Transcript The Oil Security Metrics Model David L. Greene Paul N. Leiby

The Oil Security
Metrics Model
David L. Greene
Paul N. Leiby
Oak Ridge National Laboratory
A presentation to the
IWG GPRA USDOE
March 6, 2005
Washington, DC
OSMM estimates oil security benefits of
changes in the U.S. oil market.

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Based on the NAS Committee’s framework that
distinguishes energy security benefits from normal
market benefits.
Includes uncertainty about future oil market
conditions via up to four alternative AEO projections.
Simulates supply disruptions calibrated to historical
deviations of OPEC supply from AEO projections.
Technologies change both the level of demand & its
response to oil prices. Both are estimated.
Security benefits, are estimated as the difference
between normal market (AEO Reference Case)
benefits and benefits in alternative futures that allow
supply disruptions.
The OSMM does not:

Predict technological or market success of DOE’s
R&D programs or how technology would change
w/o DOE R&D efforts.

Predict impact on U.S. petroleum consumption
(the VISION Model is used for this).

Estimate impacts of DOE R&D on the probability,
size or timing of oil market disruptions. It should.

Estimate defense or foreign policy costs in
dollars.

Incorporate a global demand response to DOE’s
R&D achievements.
The NRC (2005) made a distinction between
normal and disrupted market benefits.
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“Economic net benefits are based on changes in
the total value of goods and services that can be
produced in the U.S. economy under normal
market conditions,…” (NRC, 2005, p. 29)
“Security net benefits are based on changes in
the probability or severity of abnormal energyrelated events that would adversely impact the
overall economy, public health and safety, or the
environment.” (NRC, 2005, p. 29)
At present, the OSMM does not estimate the
changes in the probability of supply disruptions.
The definition appears to omit “insurance costs”
of oil security (e.g. SPR, defense costs) during
undisrupted periods.
The cartelized, volatile oil market produces
three direct costs to the U.S. economy.
1.
2.
3.
Loss of potential GDP due to greater economic
scarcity of oil.
Transfer of wealth due to monopoly pricing and
price shocks.
Dislocation losses of GDP due to oil price
shocks.
Transfer of wealth is not a
loss of GDP but a change in
the ownership of GDP. It
can occur in disrupted and
undisrupted markets and
occurs whether or not OPEC
is the cause of the
disruption.
The direct economic costs of oil dependence have
been greatest during supply “disruptions”.
Costs of Oil Dependence to the U.S. Economy
2005 Oil Price of $45.50/bbl
$250
Wealth Transfer
Billions of 2000 $
$200
Macroeconomic Adjustment
Potential GDP Loss
$150
$100
$50
$0
1970
1975
1980
1985
1990
1995
2000
2005
Implementing as a spreadsheet model with Monte
Carlo simulation software allows price shocks, OPEC
reaction & parameter uncertainty to be represented.
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Economic net benefits in normal market are obtained by
using the undisrupted AEO cases (or Reference Case),
with and without DOE program impacts.
Economic + Security benefits are obtained by running
Monte Carlo simulations, with and without DOE
programs, using probability distributions for:
• Occurrence of a disruption
• Timing of a disruption
• Size of a disruption

Security net benefits =
(Economic + Security benefits)
– Economic net benefits
The impacts are tested in 10,000 futures.
Randomly Choose
Oil Market Scenario
& Calibrate WOM
• High Oil Price
• Reference Oil Price
• Low Oil Price
• Parameters
Iterate to 10,000
Compute Oil Dependence Costs
• Transfer of Wealth
• Reduced Potential GDP
• Disruption Costs
Adjust for Technology Impacts
• Reduced oil demand
• Increased oil supply
• Changes in price elasticities
Generate Stochastic
Oil Supply Disruption
Select OPEC Strategy &
Solve New Oil Market
Equilibrium
Distribution of Oil Dependence Costs as % of GDP
Base Case Simulation
6%
5%
4%
Distribution of Oil Dependence Costs by Year
3%
2%
1%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
The impacts of reducing US oil use, on
imports and oil prices can be bounded.
The key question is, “What will OPEC do?”
1. Maintain production:
• World oil price falls
• US imports depend on elasticities
• OPEC market share increases
2. Maintain the price of oil
• US supply unchanged
• US imports fall
• OPEC market share decreases
3. Increase production?
4. Decrease production more than enough to
maintain the previous price?
The supply shock simulation model creates projections
more consistent with recent history. Supply shocks are
deviations from AEO projected OPEC supply.
OPEC Production: 2005 AEO Reference Case & Supply
Shock Simulation
MMBD
80
70
Reference case
60
Minimum Share
Shocked
50
40
30
20
10
0
1970
1980
1990
2000
2010
2020
2030
Each oil market future chooses an AEO Case in
which there may be oil supply disruptions that
generate price shocks.
Expected hybrid vehicle benefits alone = $191B PV, assuming OPEC
maintains its production plan (Ref. Proj. = $137 direct oil savings). By
NAS definition, security benefits are $191B - $137B = $54B.
If OPEC maintains the price path, expected benefits are
$120B PV, versus Ref. Proj. $71B direct oil savings.
Security benefits are $120B - $71B = $49B. (Versus $54B)
In addition to monetary benefits, a number
of non-monetary metrics are calculated.
Table 3. Non-Monetray Indicators of U.S. Oil Security
Energy Security Metrics Recommended by Lee (2005)
1.
2.
3.
4.
U.S. Oil Imports as a percentage of consumption
Domestic oil consumption
Estimate of price elasticity of U.S. fuel supply
Estimate of price elasticity of U.S. oil demand
Indicators Produced by the Oil Security Metrics Model
1. U.S. Oil Consumption
2. U.S. Oil Consumption per Dollar of GDP
3. U.S. Oil Imports
4. Imports as a Share of U.S. Oil Consumption
5. U.S. Oil Expenditures
6. U.S. Oil Expenditures as a Share of GDP
7. SPR Size at Constant Days of Import Replacement
8. SPR Days of Import Replacement at Constant Size
9. SPR Cost Savings Assuming Constant Days of Import Replacement
10. Estimated U.S. Price Elasticity of Oil Demand
11. World Oil Price
12. OPEC Share of World Oil Market
13. OPEC Gross Revenues from Oil Sales
The OSMM rigorously estimates the prospective
oil security benefits of EERE R&D programs.
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
Using the NAS definition of security
benefits.
Reflecting key uncertainties.
• Oil market conditions via AEO Cases
• Supply disruptions
• Parametric uncertainties, too.

Includes price elasticity as well as demand
reduction impacts.
• Vehicle technology elasticity impacts included
• Biofuel supply impacts to come.
THANK YOU.
U.S. oil imports in the base case, supply
shock and EERE impacted cases.
Impact of EERE Technologies on U.S. Oil Imports
18
16
14
MMBD
12
10
Base Case
Base Case Shocked
8
6
OPEC Production
Constant PRICE
4
2
0
2005
2010
2015
2020
2025
2030
The impact of EERE technology on
world oil price.
Impact of EERE Oil Demand Reduction on World Oil Price
$90
$80
Constant PRICE
$70
OPEC Production
2003 $/bbl
$60
Base Case
$50
$40
$30
$20
$10
$0
2005
2010
2015
2020
2025
2030
The impact on OPEC’s market
share.
Impact of EERE Oil Demand Reduction on OPEC Market Share
60%
OPEC Production
Base Case
50%
Constant PRICE
Base Shocked
Percent
40%
30%
20%
10%
0%
2005
2010
2015
2020
2025
2030
The impacts on OPEC gross
revenues.
Impact of EERE Oil Demand Reduction on OPEC Gross Revenues
$900
Billions of 2003 $ per Year
Base Case
$800
Base Shocked
$700
OPEC Production
Constant PRICE
$600
$500
$400
$300
$200
$100
$0
2005
2010
2015
2020
2025
2030
The impacts on U.S. oil
consumption.
Impact of EERE Oil Demand Reduction on U.S. Oil Consumption
30
Million Barrels per Day
25
20
15
Base Case
10
Base Shocked
OPEC Production
5
Constant PRICE
0
2005
2010
2015
2020
2025
2030
The impact on U.S. wealth
transfer.
Impact of EERE Oil Demand Reduction on U.S. Transfer of Wealth
$300
Base Shocked
Billions of 2003 Dollars
$250
OPEC Production
Constant PRICE
$200
$150
$100
$50
$0
2005
2010
2015
2020
2025
2030
The impact on the size of the
SPR.
Impact of EERE Oil Demand Reduction on Size of Strategic Petroleum
Reserve Equuivalent to 57 Days' Imports: 2005 AEO Reference Case
1,000,000
Base Scenario
Thousands of Barrels
900,000
Base Shocked
800,000
OPEC Production
700,000
Constant PRICE
600,000
500,000
400,000
300,000
200,000
100,000
0
1970
1980
1990
2000
2010
2020
2030
And, the impact on the price
elasticity of U.S. oil demand.
Impact of EERE Technologies on Long-Run Price Elasticity of Oil Demand
(Linear Equation)
1970
1980
1990
2000
0.00
-0.10
Elasticity
-0.20
-0.30
-0.40
Base Scenario
-0.50
Base Shocked
OPEC Production
-0.60
-0.70
Constant PRICE
2010
2020
2030
One can measure how advanced technologies
expand the fuel economy-cost envelope and
increase the price elasticity of oil demand.
Passenger Car Fuel Economy Price Curves
Retail Price Increase
$5,000
2014 Sierra Res.
$4,000
2020 MIT
ACEEE-Advanced
$3,000
2013-15 Ch. 5
NRC 2001 Mid
$2,000
NRC 2001 Lower
NRC 2001 Upper
$1,000
Ch. 5 w/o wgt
$0
0
5
10
15
Increase in MPG
20
25
Technology changes the price elasticity of MPG, which
changes the price elasticity of gasoline demand.
 f , p  (  m,c (1   e, p ))   e, p
Effect of Technology and Consumer Rationality
on Supply and Demand for Fuel Economy
$200
MPG
at
$2/gal.
Gasoline Price
Elasticity of
MPG
%
Change
Sierra Research
Current Tech.
30.1
31.2
0.13
--
MIT
2020
Technology
33.0
35.4
0.25
+96%
 o, p   f , p
$175
$150
2000 $
MPG
at
$1.50/g
al.
Source of
Technology
Estimates
Sierra Res.
MIT (Derived)
Full Life WTP
3-Yr Payback
Full Life $2
3-Yr $2
$125
$100
$75
$50
$25
$0
28 30 32 34 36 38 40 42 44 46 48 50
MPG
dPf
dPo
 0.5 f , p
Energy Efficient technology
clearly affects the long-run
price elasticity of demand.
The short-run impact must
be carefully considered.
The impacts of alternative and replacement fuels
on price elasticity can be similarly estimated.
Pg
G Pg
g   f
 s r bg Pg   f s g
 s r bg Pg 
F P
P
f
RPr
1
GPg
 s r bg Pg
β’s are price elasticities, b’s price slopes, s’s are market shares,
g, r, and f indicate gasoline, replacement fuels, and all motor fuel.
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Given VISION program impact estimates of
alternative fuel market shares, elasticity changes
over time can be calculated.
The time trend in elasticities can be entered into
the oil market simulation model by modifying the
price slope of the US oil demand equation.
Each direct cost component can be
estimated by a relatively simple equation.
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Total costs
TC  WT  GL  SL
Wealth Transfer

WT  P1  P0  D Q1  S Q1


Loss of potential GDP (dynamic)
K
GL  GDPLoss  P  P  Q  Q   P  P  Q
S
2

1
0
S
0
D
1
1
0
0
 D Q1
Disruption losses (dynamic)
PQ
 P
SL  ShockLoss  GDP 
 PA 

GDP
Po Qo
GDPo
 P
 GDP 
 PA 

GDPo PQ
GDP Po Qo

700
600
M illio n s o f B arrels
SPR benefits are
readily monetizable
either as a
reduction in costs
or an increase in
insurance value.
(Leiby & Bowman, 2000)
S ize o f U .S . S trateg ic P etro leu m R eserv e
500
400
300
200
100
0
1975
Size of SPR Relative to Net Petroleum Imports
140
120
D A YS
100
80
60
40
20
0
1975
1980
1985
1990
1995
2000
1980
1985
1990
1995
2000
Reduced costs of an SPR sized to replace
57 days of imports are expected to be
$2.4B, PV.
The proposed method doesn’t include dollar
estimates for defense or foreign policy costs.
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It should.
Instead, the model can provide indicators:
• OPEC revenues
• OPEC market share
• US petroleum imports
• US petroleum consumption
When used in simulation mode, these
would be probability distributions.
OPEC oil revenues are an indicator
of monopoly rents to oil producers.
O P E C N et O ilE xport R evenues
$600
B illio n s o f D o llars
$500
2005 Dollars
Current Dollars
$400
$300
$200
$100
$70
75
80
85
90
YEAR
95
00
05
Net US imports are an output of the oil market
model. OPEC or Persian Gulf imports are not.
S trateg ic O ilD ep en d en ce M etrics
P ercen t o f U .S .C o n su m p tio n
100%
90%
80%
Net
Imports
70%
60%
OPEC
50%
40%
Persian
Gulf
30%
20%
10%
0%
1970
1975
1980
1985 1990
1995
2000
2005
The world oil market changed
profoundly in 1973.
World Price of Crude Oil
$70
$60
2000 $
$50
$40
$30
$20
$10
$0
1950
1960
1970
1980
1990
2000
OPEC is an imperfect, partial
market monopoly cartel.

It influences oil markets via decisions on:
• Long-run: production capacity
• Short-run: production
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Its ability to collude is limited.
Its control of markets is limited.
It has a strong incentive to price above MC
C
P
 t q

rt 1
1 e
 e
 1
 
Qo 
P = monopoly price
C = competitive price
β = demand price elasticity
σ = OPEC mkt. share
q = ROW supply
Qo = OPEC supply
r = rate of demand growth
δ = rate of ROW supply
decline
Short- and long-run elasticities bound the
region in which OPEC can operate.
Cartel Market Share and World Oil Prices: 1965-2005
Key Assumptions:
Linear lagged adj.
Supply Elasticities:
L.R. = 0.60
S.R. = 0.06
1-lambda = 0.90
Demand Elasticities:
L.R. = -0.70
S.R. = -0.10
1-lambda = 0.85
Competitive price =
$13/bbl.
$70
2000 $/Barrel
$60
$50
2005
$40
1985
1979
1990
$30
$20
1986
$10
$0
20%
1974
2000
1998
25%
30%
35%
1965
40%
45%
50%
OPEC Core Market Share
Algeria, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, United Arab Emirates, Venezuela
It is not likely that the problem of OPEC market
power will go away soon. (3/11/04).
Dermot Gately has convincingly argued that
OPEC will not expand its capacity to meet
the world’s demands at a low price.
Cumlative Production and Revenues, 2003-2025:
Middle East OPEC Members
$7.1
$6.7
$6.6
$7.0
Billions of Barrels
250
200
$8.0
$6.0
235.4
$5.0
189.8
171.9
150
100
$3.0
Production
$2.0
Revenues
50
$4.0
$1.0
0
$0.0
Reference Case
High A Oil Price
High B Oil Price
2005 Annual Energy Outlook Case
Trillions of 2003 Dollars
300
If Middle East producers do not increase output by 80%,
unconventional oil production may have to expand rapidly.
The M.E. can retain a third of the market as the lowest cost
producer through 2050.
World Oil Production from Conventional and
Unconventional Resources: Reference/USGS
10
9
8
7
Change vs. Scenario
GTOE
6
Shale Oil
5
Heavy+Bitumen
Conventional MEA
4
Conventional ROW
3
2
1
0
2000
2010
2020
2030
2040
2050
Security benefits can also be estimated for a portfolio
of EERE technologies, but this has not yet been done.
Expected oil dependence costs under BAU = 2% of GEP with a
90% C.I. of 0.8-3.5% of GDP.
(Interior interval = +/- 1 std. dev., exterior interval = 5% to 95% C.I.)
Distribution of Oil Dependence Costs as % of GDP
Base Case Simulation
6%
ofofGDP
%%
GDP
5%
4%
3%
2%
1%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
A one-time single-focus policy is insufficient: Raising
LDV fuel economy to 35 MPG by 2017, then stopping,
lowers the cost range to 0.5% to 3.0%.
Distribution of Oil Dependence Costs as a % of GDP
Fuel Economy Case, OPEC Maintains Scenario Oil Price
6%
% of GDP
% of GDP
5%
4%
3%
2%
1%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
The result is nearly unchanged if OPEC
chooses to maintain output.
Distribution of Oil Dependence Costs
Fuel Economy Case: OPEC Maintains Scenario Production
6%
GDP
ofofGDP
%%
5%
4%
3%
2%
1%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
The NCEP strategy falls just short of the independence
goal. More is needed, and progress must be
sustained beyond 2030.
Distribution of Oil Dependence Costs as a Percent of GDP:
NCEP Strategy Scenario, OPEC Maintains Price
6%
Percent of GDP
5%
4%
3%
2%
1%
0%
1970
1980
1990
2000
2010
2020
2030
Oil independence works regardless of
OPEC’s response strategy.
Distribution of Oil Dependence Costs as a Percent of GDP:
NCEP Strategy Scenario, OPEC Maintains Production
6%
Percent of GDP
5%
4%
3%
2%
1%
0%
1970
1980
1990
2000
2010
2020
2030
A simple oil market model that can be
calibrated to any AEO scenario can be
constructed with four linear equations.

US Demand

ROW (incl. OPEC) Demand
QUS (t )  At ,US  BUS Pt  (1   )QUS (t  1)
QROW (t )  At , ROW  BROW Pt  (1   )QROW (t  1)

US Supply
qUS (t )  at ,US  bUS Pt  (1   )qus (t  1)

ROW (excl. OPEC) Supply
qROW (t )  at , ROW  bROW Pt  (1   )qROW (t  1)

OPEC Supply assumed exogenous.
National defense and foreign policy costs are
controversial, difficult to measure, but not zero.



Two wars since 1990 not entirely
unrelated to oil security.
Protection of oil supplies has some
impact on US military expenditures.
Transfer of wealth
• Provides surplus that can be spent on
military build-up but also support for
terrorism.
• A blessing or a curse?

Assuming these costs to be zero is not
defensible but, at present, OSMM does
not estimate national security costs.
The OSMM does estimate the effects of
EERE’s R&D programs on the:

Economic costs of oil supply disruptions,
• Wealth transfer
• Potential GDP losses
• GDP dislocation costs





Potential GDP and wealth transfer costs
during normal market periods,
Levels of US oil imports,
World oil prices,
OPEC market share and market power and
SPR costs or benefits.