12 Nov 2018 | 12:00 UTC — Insight Blog

Insight from Washington: US energy conservation gets lost in the drive for oil abundance

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Featuring Meghan Gordon


US energy abundance underpinned the Trump administration's case for rolling back federal vehicle fuel economy standards, a policy the government aims to adopt by March.

The US is producing enough oil "to satisfy nearly all of its energy needs and is projected to continue to do so," the administration argued in the proposal that would freeze fuel efficiency for cars and light trucks at the 2020 target of 43.7 miles per gallon. Booming domestic output has "added new stable supply to the global oil market and reduced the urgency of the US to conserve energy," it said.

However, this newly abundant supply has not shielded US drivers from global price risks, as recent volatility has shown. And the US has not become less exposed to global market forces as it pumps more crude and exports it around the world.

"The idea that the imperative on conservation is gone because you have abundance is just exceedingly short-sighted and not strategic," said Sarah Ladislaw, director of the Center for Strategic & International Studies' energy and national security program.

"That's where people really take issue with an articulation of that position, because it seems to fundamentally misunderstand the history of oil markets," she said. "You can have all the supply that you want, but if it can't get to where it's going, your reliance on it is still a strategic vulnerability."

US oil import dependence has fallen sharply from a peak of 60% in 2005 to 21% in 2017, according to the Energy Information Administration. The EIA projects it will average 17.5% for 2018 and keep falling steadily until 2029, when total crude and refined product exports will overtake imports for the first time.

This figure – which EIA calls the net import share of product supplied – reflects the dramatic shift toward US energy abundance that the Trump administration rightly praises. The fact that this figure is on a clear path toward zero does not mean the US is "producing enough oil to satisfy nearly all of its energy needs."

The US still imports about 7.9 million b/d of crude and 2.2 million b/d of refined products. Those volumes are projected to fall, while US exports of crude and products keep rising.

Even when the US becomes a net oil exporter, US producers will still rely on export markets to find the best home for their particular crude, while US refiners will rely on imports for feedstock. Gulf Coast refineries were built to process heavy crudes from Saudi Arabia and Venezuela. Some of this capacity will be reconfigured to take advantage of the light sweet crude streaming out of West Texas, but not enough to say the US can become self-sufficient when it comes to producing and refining all the oil it consumes.

"The idea that the amount that you're producing equals self-sufficiency is wrong," Ladislaw said. "If you look at what's happening in the US oil market, we're getting more deeply integrated into global oil markets because we're trading and we need to trade to make sure we can optimize our own energy system from the upstream all the way to a downstream perspective."

Congress created the first US fuel economy standards in 1975 to protect against price shocks and supply shortages like those seen during the 1973 oil embargo. The first rule aimed to double the average fuel economy of the new car fleet to 27.5 mpg by model year 1985. Fast forward to the Obama administration adopting standards for 2012−25 model years to get the fleet-wide average to an equivalent of 54.5 mpg, which would have been 49.6 mpg in actual efficiency gains plus offsets.

The Trump administration said the US no longer needed such ambitious targets because of rising domestic oil production and the US consuming a smaller share of global supply. In addition, a greater diversity of both suppliers and consumers in the oil market since the 1970s had made it less likely a single actor or group like OPEC could harm consumers. "The global oil market can, to a large extent, compensate for any producer that chooses not to sell to a given buyer by shifting other supply toward that buyer," the administration said in the August proposal.

Despite this line of reasoning by his administration, President Donald Trump has spent much of 2018 blaming OPEC for high US gasoline prices. "The OPEC monopoly must get prices down now!" he said September 20 in one of half a dozen tweets devoted to high gasoline prices and OPEC.

Easing the vehicle efficiency standards is expected to increase US oil demand by 500,000 b/d. The proposal says the economic impact of this extra 2−3% of oil demand is dwarfed by cost savings for auto buyers.

The proposal acknowledges that rising US production and falling import dependence cannot entirely insulate consumers from the effects of price shocks. "But it appears that domestic supply may dampen the magnitude, frequency, and duration of price shocks," it said. "As global per-barrel oil prices rise, US production is now much better able to (and does) ramp up in response, pulling those prices back down. Corresponding per-gallon gas prices may not fall overnight, but it is foreseeable that they could moderate over time, and likely respond faster than prior to the shale revolution."


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