1. “An ounce of prevention is worth a pound of cure”
Chapter 16
Energy Security Part A
“An ounce of prevention is worth a pound of cure”
~Benjamin Franklin (1735)
Peter Schwarz
Professor of Economics, Belk College of Business and
Associate, Energy Production and Infrastructure Center (EPIC)
UNC Charlotte

2. Outline Introduction Definition of Energy Security
History of Oil Security Since 1973
Current Issues in Primary Energy Security
Primary Energy
Energy Infrastructure
Electricity and Energy Security
Costs and Benefits of Energy Security
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3. Introduction (1)
Energy security concerns began with the 1973 Middle East oil embargo
Showed the vulnerability of economies to supply interruptions
Attempts to increase energy security are generally focused on supply
Increased domestic production
Shift to alternative fuel sources
Strategic Petroleum Reserve (SPR)
Stores oil to meet future contingencies
Increased military budget to protect energy supplies
Increased security also possible by decreasing demand
Energy intensity has been steadily decreasing since 1973
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4. Introduction (2)
Energy security also applies to threats, such as terrorist attacks on the electricity grid
Could target the physical system, cyber system, or supply chain
Economics must consider costs and benefits
Should we invest more in energy security or reducing air pollution?
Review Question: What is energy intensity?
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5. Definition of Energy Security (1)
The International Energy Agency (IEA) has this definition:
“The uninterrupted flow of energy at an affordable price.”
What is the meaning of affordable?
What supply is sufficient to ensure continuous availability?
Metcalf (2014) suggests an alternative definition:
“The ability of households, businesses, and governments to accommodate disruptions of supply in energy markets.”
Seeks to clear up three areas of confusion common in policy discussions.
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6. Definition of Energy Security (2): Misleading Policy Arguments According to Metcalf
Energy independence: focusses on reducing imports from politically unfriendly regimes
Meant to protect us from price shocks
However, domestic oil prices will adjust to the world price
Oil will flow to the country willing to pay the highest price
Energy security as an externality (Bohi and Toman, 1996)
Examples are costs such as the oil stockpile and military preparedness
Farrell, Zerriffi, and Dowlatabadi (2004) argue energy security as a public good
Metcalf sees bottlenecks in specific locations: Fukushima, Polar Vortex
Macro effects (effects on business cycle from price instability) and micro effects (interruptions to energy)
Low prices need not enhance energy security
Low prices weaken the incentive for energy efficiency
Low revenues weaken investor incentives to pursue infrastructure improvements
Economists need to incorporate political reality
Foreign policy influence
May differ with foreign supplier over human rights or terrorist concerns
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7. History of Oil Security Since 1973 (1): OPEC and the 1973 Embargo
1973: Arab-Israeli War
Middle East members of OPEC instituted an oil embargo against countries that had provided support to Israel
Price went from $3-$12
1979: Iranian Revolution
U.S. allowed the deposed Shah of Iran to seek medical treatment
Followed by the Iran hostage crisis
Price went from $14-$36
Stagflation
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8. History of Oil Security Since 1973 (2): Price Controls
$/gallon
Q gallons S1 S0 D0
230
160
$0.35
$0.70
$0.50
100
$1.10
Shortage A B
190
First response was to put a ceiling on the price of gasoline
Long lines and angry customers
Many gas station owners found ways to get around the price ceiling
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9. History of Oil Security Since 1973 (3): 1970s (cont.)
Rationing was used during the second gas price shock
Drivers could only buy gas on days of the week that corresponded to their license plate numbers
Did nothing to alleviate the shortage and may have caused even longer lines
1975:
U.S. bans crude exports in an attempt to achieve energy independence
An average gas station in Portland, where customers where limited to 5 gallons each
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10. History of Oil Security Since 1973 (4): Federal Speed Limit
1974: President Nixon signs a law, mandating a national speed limit of 55 mph
Vehicles run more efficiently at lower speeds
Oil prices collapsed in the early ‘80s but mandate was not lifted New justification: Lower limit saved lives
Forester, McNown, and Singell (1984)
Performed a CBA and found costs far outweighed benefits of the mandate
Used hedonic wage studies to determine the value of statistical lives (VSL) saved by speed limit.
Compared against the value of time measured by foregone earnings
Costs exceeded benefits by more than 100%
Finally lifted in 1995 by President Clinton
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11. History of Oil Security Since 1973 (5): Electricity in the ‘70s
Prices soared as oil was a major generating fuel
Consumers looked to natural gas as an alternative for electricity generation and direct heating
U.S. Supreme Court Phillips decision capped natural gas wellhead prices in 1954
Recall the graph describing price controls on oil
1978: Public Utilities Regulatory Policy Act (PURPA)
Opened the door for independent power producers
Short term: Drove up price of electricity
Required utilities to buy alternative energy from qualified facilities at avoided cost
1978: Natural Gas Policy Act
Phased in decontrol of natural gas prices
Eventually led to full decontrol of wellhead prices
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12. History of Oil Security Since 1973 (6): Price Volatility
The high volatility of energy prices in the ‘70s contributed to the recession of the early ‘80s
Increased oil prices have preceded each recession since 1973
1990: Saddam Hussein invades Kuwait and is pushed out by U.S. Troops months later
Price of oil: $18  $40
U.S. recession in 1991
2008: A global meltdown of financial institutions leads to the Great Recession
Oil prices peaked earlier that year at $147 per barrel
Kuwaiti Oilfield fires during operation Desert Storm
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13. History of Oil Security Since 1973 (7): Speculators
Market participants who do not buy or sell any physical products in a marketplace
Typically take higher-than-average risk in return for greater returns
Look to profit off of price volatility
Some suspect oil speculators have been partially responsible for high prices and volatility in the 21st century
Economists generally find that speculators are useful
May actually reduce price volatility
Provide useful information regarding future price expectations
Investigations into alleged market manipulation by speculators has not turned up any convincing evidence
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