U.S. CHAMBER OF COMMERCE

2012 Index of U.S. Energy Security Risk

2012 Index of U.S. Energy Security Risk

EIA forecasts suggest the Index will remain quite high for many years. Based on EIA’s latest AEO 2012 reference case projection, the Index is projected to average 95.5 points over the entire forecast period from 2012 to 2035, never dropping below 93.7. This average score is 1.8 points higher than the average projected score from last year based on the AEO 2011. The increased risk level is being driven primarily by projections of increasing crude oil prices and stubbornly high crude oil price volatility that in turn lead to higher energy prices and expenditures.

The forecasted U.S. energy security risk scores out to 2035 would be higher still but for greater shale oil and natural gas production and slower growth in carbon dioxide emissions. The AEO 2012 increased the outlook for shale gas over the AEO 2011 forecast, and this change alone trimmed more than half a point from the average risk score out to 2035. Lower projected growth of carbon dioxide emissions and slight improvements in the energy use across all sectors also helped to moderate the impacts of higher crude oil prices and volatility.

EIA projects that even as natural gas makes inroads into electricity markets, coal will remain a mainstay of the U.S. energy mix, accounting for approximately 40% or more of electricity generation. Regulatory pressure and price competition from natural gas will lift exports of coal, which are expected to increase even more than the amount anticipated just last year.

Geopolitical energy security risks rose by 5.3 points in 2011, breaching 100 for only the second time since 1980. Its score of 101.6 is 18.4 points above the above the 1970-1999 average of 83.2. Most of the increase in risks seen in the Geopolitical Sub- Index over the past decade or more is due to higher crude oil prices and price volatility and greater import expenditures. However, lower crude oil and natural gas import risks stemming from growing oil output from the Bakken shale formation in North Dakota and natural gas from the Barnett and Marcellus shale formations in Texas and Pennsylvania helped offset some of the rising risks from volatility in world oil markets. Metrics measuring security of global fossil fuel reserves and production were essentially unchanged from 2009.

Economic energy security risks rose by 8.6 points in 2011 to 102.1, a record high for this measure. The Economic Sub-Index risk score for 2011 is 28.3 points higher than the 30-year average of 73.8. It is only the third time since 1970 that this sub-index has gone to or above 100. Higher crude oil prices and volatility, greater import expenditures, and increasing household energy expenditures were the primary causes, and these factors are expected to help maintain an economic risk score greater than 96 through 2035.

Reliability energy security risks worsened for the third year running, climbing 1.1 points in 2011 to 112.7. This, too, is a record score, and since 2005, only one year—2008—had a Reliability Sub-Index score below 100. Very high crude oil price volatility is responsible for much of the increase. Reliability risks related to oil and natural gas imports and the power sector, however, continue to show some improvement. Even after assuming that crude oil energy price volatility will return to historical averages, forecast scores based on the AEO 2012 suggests risk level above 98 will be the norm for this sub-index through 2026, and over 100 after that.

Environmental energy security risks in 2011 fell to 88.3, 2.9 points lower than the year before and 11.1 points below the historical (1970-1999) average. This is the second lowest score in the subindex record. Most of the improvement was from a drop in carbon dioxide emissions linked to relatively slow economic growth, mild winter weather, gains in efficiency and fuel economy, and some fuel switching in the power sector. Estimated future risks based on EIA's AEO 2012 indicate steady improvement, driven largely by gains in energy intensity, better vehicle fuel economy, and greater use of natural gas and renewables in electricity generation. U.S. carbon dioxide emissions from energy are still projected to rise, but only modestly. Projections suggest that by 2027 this Sub-Index could fall below 80 for the first time.