1

Approach to Estimating the U.S. Oil Security Premium

for the Proposed 2017-2025 Light -Duty Vehicle GHG/Fuel Economy Rule

Paul N. Leiby

Oak Ridge National Laboratory (ORNL)

October 14, 2011

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

Administration (NHTSA) are proposing a program to reduce greenhouse gas (GHG) emissions and 

improve fuel efficiency in the light-duty highway vehicle sector in the U.S. This sector – light-duty 

passenger cars and trucks – represents the largest single contributor to U.S. oil consumption and one of 

the largest sources of GHG emissions.1

Setting GHG emissions and fuel consumption standards for the light-duty vehicle sector will 

improve the U.S.’s energy security by reducing the U.S.’s dependence on foreign oil and reducing its 

exposure to oil shocks. This 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 $120 per barrel in 2008 and again in 2011, 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. Light-duty vehicles account for about 60 percent of U.S. transportation oil use, 

which means that they alone account for about 43 percent of all U.S. oil consumption.

2

Background on Energy Security Methodology

To provide a measure of the energy security implications of the Light-Duty GHG emissions/fuel 

economy Rule for 2017 to 2025 (“LDV 2017 Rule”), an oil import security premium was estimated over 

the duration of the rule’s phase-in and for years after its completion. The LDV 2017 Rule will reduce U.S. 

oil consumption and, to a similar extent, oil imports. It will also encourage the introduction of some 

new vehicle technologies, including Plug-in Hybrid Electric Vehicles (PHEVs) and Battery Electric Vehicles 

(BEVs). To estimate energy security benefits for this proposed rule, 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, and are not fully accounted in the market 

decisions of private firms and individuals, reducing them is a societal benefit. The import premium 

includes components that account for incremental costs during disrupted and normal oil market 

 

1

See U.S. EIA 2011. Emissions of Greenhouse Gases in the U. S., March 31, 2011, Report Number: DOE/EIA0573(2009)http://www.eia.gov/environment/emissions/ghg_report/.

2

In 2009 Source: EIA Annual Energy Outlook 2010 released May 11, 2010
2

conditions. The definition and methodology for estimating the oil import premium are presented in 

Leiby (2008),3along with prior estimates. This paper summarizes the differences between the premium 

analysis conducted in support of this LDV-2017 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 (AEO2011 final release, 

Reference case4). 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 vehicle 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.5 The approach estimates the incremental benefits to society, in dollars per barrel, 

of reducing U.S. imports.6 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. The LDV rule may 

also induce greater use of electric and plug-in electric vehicles, but the analysis to this point does not 

consider any additional energy security considerations that may follow from their use.7 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.

 

3

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.

4

U.S. EIA 2011. Annual Energy Outlook 2011 with Projections to 2035, Updated April 2011, 

http://www.eia.gov/forecasts/aeo/data.cfm, accessed 9/9/2011. NEMS case is ref2011.d020911a.

5

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.

6

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.”

7

Since EPA anticipates that more electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) will penetrate 

the U.S. automobile market over time as a result of this proposal, there may be value to further-analyzing the 

energy security implications of these vehicles and the fuels that they consume. Apart from the potential for 

increased electricity use in vehicles to reduce U.S. oil imports, there are questions of the potential for disruptions 

in electricity supply and of the overall expected impact, if any, of additional battery and plug-hybrid vehicle use on 

the stability and resilience of fuel and electricity markets.
3

2. Methodology for Premium Calculation

The estimation of security premium for the LDV-2017 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), and analyses for the 2011 Heavy-Duty Vehicle rule. 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 

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 Light-duty vehicle energy security premiums, the primary change from 

previous estimates is the development of a revised time path for the premium over a longer horizon, 

from 2015 to 2050, under the updated oil market projections embodied in the U.S. Energy Information 

Administration’s 2011 Annual Energy Outlook (AEO2011). Values after 2035 were based on simple 

extrapolation, since AEO projections are unavailable after 2035. Based on the AEO2011 projection, 

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/2012 

LDV Rule (AEO2007 

Reference Case) 

Avg. for 2006-2015

Current Study/ LDV2017 Rule 

(AEO2011

Reference Case) 

2015

Current Study/ LDV2017 Rule 

(AEO2011

Reference Case) 

2020

Current Study/ LDV2017 Rule 

(AEO2011

Reference Case) 

2025

Oil Price (2009$/BBL)

$55.71 $81.69 $92.81 $101.04

U.S. Oil Imports 12.560 10.338 9.778 9.565

U.S. Oil Demand 22.190 20.758 20.977 21.289

OPEC Supply 34.430 37.298 39.235 40.766

U.S. GDP (bill 2009$)

$15,343 $15,817 $17,965 $20,645

Oil Share of GDP 2.83% 3.92% 3.96% 3.80%

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 LDV-2017 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 we

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.

8

 

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 the modest price changes induced by the LDV2017 rule. In any event, EU GHG emissions, given the cap, would be unaffected even if EU oil

demand changed by a small amount in response to the U.S. LDV Rule under 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, 

 

8

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

Research Service, January, 2010
5

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

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 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. While substantial in 

volume, the reduction in oil use from the LDV-2017 rule is under 1 per cent of world liquid fuels 

demand through 2025, and under 2.1 percent through 2035. It amounts to 3.8% of U.S. liquid fuels 

demand in 2025, growing to 10% by 2035.

9

The total current premium for 2015 is about 31 per cent larger than the prior premium in the 

2008 analysis, which was calculated for average market conditions from 2006-2015, as projected in 

2007. On a per-barrel basis, these results are close to the estimates produced earlier this year for 

the Heavy Duty Vehicle rule, also based on the AEO2011 (Early Release). This premium increase 

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

include 47 per cent higher projected oil prices, 11% higher OPEC supply, and a 38% higher value 

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

levels that are 7 per cent and 18 per cent lower, respectively, than projected in AEO2007. For years 

after 2015, the EIA projected real oil price, GDP, and OPEC supply continue to grow. Oil 

consumption grows slowly and oil imports are projected to decline 7.5% by 2025. Oil value share in 

the U.S. economy peaks in 2020 and then slowly declines. Together, these conditions yield a 

gradually but steadily increasing oil security premium through 2030.

 

9

Source for projected liquid fuels demand is AEO2011, Table 21. International Liquids Supply and Disposition. 

Estimates of projected fuel savings from the rule are from EPA.
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Table 2: Summary Results – Comparison of Current and 2008 Report

Effect / Study Prior Analysis:

ORNL 2008 Report

(2009$/BBL, average for 

2006-2015)

Current Analysis:

LDV 2017 Rule Analysis

(2009$/BBL, for example year 

2015)

Monopsony Component $8.11

($3.03 - $14.21)

$10.75

($3.64 - $20.38))

Macroeconomic Disruption/ 

Adjustment Costs

$5.02

($2.30 - $8.10)

$6.48

($3.07 - $10.54)

Total Mid-point $13.13

($7.30 - $19.64)

$17.22

($8.74 - $27.30)

Results in 2009$. 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 

2015-2050 in five-year intervals. 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 2015 through 2050

(2009$/Barrel)

Effect 2015 2020 2025 2030 2035 2040 2050

Monopsony 

Component $10.75

(3.64 - 20.38)

$11.12 

(3.78 - 21.21)

$11.26

(3.78 - 21.48)

$10.91 

(3.74 - 20.47)

$10.11 

(3.51 - 18.85)

$10.11

(3.51 - 18.85)

$10.11

(3.51 - 18.85)

Macroeconomic

Disruption/ 

Adjustment Costs

$6.48 

(3.07 - 10.54)

$7.10 

(3.4 - 10.96)

$7.77 

(3.84 - 12.32)

$8.32

(4.09 - 13.34)

$8.60 

(4.41 - 13.62)

$8.60 

(4.41 - 13.62)

$8.60 

(4.41 - 13.62)

Total Mid-point $17.22

(8.74 - 27.3)

$18.22

(9.53 - 29.06)

$19.03 

(9.93 - 29.75)

$19.23 

(10.51-29.02)

$18.71

(10.3 - 28.2)

$18.71 

(10.3 - 28.2)

$18.71 

(10.3 - 28.2)

Results in 2009$. 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 LDV-2017 vehicle rule. For instance, for 2020, the total 

energy security premium with the inelastic EU oil demand is $18.22/barrel. If oil demand in the 

EU is demand responsive, then the energy security premium is $17.63/barrel. The macrodisruption component of the energy security premium is essentially unchanged at $7.10/barrel 

in 2020.10 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 LDV-2017 rule only counts the macro-disruption portion of the energy security 

premium when valuing the energy security benefits of the LDV-2017 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.

 

10 Small changes of ~$0.05/BBL in the mean can be attributed to random sample variation in the simulation.
8

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.

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.
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Tables and Graphs

Table: Summary Results - Oil Import Premium Under Various Cases ($2009/BBL)

Component Statistic 2015 2020 2025 2030 2035 2040 2045 20

Monopsony Component Mean $10.75 $11.12 $11.26 $10.91 $10.11 $10.11 $10.11 $10.1

Range (3.64 - 20.38) (3.78 - 21.21) (3.78 - 21.48) (3.74 - 20.47) (3.51 - 18.85) (3.51 - 18.85) (3.51 - 18.85)

(3.51 

18.85)

 Disruption Import Costs Mean $3.21 $3.46 $3.68 $3.78 $3.72 $3.72 $3.72 $3.72 

Range (0.95 - 5.71) (1.11 - 6.16) (1.19 - 6.61) (1.03 - 6.49) (1.14 - 6.59) (1.14 - 6.59) (1.14 - 6.59) (1.14 - 6.

 Disruption Dislocation GDP Losses Mean $3.26 $3.64 $4.08 $4.54 $4.88 $4.88 $4.88 $4.88 

Range (1.09 - 5.95) (1.31 - 6.61) (1.49 - 7.44) (1.53 - 8.16) (1.65 - 8.6) (1.65 - 8.6) (1.65 - 8.6) (1.65 - 8

Disruption Component Total Mean $6.48 $7.10 $7.77 $8.32 $8.60 $8.60 $8.60 $8.60 

Range (3.07 - 10.54) (3.4 - 10.96) (3.84 - 12.32) (4.09 - 13.34) (4.41 - 13.62) (4.41 - 13.62) (4.41 - 13.62)

(4.41 

13.62)

Total Mid-Point Mean $17.22 $18.22 $19.03 $19.23 $18.71 $18.71 $18.71 $18.7

Range (8.74 - 27.3) (9.53 - 29.06) (9.93 - 29.75) (10.51-29.02) (10.3 - 28.2) (10.3 - 28.2) (10.3 - 28.2) (10.3 - 28

Total Premium, in $/Gallon Mean $0.41 $0.43 $0.45 $0.46 $0.45 $0.45 $0.45 $0.45 

Disruption Premium in $/Gallon Mean $0.15 $0.17 $0.18 $0.20 $0.20 $0.20 $0.20 $0.20 

Rate of Price Reduction ($/MMBD) Mean $1.26 $1.39 $1.44 $1.40 $1.31 $1.31 $1.31 $1.31 

Notes: Results from Oil Import Premium Risk Analysis - Updates Using AEO2011 (Final Release). Sept. 9, 2011. 90% confidence intervals. 

Base case, AEO2011 final, Multiple Yrs with Constrained OECD Europe demand. Values in 2009$/BBL.
10

0

5

1 0

1 5

2 0

2 5

2015 2020 2025 2030 2035 2040 2045 2050

$2009/BBL

Oil Import Premium Components ($/BBL)

Monopsony Component Mean

Disruption Component Total Mean

Total Mid-Point Mean