**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 Propose**  **d 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, 1 

### and utilizing data on projected oil market conditions from the 2014 A nnual Energy Outlook (Early Release) from U.S. EIA. 2 

### The results in Table 1 show lower overall security premium level s , and particularly lower estimate s 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 disrup tion 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 , o ther risk and cost - related drivers remain. S o the oil impor t 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 downwa rd 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 increas e 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, tha t 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 import s, and the quantity of imports are lower, the monopsony premium compone nt 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 project ed to decline, suggesting diminished over all influence and some reduction in marginal influence on world oil price. More important ly , 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 h ere 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 impor ts 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.**  **o il**  **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 s hows that under AEO2014 projected U.S. real annual oil expenditures c ontinue 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 20 05.  **Macro disruption component is moderately lower due to l**  **ower 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 AEO 2012 . B ut price level s 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 little**  **** **changed under AEO2014).**  **Most of these effects that decrease the security premium estimate**  **are stronger over**  **the next decade, and diminish after 2025**  .

------------------ **0% 1%**  **2% 3%**  **4% 5%**  **6% 7%** 

**0 100**  **200 300**  **400 500**  **600 700**  **800 900** 

**1970 1975**  **1980 1985**  **1990 1995**  **2000 2005**  **2010 2015**  **2020 2025**  **2030 E** **x p** **e n** **d i** **t u** **r e** **a s** **S h** **a r** **e o** **f G** **D P** **$ B** **i l** **l /** **y r** **, 2** **0 1** **2 $** 

**Ye ar**  

### Pr**ojected and Historical U.S. Expenditur es, and Expenditur**  **e Shar e,**  **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 Com ponent**  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 Co mponent 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**  **$1.52 Table**  **2 : Evolving Oil Market Conditions and U.S. Oil Use**  **2012 Study/ LDV -**  **2017 Ru le (AEO2012 Ref Case)**  **Current Study/ HD -**  **2014 Ru le (AEO2014 Ref Case)**  **Current/Previous (% change)** Year 2017 2020 2025 2030 2035 2017 2020 2025 2030 2035 2017 2020 2025 2030 2035 Oil Price (2010$/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 Expen diture 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 p ositively related to the size of the import premium, to var ying 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 ”