From: Robin Moran/AA/USEPA/US 

To: "Achanta, Chandana L." <Chandana_L._Achanta@omb.eop.gov> 

Cc: William Charmley/AA/USEPA/US@EPA, rebecca.yoon@dot.gov, james.tamm@dot.gov, 

Don.Pickrell@dot.gov. james.tamm@epa.gov, Michael Shelby/DC/USEPA/US@EPA 

Date: 03/26/2010 01:12 PM 

Subjec

t: 

Revised Energy Security text per OMB/CEA Comments 

Chandana, 

Here is revised text that EPA/NHTSA developed to address CEA's concern about 

comment 5b. 

This text will be added to Preamble Section III.H.8, and Section IV.G.4 and Joint TSD 

Chapter 4: 

[attachment "Macro Disruption Costs for OMB.doc" deleted by Tad Wysor/AA/USEPA/US] 

Robin Moran 

Senior Policy Advisor 

Assessment and Standards Division 

U.S. EPA, Office of Transportation and Air Quality 

2000 Traverwood Dr. 

Ann Arbor, MI 48105 

(734) 214-4781 

(734) 214-4821 (fax)
DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

OMB Question 

5b. The revised energy security benefits include two categories associated with supply disruption 

– one is a transfer and should probably be excluded. While EPA and NHTSA discuss this issue, 

the agencies continue to include it and say they will examine the issue for future rulemaking. 

NYU School of Law argued the agencies should exclude wealth transfers from the supply 

disruption component. We recommend that the agencies evaluate this point and show what the 

benefits would look like if this piece is excluded. 

Response: 

The agencies have added the following discussion in Preamble Section III.H.8, and Section 

IV.G.4 and Joint TSD Chapter 4: 

In the energy security literature, the macroeconomic disruption component of the energy 

security premium traditionally has included both (1) increased payments for petroleum imports 

associated with a rapid increase in world oil prices, and (2) the GDP losses and adjustment costs 

that result from projected future oil price shocks. One commenter suggested that the increased 

payments associated with rapid increases in petroleum prices (i.e., price increases in a disrupted 

market) represent transfers from U.S. oil consumers to petroleum suppliers rather than real 

economic costs, and therefore, should not be counted as a benefit. 

 This approach would represent a significant departure from how the macroeconomic 

disruption costs associated with oil price shocks have been quantified in the broader energy 

security literature, and the Agencies believe it should be analyzed in more detail before being 

applied in a regulatory context. In addition, the Agencies also believe that there are compelling 

reasons to treat higher oil import costs during oil supply disruptions differently than simple 

wealth transfers that reflect the exercise of market power by petroleum sellers or consumers. 

According to the OMB definition of a transfer: “Benefit and cost estimates should reflect real 

resource use. Transfer payments are monetary payments from one group to another that do not 

affect total resources available to society...The net reduction in the total surplus (consumer plus 

producer) is a real cost to society, but the transfer from buyers to sellers resulting from a higher 

price is not a real cost since the net reduction automatically accounts for the transfer from buyers 

to sellers.”1

 In other words, pure transfers do not lead to changes in the allocation or 

consumption of economic resources, whereas changes in the resource allocation or use produce 

real economic costs or benefits. 

While price increases during oil price disruptions can result in large transfers of wealth, 

they also result in a combination of real resource shortages, costly short-run shifts in energy 

supply, behavioral and demand adjustments by energy users, and other response costs. Unlike 

pure transfers, the root cause of the disruption price increase is a real resource supply reduction 

due, for example, to disaster or war. Regions where supplies are disrupted (i.e., the U.S.) suffer 

very high costs. Businesses’ and households’ emergency responses to supply disruptions and 

 

1 OMB Circular A-4, September 17, 2003. See 

http://www.whitehouse.gov/omb/assets/omb/circulars/a004/a-4.pdf
2

DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

 

rapid price increases are likely to consume some real economic resources, in addition to causing 

financial losses to the U.S. economy that are matched by offsetting gains elsewhere in the global 

economy. 

 While households and businesses can reduce their petroleum consumption, invest in fuel 

switching technologies, or use futures markets to insulate themselves in advance against the 

potential costs of rapid increases in oil prices, when deciding how extensively to do so, they are 

unlikely to account for the effect of their petroleum consumption on the magnitude of costs that 

supply interruptions and accompanying price shocks impose on others. As a consequence, the 

U.S. economy as a whole will not make sufficient use of these mechanisms to insulate itself from 

the real costs of rapid increases in energy prices and outlays that usually accompany oil supply 

interruptions.2

 Therefore, the ORNL estimate of macroeconomic disruption and adjustment 

costs that the Agencies use to value energy security benefits includes the increased oil import 

costs stemming from oil price shocks that are unanticipated and not internalized by advance 

actions of U.S. consumers of petroleum products. The Agencies believe that, as the ORNL 

analysis argues, the uninternalized oil import costs that occur during oil supply interruptions 

represents a real cost associated with U.S. petroleum consumption and imports, and that reducing 

its value by lowering domestic petroleum consumption and imports thus represents a real 

economic benefit from lower fuel consumption. 

2

 For a more complete discussion of the reasons why the oil import cost component of the 

macroeconomic disruption and adjustment costs includes some real costs and does not represent 

a pure transfer, see Paul N. Leiby, Estimating the Energy Security Benefits of Reduced U.S. Oil 

Imports: Final Report, ORNL-TM-2007-028, Oak Ridge National Laboratory, March 14, 2008, 

pp. 21-25.