—a from coal and oil toward and chance to respond in a more orderly fashion. renewables in part due to . Energy security policy can aim to I will apply this framework of vulnerability, address any of these dimensions. For risk, and offsets to the current oil market and example, vulnerability can be reduced a potential future energy system in transition by diversifying the fuel mix, risk can be to renewable energy and natural gas. This managed via diplomacy or military power, discussion is not intended to be an exhaustive and a strategic stockpile can be used to review of all potential facets of the issue, offset lost supply. but as an illustration of the framework’s application. I primarily focus on the US, but with some consideration of other key energy APPLYING THE FRAMEWORK TO OIL players and the world as a whole. Vulnerability Global—and US—vulnerability to oil shocks THE FRAMEWORK has improved significantly in recent years, but it still remains a significant concern. The The first element of the framework is shale revolution has put the longstanding vulnerability, which is how exposed the US goal of energy self-sufficiency within US and global energy systems are to a reach. The US recorded the world’s largest shock. This could include the size of the ever increases in production of both oil and energy input to the economy (in absolute natural gas in 2018, and it is the world’s terms and especially in financial value), largest producer of both fuels. In addition, the degree of substitutability, and the the country is now a net exporter of natural concentration in key sectors, such as the gas and has seen net oil imports as a share importance of oil in transport. Vulnerability of domestic consumption fall from a high of has loomed in public perceptions as an 60% in 2005 to just 11% last year.2 The US economic consideration, experienced Department of Energy’s Energy Information as either price spikes and/or physical Administration (EIA) projects that the US shortages. Other vectors of vulnerability could become a net oil exporter as soon as can include potential adverse effects from 2020.3 Rising oil and gas production have a disruption for diplomatic, strategic, boosted the US economy via higher levels or military objectives. In recent years, of investment, employment, and corporate/ environmental objectives—especially climate individual taxes, as well as the resulting change—have emerged as increasingly decline in energy prices for consumers important to assessing vulnerability. and businesses.4

2 ENERGY SECURITY AND THE ENERGY TRANSITION: A CLASSIC FRAMEWORK FOR A NEW CHALLENGE

Broader changes in the US ). is also an increasingly system have also impacted US vulnerability. large importer of natural gas (over 40% On the demand side, growing energy of its 2018 energy consumption), and the diversity and significant improvements in country even imports coal. Furthermore, the efficiency of energy use have reduced Europe depended on imports of oil and America’s vulnerability to supply disruptions. natural gas in 2018 to meet roughly three- Oil’s share of the US energy mix has declined quarters and 55% of its consumption, from a peak of 48% in 1977 to just 36% last respectively. Japan is almost entirely reliant year; the share of oil in the global oil mix on imported oil and natural gas, while has also declined.5 In addition, the amount imports about 80% of the oil consumed and of energy needed to produce a (real) dollar half of the natural gas used.11 of GDP has fallen by more than 50% since While the impact of higher oil prices 1980. As a result of greater efficiency and on the US economy is now more balanced, lower prices, spending on energy as a with producing regions benefiting even share of GDP has fallen from 13% in 1980 as consumers are adversely impacted, to roughly 5%.6 The shale revolution potential price spikes—and increased price and growing use of renewables have also volatility—stemming from global oil outages contributed to reduced US CO2 emissions still pose risks to both households and from energy use by allowing natural gas to industry. Oil remains the dominant energy displace coal in power generation; emissions source for the global economy, accounting have fallen by 12% since 2007 (although for 36% and 34% of US and global energy they increased in 2018).7 consumption, respectively. Moreover, oil The US shale revolution has also (and increasingly other energy forms) impacted global energy markets and energy are global commodities, meaning that US Vulnerability, risk, security beyond the nation’s borders.8 markets remain vulnerable to the price and offsets can be a Rising US oil production (and OPEC’s desire effects of supply disruptions abroad, even useful framework for to maintain market share) led to a sharp as domestic production increases. decline in oil prices in recent years: crude While net oil imports have fallen sharply, assessing the security prices averaged above $100 per barrel the US remains a significant importer due to of an energy system during 2011-14 but now stand near $60.9 a mismatch between the configuration of US in transition. While benefiting consumers, lower prices refineries favoring heavy imported crudes have created large budget deficits in oil- and the light quality of domestic crude oil exporting countries and have prompted production. Gross oil imports in 2018 were efforts in countries like Saudi Arabia to still nearly 10 Mb/d of largely medium and adopt economic reforms aimed at reducing heavy blends of crude oil.12 Moreover, the dependence on oil revenues. The lower adverse economic impact of an oil price prices have also adversely affected energy spike would be front-loaded, whereas the producers in the US. The rapid growth of US benefits would take time to manifest. If natural gas exports is also impacting global world oil prices spiked, consumers would markets. For example, has been see higher fuel costs quickly. The benefits of forced to price its natural gas exports to higher prices on domestic producers would Europe more competitively due to growing take time to materialize through business competition from liquefied natural gas (LNG) decisions including higher capital spending from the US.10 and job creation, as well as dividends and Recent US energy trends stand in sharp distributions to shareholders. contrast to other leading economic centers, In addition to pure economic which remain more vulnerable to global considerations, others have examined how disruptions—at least when considering the the shale revolution and growing energy degree of import-dependence. China, which self-sufficiency has impacted the broader was self-sufficient in oil in 1992, is now the strategic calculus for the US and other key world’s largest oil importer, with net imports countries.13 The strategic and economic of nearly 10 million barrels per day (Mb/d) in vulnerabilities of the current US and global 2018 (meeting over 70% of domestic energy energy system stemming from rising 3 BAKER INSTITUTE REPORT // 11.25.19

CO2 emissions (as well as local impacts such as the Middle East. However, the US including land and water use) have been supply has experienced both large increases considered by many. and declines over the past decade due to Finally, oil remains the dominant fuel for investment decisions by domestic operators transport, including for military equipment; in response to volatile oil prices, as well as access to fuel therefore remains a key the impact of hurricanes. Moreover, policy vulnerability from a military perspective. changes at both the federal and state levels Indeed, a key dimension of vulnerability can significantly impact both investment for oil is its concentration in transport and and production, as seen in the calls for a petrochemicals and a lack of large-scale, domestic ban on hydraulic fracturing.16 affordable substitutes. Many other factors have also impacted oil supplies in recent years, including Risk industrial accidents and storms. In particular, Global oil supply disruptions are significant hurricanes have impacted US refinery and and have helped to support oil prices in pipeline operations, the natural gas system, recent years, even with rapid growth of US and the domestic grid. Energy production. The recent attacks on Saudi oil systems in many Caribbean nations have facilities briefly resulted in the loss of 5.7 also been impacted by hurricanes. Cyber and Mb/d of crude oil production, 0.7 Mb/d of terrorist threats also pose risks to critical natural gas liquids, and 2 billion cubic feet domestic (and global) energy infrastructure, per day (Bcf/d) of natural gas production, as seen in the attack that disabled over 17 according to official Saudi statements, 30,000 computers at Saudi Aramco in 2012. making it the largest supply disruption ever. On a positive note, US oil and gas The US and other Even before those attacks, the EIA reported security is bolstered by strong relations countries have built a that nearly 3 Mb/d of world oil supply was with the country’s primary trading partners, especially its neighbors in the significant capacity for disrupted as of August 2019—about 3% of global supply.14 In particular, US sanctions well-integrated North American energy addressing oil supply have significantly reduced Iranian production. market. In particular, Canada and Mexico disruptions. Venezuelan output has also fallen sharply are the leading destinations for US exports in recent years, even before the recent of crude oil and refined products, and imposition of US sanctions, which have they are also the leading suppliers to the further reduced production and exports. US, along with Saudi Arabia. Canada and In addition, significant outages continue in Mexico are also the largest destinations for Libya, Syria, and Yemen due to civil unrest. US natural gas exports, and Canada is the Rising Middle East tensions also pose largest source of US natural gas imports. the risk of more significant disruptions. The recent attacks on Saudi infrastructure Offsets (including oil fields, processing facilities, The US and other countries have built a pipelines, and tankers) highlight the risk to significant capacity for addressing oil supply not only Saudi supplies but broader regional disruptions over the past 50 years, often in production and exports, with nearly 21 Mb/d a cooperative fashion. The first and most of oil (according to EIA) transiting the Strait of important line of defense is an integrated Hormuz last year.15 Iranian officials continue global market, which quickly and efficiently to threaten regional oil flows in the face of reallocates supply in response to unexpected tighter US sanctions. Other key energy trade changes in global supply and demand chokepoints include the Suez canal/Suez- patterns. Deep financial markets also allow Mediterranean pipeline and Bab el Mandeb market participants to manage their risks (at opposite ends of the Red Sea), the Turkish through hedging. Price volatility is a feature Straits, and the Strait of Malacca in Asia. of this system, however, which can have US oil and natural gas production adverse impacts on consumer and investor is commonly viewed as less risky than confidence and planning, as well as lead to importing supplies from other regions politically unpopular price movements. 4 ENERGY SECURITY AND THE ENERGY TRANSITION: A CLASSIC FRAMEWORK FOR A NEW CHALLENGE

This highlights an important (and production capacity. Saudi Arabia is unique unavoidable) tension for policymakers in in having invested to maintain a significant terms of when to rely on market forces and buffer of spare production capacity as its when to intervene. Policy intervention—or contribution to improving global oil security. the expectation thereof—can impede the Before the recent attacks, Saudi Aramco said normal functioning of the marketplace, so that its maximum sustainable production when is it appropriate? For example, some capacity was 12 Mb/d, with production near have argued that the creation of a strategic 10 Mb/d. The EIA estimated that the total stockpile adversely impacted energy OPEC spare production capacity stood at security by reducing incentives for industry about 2 Mb/d—largely in Saudi Arabia— to hold commercial stockpiles. In practice, slightly below the historical average.19 It US and International Energy Agency (IEA) remains unclear how the recent attacks policy has developed a view that strategic have impacted Saudi production and stocks should be used to manage physical capacity; Saudi officials say that production shortages rather than price volatility, though has been restored to pre-attack levels this has always been a judgment call. and that they expect capacity to be fully Both commercial and government restored by the end of November 2019. inventories are another key offset. Members Many observers have noted that of the IEA—including the US—are obliged the nature of US shale development— to hold oil inventories sufficient to cover with far less capital cost per well and 90 days of imports.18 The IEA reports that much faster drilling and completion than member states hold roughly 1.5 billion offshore platforms—allows production to Saudi Arabia is unique barrels of “public” strategic stocks, in respond more quickly to changing market addition to nearly 3 billion barrels of conditions. This increased price response in having invested commercial stockpiles (held by companies therefore improves US and global energy to maintain spare in the normal course of their operations). security while also improving the country’s production capacity. China and India are not IEA members, but foreign policy leverage.20 However, this as significant oil importers, they have price response still takes months to have also begun to build both commercial and a significant impact on US production, strategic oil stockpiles. meaning it can not be a first response to It is important to note, however, that future supply disruptions.21 strategic stocks are largely held as crude oil. Disruptions to US refining and pipeline operations (for example, from Superstorm APPLYING THIS FRAMEWORK TO A Sandy in 2012 and Hurricane Harvey in 2017) FUTURE ENERGY SYSTEM have begun to broaden the focus to include While the energy future is highly uncertain, other dimensions of the oil value-chain even almost all forecasters expect oil to decline though the Strategic Reserve (SPR) in importance as a share of total energy continues to be exclusively held as crude oil. consumption and relative to economic In addition, IEA member countries activity. Meanwhile, most forecasters have developed emergency response expect natural gas and renewable energy protocols for sharing oil supplies in the to grow in importance (both as a share of event of a disruption, as well as restraining total energy consumption and in absolute demand and encouraging fuel switching. terms), with wind and The member countries have also begun expected to grow rapidly. More concerted to engage in coordinated discussions to action to address climate change would improve the resilience of the energy system accelerate this transition. more broadly in the face of threats ranging from climate change to cyberattacks. On the supply side, Saudi Arabia and other OPEC members have played an important role in offsetting supply disruptions by utilizing their spare 5 BAKER INSTITUTE REPORT // 11.25.19

Vulnerability countries. For example, while power from The displacement of oil by other energy renewable energy is domestically produced, sources would clearly reduce US and global China dominates the global production of vulnerability to oil shocks, but it could also rare earth metals (an important component introduce new vulnerabilities and risks for batteries), panels, and to the energy system. For example, the batteries for electric vehicles. Additionally, IEA’s New Policies Scenario sees oil’s share two-thirds of the world’s cobalt production of global energy use falling from 32% (another battery, solar panel, and wind to 28% by 2040 (with oil remaining the turbine component) is concentrated in the largest single fuel source), while gas and Democratic Republic of Congo, a country renewables gain market shares (to 25% and with a history of human rights abuses 20% respectively by 2040).22 Moreover, and corruption. In contrast, the US, as the in the IEA’s Sustainable Development world’s largest oil and natural gas supplier, Scenario (consistent with meeting the accounts for just 13% and 20% of global oil UN’s sustainable development objectives, and natural gas production, respectively. including limiting the impact of climate The expected growth in renewable change to 1.5°C or less), renewables play a energy and batteries will also require an much greater role, accounting for 31% of the unprecedented increase in the global energy mix by 2040.23 A similar range and refining of ores. Given the long lead of scenarios can be developed for potential times for developing new mines and the pathways for the US energy system. environmental and social issues related to The displacement of Greater emphasis on energy efficiency mining and refining (both heavily fossil- oil by other energy is another key feature common to many fuel dependent), such growth poses a risk sources would forecasts. Since policies such as improved of future supply shocks. Moreover, both the US and Europe are highly dependent on reduce vulnerability vehicle efficiency standards help to reduce the amount of energy needed to produce a ores that are mined and refined outside of 24 to oil shocks, but it dollar of economic output, improved energy their borders. could introduce new efficiency would also reduce the economy’s A key factor of many energy forecasts vulnerability and risks. vulnerability to energy shocks. is an expectation that the role of electricity The rapid growth of new energy sources will continue to grow as a share of total can also introduce new vulnerabilities energy use in the US and globally. Growing into the US and global energy systems. dependence on power and the ubiquity of For example, global markets are much electrical equipment in the modern economy less developed for natural gas than for mean that vulnerability to electrical supply oil—today, about one-third of global gas outages will likely grow. The unique consumption is traded internationally, properties of power markets (with largely compared to about two-thirds of oil. While domestically produced electricity and trade creates exposure to international substantial reserve margins to maintain risks, it also provides greater flexibility. For supply availability, but with virtually no example, Japan was able to increase imports effective storage capability) stretch the of fossil fuels to maintain power availability application of our framework, but we after the Fukushima nuclear disaster caused still can find useful insights. For example, a sharp reduction in . Gas improved data gathering can lend insight trade is growing, with rapid growth of into the frequency, duration, and impact liquefied natural gas in particular helping of power outages, and the economy’s create a more global natural gas market. vulnerability to such outages. Meanwhile, renewable energy is almost Finally, in assessing vulnerability, there exclusively domestically produced, which is is an important distinction between fuel a significant security benefit. But production that is consumed (such as oil, natural gas, of inputs to these energy sources are or electricity) and equipment that produces frequently produced abroad, and—at least (such as wind turbines and solar panels) for now—are highly concentrated in a few or stores (such as batteries and pumped hydro) energy. A disruption in the trade of 6 ENERGY SECURITY AND THE ENERGY TRANSITION: A CLASSIC FRAMEWORK FOR A NEW CHALLENGE

the equipment that stores energy would software of a “smarter,” more connected not immediately disrupt energy availability, energy system could be significantly more but it would have delayed impacts on robust, reducing risks of disruptions, but it investment and therefore future energy could also be more vulnerable to cyberattack. availability.25 In this sense, the potential Power grids have come under cyberattack in disruption of fuels poses a much more Ukraine and elsewhere, and US utilities have substantial short-term vulnerability to the been subject to penetration attempts.27 US and global energy systems. More broadly, assessing the risks of disruption for non-oil energy sources is Risk hindered by a lack of historical data. For The assessment of supply risks for non-oil example, while the EIA tracks global oil energy sources is still in its infancy. While oil supply disruptions monthly, they do not supply disruptions have historically been the have a corresponding effort for other energy 28 focus of energy security discussions, other forms. While domestically produced energy forms are not without risks. renewable energy may not be subject For natural gas, we have seen large-scale to geopolitically driven disruptions, all supply disruptions. As with oil, hurricanes domestic energy supplies remain at risk to have caused significant disruptions of US disruptions due to factors including weather natural gas production, processing, and and industrial accidents. Greater reliance on pipeline flows. Hurricanes and storms also distributed energy forms can reduce the risk pose significant and potentially widespread of large-scale systemic outages, but may risks to the power system. In addition, lead to more frequent—albeit smaller and geopolitical disputes also have the potential more localized—disruptions. Moreover, the to disrupt natural gas supplies. Russian gas control systems for energy infrastructure exports to Europe, which account for one- produced abroad may also be at greater risk third of the continent’s gas consumption, to hostile cyberattack. have been disrupted several times over the Accordingly, a data-gathering exercise past decade—for example, as a result of to understand the true risks to energy disputes with Ukraine over pipeline transit. sources other than oil—both domestic and Flows of LNG through the global—would be an appropriate first step to or other chokepoints also face the risks to oil understanding potential risks of an energy discussed above. transition. In addition to gathering historical Other energy forms have also data, another approach to assessing the experienced supply outages or threats of potential frequency, magnitude, and disruption. Coal shipments from Australia duration of disruptions in these new energy (one of the world’s largest exporters) forms could be a survey of expert opinions. were disrupted by bad weather in 2017. The US Department of Energy has in the Furthermore, the Chinese government has past conducted expert workshops to gauge used its dominance of rare earth supplies as the risks of oil supply disruptions (including leverage in the past, and it has threatened to frequency, magnitude, and duration) as part disrupt supplies in the face of growing trade of its to determine the proper size tensions with the US and other partners. of the SPR. China’s dominance in the global export of wind turbines, solar panels, and electric Offsets vehicle batteries could also be put at risk Historically, energy security assessments under future conflict scenarios. Finally, have been directed at oil supplies, and Indonesia has proposed to ban nickel ore the resulting domestic and multinational exports from January 1, 2020, to stimulate framework is therefore heavily oriented domestic processing of the metal.26 toward managing oil supply risks. What can The digital revolution as applied to the we say about the various offset mechanisms energy system can also mitigate risk, as well discussed above when applied to a as introduce new risks. For example, the transitioning global energy system? 7 BAKER INSTITUTE REPORT // 11.25.19

In terms of the markets, international respond more quickly to price signals than trade of natural gas and critical metals other gas resources, but not quickly enough needed for renewables and batteries is to be a first responder in a shock. growing, but global markets are much less Furthermore, the IEA has begun deep and liquid compared to oil. Furthermore, to expand discussions of emergency there are no viable futures markets for preparedness to include other forms of some metals, making it difficult for market energy. Some European countries, such participants to assess their vulnerabilities as Spain,29 have begun to impose natural and impossible to manage them by hedging. gas storage obligations on companies. Natural gas markets are also becoming more Unlike oil, however, there are no formal, globally integrated via rising LNG trade. binding multinational agreements laying Within the US, the gas and power markets out obligations for holding and releasing are large and efficient, though the power grid inventories, sharing supplies, fuel switching, and marketplace are regional rather than or demand restraint. Furthermore, there national. Large, efficient markets greatly is no organized system in the US, nor a assist in managing vulnerabilities and risks, cooperative multinational effort, to hold but the lack of a truly national grid—and of a strategic stockpiles for non-oil energy forms. coordinated national response capability—is a potential limitation on the robustness of the US power system. CONCLUSION With regard to inventories, US commercial inventories of natural gas The domestic and international assessment are large, helping to manage what of—and policies aimed at improving— The assessment of has traditionally been large seasonal energy security must evolve along with energy security must variation in domestic demand. There is no the energy system. Growing reliance on government stockpile, and gas storage is natural gas and renewable energy help evolve along with the mitigate vulnerability to future oil supply energy system. much smaller relative to consumption in many other regional markets around the disruptions. But with these alternatives world. In terms of the metals needed for playing a much larger role in the global renewables, solar panels, wind turbines, energy economy, and with mining of base and batteries, there is no reliable global metals and manufacturing of new energy data for commercial inventories, nor are components concentrated abroad, these there strategic government stockpiles. Note same dynamics also raise the prospect of that electricity—unlike oil or gas—cannot new vulnerabilities and risks that must be currently be stored economically at scale; understood and managed. Data collection the future will depend on the economic and is always a good place to start; cooperative technical development of large-scale, grid- efforts to systematically gather information connected batteries. on the relevant indicators for new energy In the power system (unlike oil and forms is in its infancy. Moreover, a robust natural gas production operations), the set of capabilities and institutions has been concept of reserve margins to manage built up over the past 50 years for managing unexpected swings in demand and oil supply risks, but such capabilities variability of supply is well-established. are limited for other energy forms. The The importance of these reserves will framework of assessing energy security by grow as intermittent renewables become analyzing vulnerability, risk, and offsets— more important. But for the broader and building domestic and international energy system, such practices are not policies to address these three factors— institutionalized. Moreover, there is no can be a useful approach in tackling this global or domestic supplier that invests in emerging challenge. While the application of maintaining a buffer of spare production this framework to the new energy system capacity for new energy sources to help discussed here is by no means definitive, manage disruptions, as Saudi Arabia does for it may serve as a useful starter to the oil. As with oil, US shale gas production can conversation, here in the US and abroad. 8 ENERGY SECURITY AND THE ENERGY TRANSITION: A CLASSIC FRAMEWORK FOR A NEW CHALLENGE

114 (March 2018): 558-565, https://doi. ACKNOWLEDGMENTS org/10.1016/j.enpol.2017.12.050. I am grateful for comments from Baker 9. US crude oil prices have traded at a Institute fellows Kenneth B. Medlock III, substantial discount to international prices in Michael Maher, Jim Krane, Peter Hartley, recent years due to domestic infrastructure and Michelle Michot Foss, as well as Adam bottlenecks and shifting trade flows. Sieminski, president of the King Abdullah 10. See for example Nathalie Hinchey Petroleum Studies and Research Center. and Anna Mikulska, “LNG Versus Russian Gas In Central And Eastern Europe: Playing Poker On A Continental Scale,” Forbes Blog, August ENDNOTES 24, 2017, http://bit.ly/34VsS2p; Nathalie Hinchey, “The Impact of Securing Alternative 1. See for example: Mark Finley and Energy Sources on Russian-European Kenneth B Medlock III, “Attacks on Saudi Oil Natural Gas Pricing,” The Energy Journal 39, Facilities Cast a Huge Shadow of Uncertainty no. 2 (2018), http://bit.ly/33zj4uy. on the Oil Market,” Forbes Blog, September 11. “Statistical Review of World Energy,” 17, 2019, http://bit.ly/2CASl56. BP, 2019, https://on.bp.com/2Q9vs0C. 2. “Petroleum Overview,” Monthly 12. With exports of crude oil and refined Energy Review, US Energy Information products of about 7.5 Mb/d, US net oil Administration, accessed October 31, 2019, imports were just over 2 Mb/d in 2018. http://bit.ly/2CB16fr. 13. See for example Meghan O’Sullivan, 3. “U.S. Petroleum and Other Liquids Windfall: How the New Energy Abundance Supply, Consumption, and Inventories,” Upends Global Politics and Strengthens Short-Term Energy Outlook, US Energy America’s Power (New York: Simon & Information Administration, accessed Schuster, 2017); Hearing on Geopolitics October 31, 2019, http://bit.ly/2Q7KzYn. of US Oil and Gas Competitiveness, 4. See for example Nida Çakir Melek, before the House Committee on Foreign Michael Plante, and Mine K. Yücel, “Resource Affairs Subcommittee on Terrorism, Booms and the Macroeconomy: The Case Nonproliferation, and Trade, 115th Cong. of U.S. Shale Oil,” Federal Reserve Bank (2018) (statement of Kenneth B. Medlock of Kansas City working paper, December III, Senior Director of the Center for Energy 2018, http://bit.ly/2qDyTBT; “Dallas Fed: US Studies), http://bit.ly/2q4gFtd; and Krane Shale Boom Accounted for 10% of US GDP and Medlock III, “Geopolitical dimensions.” Growth,” Journal of Petroleum Technology, 14. “Estimated unplanned liquid August 22, 2019, http://bit.ly/36WF2cS. fuels production outages,” Short-Term 5. Oil consumption has increased Energy Outlook, US Energy Information over this period, but less rapidly than Administration, accessed November 1, 2019, overall energy consumption. “Primary http://bit.ly/2qHJEmH. Energy Consumption by Source,” Monthly 15. Justine Barden, “The Strait of Energy Review, US Energy Information Hormuz is the world's most important oil Administration, accessed October 31, 2019, transit chokepoint,” US Energy Information http://bit.ly/2O4KHF8. Administration, June 20, 2019, http://bit. 6. “Primary Energy Consumption, ly/2q1b0nK. Energy Expenditures, and Carbon 16. See for example Natasha Turak, Dioxide Emissions Indicators,” Monthly “Elizabeth Warren’s fracking ban would be Energy Review, US Energy Information bad news for the US, IEA chief says,” CNBC, Administration, accessed October 31, 2019, September 9, 2019, https://cnb.cx/33DNsEa. http://bit.ly/2qNyZH1. 17. See for example Nicole Perlroth, “In 7. Ibid. Cyberattack on Saudi Firm, U.S. Sees Iran 8. See for example Jim Krane and Firing Back,” New York Times, October 23, Kenneth B. Medlock III, “Geopolitical 2012, https://nyti.ms/34Lm6Mq. dimensions of US oil security,”

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18. With US imports declining, the 25. There are of course many other required inventory coverage (measured in sources of risk for future investments in days of imports) has also declined, which energy infrastructure, most notably in future has been a contributing factor to the recent prices, government policy, and technological decision to sell off a portion of the US SPR. innovation. 19. “OPEC Crude oil (excluding 26. See “Indonesia releases nickel ore condensates) Supply,” Short-Term export ban decree,” Reuters, September 4, Energy Outlook, US Energy Information 2019, https://reut.rs/36YScq0. Administration, accessed November 1, 27. See for example: Robert M. Lee, 2019, http://bit.ly/32xrukQ. In addition, Michael J. Assante, and Tim Conway, some producers may be able to “surge” Analysis of the Cyber Attack on the production, temporarily increasing supply Ukrainian Power Grid (Washington, D.C.: beyond normally accepted operating Electricity Information Sharing and Analysis standards, for example by relaxing reservoir Center, 2016), http://bit.ly/2qJfhMK; and management guidelines. Blake Sobczak, “First-of-a-kind U.S. grid 20. See for example Hearing on cyberattack hit wind, solar,” E&E News, Geopolitics of US Oil and Gas. October 31, 2019, http://bit.ly/2KeSmjg. 21. See for example Richard G. Newell 28. In the US and many developed and Brian C. Prest, “Is the U.S. the New economies, there is data on power supply Swing Producer? The Price Responsiveness disruptions held by grid operators, although of Tight Oil,” Resources For the Future such data is rarely aggregated to a working paper, June 2017, http://bit. national level for use in the type of studies ly/2O0CToa. envisioned here. 22. Today, natural gas and renewables 29. See “Natural Gas,” Cores, accessed are a smaller share of the US and global November 1, 2019, http://bit.ly/2CAf6px. See more Baker Institute Reports at: www.bakerinstitute.org/baker-reports system compared to oil. Natural gas and renewables account for about 22% This publication was written by a and 15%, respectively, of global energy AUTHOR researcher (or researchers) who consumption. Renewables here include Mark Finley is the Fellow in Energy and participated in a Baker Institute project. hydro, , wind, and solar. Source: Wherever feasible, this research is Global Oil at Rice University's Baker Institute. International Energy Agency, World Energy reviewed by outside experts before it is He has 35 years of experience working at Outlook 2019 (: IEA, 2019), http://bit. released. However, the views expressed the intersections of energy, economics and herein are those of the individual ly/36W2EyD. public policy. author(s), and do not necessarily 23. In the Sustainable Development represent the views of Rice University’s Scenario, the IEA assumes that as world oil Baker Institute for Public Policy. demand falls sharply (by 36 Mb/d in 2040 © 2019 Rice University’s Baker Institute relative to their New Policies Scenario), for Public Policy both OPEC and non-OPEC producers reduce output to maintain relatively This material may be quoted or constant market shares. The geopolitical reproduced without prior permission, and economic implications of such sharp provided appropriate credit is given to the author and Rice University’s Baker reductions, and the potential risks to supply Institute for Public Policy. that might result, are not explored in the IEA . Cite as: 24. See for example Hearing on Sources Finley, Mark. 2019. Energy Security and Uses of for a Clean Energy and the Energy Transition: A Classic Economy, before the US Senate Committee Framework for a New Challenge. Baker Institute Report no. 11.25.19. Rice on Energy and Natural Resources, 116th University’s Baker Institute for Public Cong. (2019) (statement of Mark P. Mills, Policy, Houston, Texas. senior fellow at the Manhattan Institute), http://bit.ly/36W1V0c. https://doi.org/10.25613/DWEP-Y289

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