Index of U.S. Energy Security Risk: Oulook to 2035
Based on EIA’s latest AEO 2012, 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. In the past, risk scores at these levels have been associated with geopolitical crises or energy shortage, such as the “Arab oil embargo” in the 1970s, the Iranian revolution and hostage crisis in 1979-80, policy-driven natural gas shortages in 2000, and the September 11, 2001 terrorist attacks and the wars in Afghanistan and Iraq. That such high levels of energy security risk are anticipated to be the norm for the foreseeable future should be a cause of concern.
Comparing this year’s edition to last year’s edition of the Index, much of the difference in the outlook for risk going forward has to do with evolving expectations about economic, technological, market, and regulatory conditions in EIA’s AEO 2011 and AEO 2012 forecasts.
The increased risk level is being driven primarily by higher projections of crude oil prices that in turn lead to higher energy prices and expenditures. From 2012 to 2035, EIA sees crude oil prices rising from about $99 to $133 per barrel (in real 2010 dollars). Compared to the AEO 2011 projection, crude oil prices over the course of the period average about $16 per barrel higher than in the AEO 2011. While crude oil price projections generally follow a fairly smooth path (in this case upward), history suggests that crude oil prices are likely to display greater volatility.
Because so little oil is used in power generation, crude oil prices have very little impact on retail electricity prices, yet the average forecast for these this year also is higher, by about 7.6% (0.7¢). New pollution rules targeting use, together with expanded requirements for generally more expensive renewables, are the primary causes of the difference.
The forecast U.S. energy security risk scores out to 2035 would be higher still but for projections of increased domestic oil and natural gas shale production and a slower carbon dioxide emissions growth. The AEO 2012 increased the outlook for shale gas over the AEO 2011 forecast, and this change alone trimmed about 0.6 points from the average risk score out to 2035. The outlook for shale gas is even better in the AEO 2012 than the AEO 2011. Estimates based on last year’s projection show a small risk in this metric lingering out to 2035. This year’s projection, however, forecasts shale gas production growing by 4.1% annually instead of 3.8%.4 By 2022, the U.S. becomes a net exporter of natural gas, and this risk metric is scored at zero, or no risk.
Tight oil production also is expected to expand, with EIA forecasting an increase in output of tight oil from formations such as the Bakken, Eagle Ford, and Three Forks—4.8% each year to 2035, enough to propel total domestic crude oil production 2% each year. The forecast of output from offshore areas, however, barely changes, and output from Alaska declines by a 3.2% year and in 2035 is less than half current output.
Greater production and use of natural gas also contributed to lower estimates of future carbon dioxide emissions from energy. EIA now expects that total energy-related emissions will grow much slower than thought just last year—0.1% per year versus 0.4% per year—and will remain below their 2001 level throughout the entire forecast period.
In addition, long-term trends towards greater energy efficiency across most sectors also had an impact on lowering the trajectory of future emissions. These efficiency trends also should lessen energy expenditures as a share of GDP, increasing the resiliency of the economy and lowering the impact of higher energy costs.
The forecast U.S. energy security risk scores out to 2035 would be higher still but for projections of increased domestic oil and natural gas shale production and a slower carbon dioxide emissions growth.
EIA projects that even as natural gas makes inroads into electricity markets, secure domestic coal will remain a mainstay of the U.S. energy mix. By 2035, coal power stations are expected to provide 40% of the nation’s electricity, down from the 46% share estimated for the same year in the AEO 2011. Exports of coal also are expected to increase even more than anticipated last year. The AEO 2012 forecast suggests that coal exports could be more than 180% greater than projected in the AEO 2011. Growing U.S. coal exports will continue improve the security of worldwide coal supplies.
While these projected trends provide an indication of where U.S. energy security might be headed, there is no objective way to determine technology changes, geopolitical crises, new resource discoveries, political elections, or any of a number of things that can and do occur whether we are prepared for them or not. If the energy future unfolds as EIA forecasts—though experience tells us that it almost certainly will not— the Index of U.S. energy security is not expected to drop below 93.7 through 2035 and average 11.3 points above the 30-year average. At this high level of risk, the impact of the next inevitable if unpredictable energy crisis has the potential to be extremely disruptive to our economy and security. Lowering risks cannot guarantee that energy crises will not emerge, but it can limit U.S. exposure when they do.
4 Total domestic natural gas production increases 1% over EIA’s forecast period.