In this section, the energy security metrics framework proposed by Lee (2005), which forms the basis of the oil security metrics used in this study, is briefly reviewed. In the following section, Lee’s non-monetary metrics are shown to be the key determinants of the direct economic costs of oil insecurity.

Methods for measuring energy security benefits were not addressed in Phase 1 of the NRC (2005) report, but were intentionally left for consideration in Phase 2 of the study. Focusing exclusively on energy security benefits, Lee (2005) has recommended a general framework for their assessment. According to Lee (2005), DOE programs may produce energy supply security benefits in four ways:

1. reduce the probability of a supply disruption,

2. reduce the loss of capacity in the event of a disruption, which has two dimensions, a. the magnitude of the disruption

b. the duration of the disruption

3. reduce the net supply shortage resulting from the loss of capacity, and 4. reduce the adverse impact of the shortage and resulting economic damage.

Like the NRC study, Lee (2005) excludes political, strategic and military costs associated with energy security and the costs of actions taken to insure against the adverse impacts of possible disruptions. While such benefits are controversial and difficult to quantify, assigning them a value of zero clearly biases benefits estimates downward. In the absence of rigorous methods for assigning monetary values to these benefits, non-monetary metrics are proposed as indicators of potential progress in addressing these costs.

Lee’s framework was intended to be applicable to all kinds of energy security events from electricity blackouts to oil market disruptions. With respect to oil market disruptions, which occur in a global market for a fungible commodity, the distinction between supply disruption and net supply shortage is less useful. Indeed, if markets are allowed to function a supply disruption will result in no net energy shortage because prices will rise to equilibrate supply and demand. Thus, the following modification to Lee’s framework is adopted.

1. reduce the probability of an oil supply disruption,

2. reduce the decrease in supply as a result of the disruption, 3. reduce the price increase as a result of the disruption,

4. reduce the other adverse consequences and damages from the disruption, and 5. reduce the cost of actions necessary to protect or insure against disruptions (e.g.,

SPR) at a given level of protection.

Initially, it is not proposed that the benefits estimation methodology attempt to predict the impacts of EERE’s R&D programs on the probability of an oil supply disruption. There appear to be no rigorous methods for making such a prediction at the present time. Although there is no accepted method for predicting the likelihood of oil price shocks, useful research has been done

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on indicators.4 However, with additional research and analysis, it should be possible to quantify these relationships in a convincing way.

Energy security metrics proposed by Lee are shown in Table 1. Four specific metrics are proposed for oil security, none of which is measured in dollars.

1. Domestic oil consumption

2. Oil imports, total and as a percentage of consumption 3. Price elasticity of fuel supply

4. Price elasticity of U.S. oil demand

These metrics are indeed the most significant factors affecting U.S. oil security that can be directly influenced by EERE’s R&D programs. But, as is argued below, these metrics can be used to calculate prospective oil security net benefits measured in dollars. Translating Lee’s metrics into dollar estimates begins with analyzing the oil security problem, followed by formulating a rigorous, yet transparent, modeling framework for calculating benefits. Still, not all important prospective benefits can be as readily measured in dollars. For these, non-monetary metrics are proposed.

4 For example, an indicator of the likelihood of a price shock based on the rates of growth of supply and demand was

developed by Santini (1999). Certainly, in theory, there should be a connection between such factors as the rate of growth of oil consumption, the level of world oil demand, the price elasticities of oil supply and demand (especially in the short run), the market share of the OPEC cartel, etc., and the probability of an oil price shock.

Table 1. Preliminary Suggestions for Energy Security Metrics from Lee (2005, table 8)

Type of Energy Security Concern

R&D Programs in EERE That Improve Energy

Security

Energy-Security Impact of Technologies Developed in R&D

Programs Impacted Factors Affecting Energy Security Suggested Energy- Security Metrics Security of

Energy Supply Biomass FreedomCAR/Vehicle Hydrogen, Fuel Cells Industrial Technologies

Reduced oil imports • Reduced probability of threat of disruption

• Reduced cost of maintaining threat at acceptable level

• Reduced impact and damage, in the event of disruption

Oil imports as a percentage of consumption

FreedomCar/Vehicle Hydrogen, Fuel Cells

Industrial Technologies

Reduced demand for

petroleum products • Reduced probability of threat of disruption • Reduced cost of maintaining threat at acceptable level

• Reduced impact and damage, in the event of disruption

Domestic oil consumption

Biomass FreedomCar/Vehicle Geothermal

Hydrogen, Fuel Cells Solar

Wind and Hydropower

Increased price elasticity of supply

• Reduced loss in production capacity, in the event of disruption

• Reduced cost of maintaining capacity, in the event of disruption

• Reduced net loss in production, in the event of disruption

• Reduced cost of maintaining net change in production, in the event of disruptions

Estimate of price elasticity of fuel supply

Biomass Federal Energy Manage. FreedomCar/Vehicle Geothermal

Hydrogen, Fuel Cells Solar

Weatherization, Intergov. Wind and Hydropower

Increased price elasticity of demand for fuels

• Reduced impact and damage, in the event of disruption

Estimate of price elasticity of U.S. oil demand

In document The Oil Security Metrics Model: A Tool for Evaluating the Prospective Oil Security Benefits of DOE's Energy Efficiency and Renewable Energy R&D Programs (Page 33-37)