Paul N. Leiby

P.O. Box 2008, MS 6036

Oak Ridge, TN 37831-6036

(865) 574-7720

Factors Influencing Estimate of Energy Security Premium for Heavy-Duty Phase II Proposed Rule

Paul Leiby, 11/1/2014

Oak Ridge National Laboratory

The energy security premium for the 2014 HD Rule (Phase II) was estimated based on the displacement of U.S. oil 

imports, following the same methodology used in the 2012 Light Duty Rule,1and utilizing data on projected oil market 

conditions from the 2014 Annual Energy Outlook (Early Release) from U.S. EIA. 2

The results in Table 1 show lower overall security premium levels, and particularly lower estimates of the “monopsony

component,” or import demand component of the premium, over the nearer-term (2015-2025). If oil prices and imports 

conform to the AEO2014 projections, the monopsony premium component over the next decade will be between half 

and two-thirds of the level estimated in 2012. The disruption component of the premium is also lower than was 

estimated in 2012, although to a lesser degree. 

This note presents some of the factors that cause the estimated energy security premium associated with oil import 

reduction to be lower than it was two years ago. While certain factors and projected oil market conditions lead to 

reduced premium estimates, other risk and cost-related drivers remain. So the oil import premium is still significant in 

magnitude.

 Lower oil prices and imports reduce import costs and monopsony premium

o The principal changes in the AEO projections since 2012 are a general downward revision in world oil 

price projections in the near term (e.g. 19% in 2020) and a sharp reduction in projected U.S. oil imports 

in the near term, due to increased U.S. supply (i.e. a 41% reduction in imports by 2017, 36% reduction in 

2020) (See Table 2). Over the longer term the import share is projected to gradually increase after 2020 

but still remain 27% below the AEO2012 level in 2035.

o These changes in oil price and import levels have the most profound effect on the monopsony portion of 

premium, that is the estimated portion of the security premium related to the change in total import 

cost that is achieved by a marginal reduction in imports. Since both the price level for imports, and the 

quantity of imports are lower, the monopsony premium component is 46% - 57% lower over the years 

2017-2025.

 Diminished influence of marginal (per barrel) U.S. import demand on world price, slightly more elastic world 

supply

o The U.S. demand on the global oil market is projected to decline, suggesting diminished overall influence 

and some reduction in marginal influence on world oil price. More importantly, projected OPEC supply 

remains roughly steady as a share of world oil supply compared to the AEO2012. OPEC’s share of world 

 

1

U.S. Environmental Protection Agency (EPA), & U.S. Dept. of Transportation National Highway Traffic Safety Administration 

(NHTSA). (2012). Joint Technical Support Document: Final Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas 

Emission Standards and Corporate Average Fuel Economy Standards, EPA-420-R-12-901 August. Retrieved from 

http://www.epa.gov/otaq/climate/documents/420r12901.pdf. Pp. 4-30 ff.

2

The analysis here is based on the AEO2014 Early Release version, for compatibility with other analyses for this rulemaking. 

AEO2014 Final Reference Case is very similar to the AEO2014ER version, with identical oil prices. All statements here 

regarding AEO2014 refer to the Early Release version.
oil supply outside of the U.S. actually increases slightly. Since OPEC supply is estimated to be more 

price-elastic than non-OPEC supply, this means that under AEO2014 the elasticity of world oil supply to 

the U.S. is slightly greater. Together, these factors mean that marginal U.S. oil imports displacement has 

a somewhat smaller estimated effect on long-run world oil price than it did in the 2012 estimates. For 

example, in 2020 the long-run price declines by $1.33/BBL for every 1 MMB reduction in imports under 

AEO2014 compared to $1.66/bbl under AEO2012 (2012$).

 Macroeconomic sensitivity to oil to oil price shocks is assumed to be similar to the case in 2012, since U.S. oil 

consumption levels and the value share of oil in the U.S. economy remain at high levels under AEO2014

o The level of U.S. oil demand under AEO2014 is essentially unchanged from AEO2012 through 2020, and 

only 3% lower by 2025. Demand is projected to be 8% lower by 2035 under AEO2014 than AEO2012. 

The estimated impact of a given price shock on the U.S. economy is not assumed to change significantly 

with the level of imports. It is expected to be more closely related to the importance of oil use in the 

U.S. economy, measured either by oil consumption levels or the value share of oil use in the U.S. 

economy. Figure XX below shows that under AEO2014 projected U.S. real annual oil expenditures 

continue to rise after 2015, to over $800 billion (2012$) by 2030. The value share of oil use in the U.S. 

economy remains between 3% and 4%, well above the levels observed from 1985 to 2005.

 Macro disruption component is moderately lower due to lower GDP, moderately lower oil prices and slightly 

smaller price increases during prospective shocks. 

o Under AEO2014, projected real GDP is very slightly lower than under AEO2012. But price levels are 19%

to 5% lower over the 2020-2035 period, and shock price increases are somewhat smaller given small 

changes in the average world net elasticity of oil supply. This leads to disruption component estimates 

for the oil security premium that are 19% to 2% lower over the same period.

 However, disruption costs are not reduced greatly since disruption risks are little-changed (the probability of 

global supply interruptions is assumed unchanged in these estimates, and the supply share from OPEC is littlechanged under AEO2014).

 Most of these effects that decrease the security premium estimate are stronger over the next decade, and 

diminish after 2025.

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0

100

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Expen

diture as Share of G

D

P

$Bill/yr, 2012$

Year

Projected and Historical U.S. Expenditures, and Expenditure Share, 

on Crude Oil

Domestic

Imported

US Oil Expenditures as Share

of GDP
Table 1: Summary Results - Oil Import Premium in Various Years ($2012/BBL)

Component Statistic

Base case, 

AEO2014ER, 

2012$/BBL

Base case, 

AEO2014ER, 

2012$/BBL

Base case, 

AEO2014ER, 

2012$/BBL

Base case, 

AEO2014ER, 

2012$/BBL

Base case, 

AEO2014ER, 

2012$/BBL

Year 2020 2025 2030 2035 2040

Monopsony Component Mean $4.96 $5.52 $6.10 $6.57 $7.25

Range (1.65 - 9.54) (1.83 - 10.58) (2.02 - 11.79) (2.13 - 12.82) (2.34 - 14.18)

Disruption Component Total Mean $6.42 $7.37 $8.48 $9.61 $10.86

Range (3.1 - 10.26) (3.61 - 11.79) (4.17 - 13.56) (4.75 - 15.37) (5.42 - 17.41)

Total Mid-Point Mean $11.38 $12.89 $14.58 $16.18 $18.10

Range (6.74 - 16.71) (7.66 - 18.85) (8.63 - 21.36) (9.51 - 23.65) (10.64 - 26.42)

Total Premium, in $/Gallon Mean $0.27 $0.31 $0.35 $0.39 $0.43

Disruption Premium in $/Gallon Mean $0.15 $0.18 $0.20 $0.23 $0.26

Rate of Price Reduction ($/MMBD) Mean $1.33 $1.42 $1.47 $1.50 $1.52
Table 2: Evolving Oil Market Conditions and U.S. Oil Use

2012 Study/ LDV-2017 Rule (AEO2012 Ref Case) Current Study/ HD-2014 Rule (AEO2014 Ref Case) Current/Previous (% change)

Year 2017 2020 2025 2030 2035 2017 2020 2025 2030 2035 2017 2020 2025 2030 2035

Oil Price (2010$/BBL) $114.67 $117.47 $122.82 $128.15 $134.42 $90.12 $94.76 $106.95 $116.76 $127.33 -21% -19% -13% -9% -5%

U.S. Oil Imports 8.218 7.730 7.670 7.393 7.661 4.873 4.938 5.066 5.384 5.598 -41% -36% -34% -27% -27%

U.S. Oil Demand 19.738 19.771 19.797 20.034 20.442 19.468 19.527 19.283 18.969 18.814 -1% -1% -3% -5% -8%

OPEC Supply 38.532 39.692 42.200 44.266 46.038 37.838 39.565 40.974 44.043 48.001 -2% 0% -3% -1% 4%

U.S. GDP (bill 2010$) $17,528 $18,847 $21,316 $24,162 $27,388 $17,342 $18,637 $20,879 $23,515 $26,421 -1% -1% -2% -3% -4%

Oil Expenditure as 

Share of GDP

4.71% 4.50% 4.16% 3.88% 3.66% 3.69% 3.62% 3.61% 3.44% 3.31% -22% -19% -13% -11% -10%

OPEC as Share of 

World Supply Outside 

U.S.

46% 47% 47% 47% 47% 47% 47% 47% 48% 49% 2% 2% 1% 2% 4%

Notes: Evolving historical and projected oil market conditions influence the premium estimate. Note that all these parameters are positively related to the 

size of the import premium, to varying degrees. (Price is in $/bbl; imports, demand and supply are in millions of bbl/day; and GDP is in $billion per 

annum.)
Backup: Figure Sources

Table 1: “ES Premium_AEO2014ER_DraftSummary20141103_full.xlsx”

Fig 1 and Table 2: “Mapping and Testing OilPrem1997_to_2014 - Ver1.xlsx”