1

Approach to Estimating the U.S. Oil Security Premium

for the Medium- and Heavy-Duty GHG/Fuel Economy Rule

Paul N. Leiby

Oak Ridge National Laboratory (ORNL)

September 8th, 2010

The Environmental Protection Agency (EPA) and the National Highway Traffic Safety 

Administration (NHTSA) (“the agencies”) are announcing a first-ever program to reduce greenhouse gas 

(GHG) emissions and improve fuel efficiency in the medium and heavy-duty highway vehicle sector in 

the U.S. This broad sector – ranging from large pickups to sleeper-cab tractors – represents the second 

largest contributor to U.S. oil consumption and GHG emissions, after light-duty passenger cars and 

trucks. 

Setting GHG emissions and fuel consumption standards for the medium and heavy-duty vehicle 

sector will improve the U.S.’s energy security by reducing the U.S.’s dependence on foreign oil, which

has been a national objective since the first oil price shocks in the 1970s. World crude oil production is 

highly concentrated, exacerbating the risks of supply disruptions and price shocks. Tight global oil 

markets led to prices of over $100 per barrel in 2008, with fuel prices reaching as high as $4 per gallon in 

many parts of the U.S., causing financial hardship for many families and businesses. Medium and heavyduty vehicles account for about 17 percent of U.S. transportation oil use, which means that they alone 

account for about 12 percent of all U.S. oil consumption.

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Background on Energy Security Methodology

To provide a measure of the energy security implications of the Medium and Heavy-Duty GHG 

emissions/fuel economy Rule (“HD Rule”), an oil import security premium was estimated over the 

duration of the rule’s phase-in and for years after its completion. The HD Rule will reduce U.S. oil 

consumption and, to a similar extent, oil imports. To estimate energy security benefits, ORNL focused 

on the benefits of the reduced U.S. oil import levels. The oil import security premium is a measure of 

the marginal economic cost of oil imports to the U.S. economy beyond the private cost that is paid for 

oil, that is, beyond the market oil price. Since these costs exceed the market price, reducing them is a 

societal benefit. The import premium includes components that account for incremental costs during 

disrupted and normal oil market conditions. The definition and methodology for estimating the oil 

import premium are presented in Leiby (2008),2along with prior estimates. This paper summarizes the 

 

1

In 2009 Source: EIA Annual Energy Outlook 2010 released May 11, 2010

2

Leiby, Paul N. 2008. “Estimating the Energy Security Benefits of Reduced U.S. Oil Imports,” Final Report, Oak 

Ridge National Laboratory, ORNL/TM-2007/028, revised March 14.
2

differences between the premium analysis conducted in support of this HD Rule and that prior 2008 

analysis. The principal difference was the re-benchmarking of reference oil market conditions through 

2035 to conform to the latest Annual Energy Outlook of the U.S. Energy Information Administration 

(AEO2010, Reference case). In addition, European Union (EU) oil demand assumptions are modified to 

account for recent EU policies related to the EU Emissions Trading Scheme (ETS).

1. Definition of Oil Import Premium

A useful measure of the energy security benefits of improved HD fuel economy is the marginal 

reduction in economic costs to the U.S. from reduced oil imports. The oil import premium is defined as 

the difference between the marginal economic cost to society for petroleum imports and the market 

price paid. This is measured and reported in dollars-per-barrel, for a small change in the number of 

barrels imported.3 The approach estimates the incremental benefits to society, in dollars per barrel, of 

reducing U.S. imports.4 This “oil import premium” approach identifies those energy-security related 

costs that are not reflected in the market price of oil, and that are expected to change in response to an 

incremental change in the level of oil imports. Omitted from this premium calculation are 

environmental costs and possible non-economic or unquantifiable effects, such as effects on foreign 

policy flexibility or military policy. Also omitted are any spillover-benefits that may accrue to U.S. allies 

and trading partners who are similarly reliant on oil, and who would benefit from a reduction in the level 

or volatility of world oil price.

2. Methodology for Premium Calculation

The estimation of security premium for the HD Rule closely followed the methodology used to 

support the RFS and Light Duty Fuel Economy/GHG emission rule regulatory analyses, as documented in 

Leiby (2008). For comparability and consistency, most of the assumptions were held unchanged.

The primary assumptions made are:

a) Supply/Demand Elasticities

OPEC-supply behavior is treated parametrically, with a Monte Carlo simulation of possible 

future outcomes using elasticities of supply over a wide range (0.25 to 6.0, with a mean of 1.8). 

Combining the Non-OPEC region demand and Non-U.S. supply elasticities implies a (mode) net elasticity 

of import demand from Non-U.S./Non-OPEC regions of approximately -1.6, with a wide random 

distribution. To account for the possibility, suggested by some but not yet definitively demonstrated or 

universally agreed upon, that the economy has become less sensitive to oil shocks over time, we applied 

 

3

Additional energy security benefits are derived from reduced consumption, and from the resulting reduced oilintensity of the U.S. economy. This can be expected to reduce the sensitivity of the U.S. GDP to global oil shocks 

(e.g. Leiby 2008, Toman 1993, 2002, and Brown and Huntington 2009). As in the 2008 analysis, this particular

component of potential benefits is not included here.

4

Technically, the oil premium is based on a “marginal” economic analysis (i.e., a differential analysis of the rate of 

change of costs per barrel change in imports). At times the term “incremental” may be used in place of “marginal” 

here to avoid confusion with marginal in the more common sense of either “fringe” or “close to the limit of 

acceptability.”
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the reduced range for the elasticity of Gross Domestic Product (GDP) with respect to oil price shocks. 

That is, in the Monte Carlo simulation the GDP elasticity ranged from -0.01 to -0.054, with a mean value 

of

-0.032. This approach was also taken in the main cases in the 2008 analysis.

b) Changes from 2008 Estimation for the Light-duty Vehicle Rule

In these estimates of HD vehicle energy security premiums, the primary change from previous 

estimates is the development of a revised time path for the premium on a year-by-year basis over a 

longer horizon, from 2011 to 2035, under the updated oil market projections embodied in the U.S. 

Energy Information Administration’s 2010 Annual Energy Outlook (AEO2010). Based on the AEO2010, 

evolving market conditions alter some of the factors influencing the oil import security premium. In 

particular: base oil price, U.S. import and consumption levels, U.S. GDP, and OPEC production shares. 

These assumptions together also imply an assumption about the value share of oil use in the U.S. 

economy.

The following Table 1 compares keys assumptions that differ in these estimates compared to 

those used in the prior fuel economy/GHG rulemaking.
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Table 1: Evolving Oil Market Conditions and U.S. Oil Use

2008 Report/LD 

Rule (AEO2007 

Reference Case) 

Avg. for 2006-2015

Current Study/HD 

Rule (AEO2010 

Reference Case) 

2011

Current Study/HD 

Rule (AEO2010 

Reference Case) 

2015

Current Study/HD 

Rule (AEO2010 

Reference Case) 

2025

Oil Price (2008$) $55.68 $66.63 $86.88 $104.42

U.S. Oil Imports 12.560 10.826 10.699 10.519

U.S. Oil Demand 22.190 20.210 20.668 21.560

OPEC Supply 34.430 35.590 37.382 40.862

U.S. GDP (bill 2008$) $15,193 $13,812 $15,494 $20.475

Oil Share of GDP 2.83% 3.56% 4.23% 4.01%

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.) 

Another change to previous estimates of energy security premiums is to assume that for the 

OECD-Europe area, oil demand is inelastic with respect to the HD Rule. The European Union has

committed to achieving a 20 per cent reduction in greenhouse gas emissions by 2020 from 1990 

levels. Phase 3 of the EU program begins in 2013 and broadens coverage on GHG emitting sources 

and establishes EU-wide rules for allowance availability and allocations. Since the last time that 

ORNL estimated energy security premiums, the European Commission has proposed a Directive to 

alter the EU-Emissions Trading Scheme (ETS) structure for Phase 3 in January, 2008, and the

Directive was amended and adopted by the European Parliament and by the Council of the EU in 

April 2009.

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 While the Directive is for GHG commitments, it is likely that the mix of energy sources, 

and the use of oil, would change only by a limited extent under changed prices. In any event, EU 

GHG emissions, given the cap, would be unaffected even if oil demand changed by a small amount 

with the EU-ETS. 

c) Results

Table 2 compares the premium estimates under the assumptions of the current analysis with 

those in the prior 2008 analysis. Following the approach of most oil security premium estimates, 

these are the long-run import premiums, reflecting marginal import costs once the market has had 

 

5

See Parker, L., “Climate Change and the EU Emissions Trading Scheme (ETS): Looking to 2020”, Congressional 

Research Service, January, 2010
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time to fully respond to any change in the level of imports. That is, they reflect the long-run 

elasticities of regional supply and demand. The current premium estimates are computed yearly, 

for 2011, 2012, and at 5-year intervals between 2015 and 2035. The oil import premium, measured 

in $/bbl of imports reduced, is not strongly affected by the estimated volume of oil imports 

displaced. In all cases the volume of reduction in oil use from the HD rule is under 0.5 per cent of 

world demand, and 3 per cent of U.S. demand. 

The total current premium for 2011 is about 17 per cent larger than the prior premium in the 

2008 analysis, which was calculated for average market conditions from 2006-2015. This premium 

increase reflects the mixed effects of changes in projected reference oil market conditions. Such 

changes include 26 per cent higher projected oil prices, slightly higher OPEC supply, and a higher 

value share of oil expenditures in GDP. Offsetting these drivers are projected oil consumption and 

import levels that are 9 per cent and 14 per cent lower, respectively, than projected in AEO2007. 

For years after 2011, the EIA projected real oil price, GDP, and OPEC supply, and oil value share 

continue to grow. Oil consumption grows slowly and oil imports are little changed. Together, these 

conditions yield a steadily increasing oil security premium through 2035.

Table 2: Summary Results – Comparison of Current and 2008 Report

Effect / Study Prior Analysis:

ORNL 2008 Report

(2008$/BBL, average for 

2006-2015)

Current Analysis:

2010 HD Rule Analysis

(2008$/BBL, for example year 

2011)

Monopsony Component $8.03

($3.00 - $14.21)

$9.58 

($3.26 - $17.87)

Macroeconomic Disruption/ 

Adjustment Costs

$4.97

($2.28 - $8.02)

$5.63 

($2.60 - $8.79)

Total Mid-point $13.00

($7.23 - $19.45)

$15.21 

($8.02 - $23.62)

Results in 2008$. Columns report mean estimate and ranges. Results for 2008 report match 

those in Leiby 2008, in 2005$. The ranges include 90% of results from the risk-analysis 

simulation, with simulations done around the EIA Reference Outlook only.

For this proposed rule, ORNL also estimated energy security premiums for the years 

2020, 2030 and 2040. These premiums are presented in Table 3 as well as a breakdown of the 

components of the energy security premiums for each of these years. Variations over time 

reflect changing reference oil price levels, U.S. import levels, and global market balances. There 

are no assumed changes in global oil market disruption risk.
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Table 3: Energy Security Premiums in 2020, 2030 and 2040 

(2008$/Barrel)

Effect 2020 2030 2040

Monopsony Component $12.28

($4.16 - $23.74)

$12.69

($4.43 – 23.80)

$12.68

($4.41 – $23.41)

Macroeconomic Disruption/ 

Adjustment Costs

$7.39

($3.39 – $11.92)

$8.54

($4.10 – $13.60)

$8.99

($4.48 - $14.08)

Total Mid-point $19.66

($10.27 - $30.90)

$21.23

($11.30 - $32.88)

$21.67

($11.54 - $33.11)

Results in 2008$. Columns report mean estimate and ranges resulting from Monte Carlo Simulation.

The EU oil demand assumption doesn’t have a large impact on estimated energy 

security premiums estimated for the HD vehicle rule. For instance, for 2020, the total energy 

security premium with the inelastic EU oil demand is $19.66/barrel. If oil demand in the EU is 

demand responsive, then the energy security premium is $18.88/barrel. The macro-disruption 

component of the energy security premium is unchanged at $7.39/barrel in 2020 with both 

cases. The disruption component is not sensitive to the assumption regarding EU demand 

elasticity since it is more a function of disruption risk, U.S. oil import levels and import elasticity, 

and U.S. GDP sensitivity to shocks. The main reasons for this limited effect of inelastic EU 

demand is that the EU comprises a limited and declining share of world oil demand outside of 

the U.S., and that the premium is largely determined by supply behavior in all world regions. 

Since the HD rule only counts the macro-disruption portion of the energy security premium 

when valuing the energy security benefits of the HD vehicle rule, whether EU oil demand is 

inelastic or demand responsive has only a relatively small impact on the overall energy security 

benefits of the rule.

References

Leiby, Paul N. 2008. “Estimating the Energy Security Benefits of Reduced U.S. Oil Imports,” Final 

Report, Oak Ridge National Laboratory, ORNL/TM-2007/028, revised March 14.

Parker, L., 2010, “Climate Change and the EU Emissions Trading Scheme (ETS); Looking to 2020”, 

Congressional Research Service.
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Toman, Michael A. 1993. “The Economics of Energy Security: Theory, Evidence, Policy,” 

Handbook of Natural Resource and Energy Economics, vol. III, edited by A.V. Kneese and J.L. 

Sweeney, Chapter 25. (New York: Elsevier Science Publishers B.V.).

Toman, Michael A. 2002. “International Oil Security Problems and Policies,” The Brookings 

Review, 20(2):20-23, Spring.