1

Approach to Estimating the U.S. Oil Security Premium

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

Paul N. Leiby

Oak Ridge National Laboratory (ORNL)

August 6, 2012

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

Administration (NHTSA) are implementing 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. 

Energy Security Risks

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,

2 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 47 percent of all U.S. oil 

consumption.

3

Potential national and energy security risks exist due to the possibility of tension over oil 

supplies. Much of the world’s oil and gas supplies are located in countries facing social, economic, and 

demographic challenges, thus making them even more vulnerable to potential local instability. For 

example, in 2010 just over 40 percent of world oil supply came from OPEC nations, and the AEO 2012 

projections through 2030 show no decline in this share.4Approximately 28 percent of global supply is 

 

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

EIA Monthly crude oil spot prices, http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.

3

In 2011. Source: EIA Annual Energy Outlook 2012, released June 25, 2012, Tables 7 and 11.

4

U.S. EIA AEO2012, Table 21, "International Liquids Supply and Disposition Summary." The projected OPEC share 

actually rises slightly to 42% by 2035.
2

from Persian Gulf countries alone.5As another measure of concentration, of the 137 

countries/principalities that export either crude oil or refined petroleum product, the top 12 have 

recently accounted for nearly 60% percent of exports (see Table 1a). Eight of these countries are 

members of OPEC, and Russia is ninth (see Table 1b). In a market where even a 1-2 percent supply loss 

raises prices noticeably, and where a 10 percent supply loss could lead to a significant price shock, this 

regional concentration is of concern. Historically, the countries of the Middle East have been the source 

of eight of the ten major world oil disruptions with the ninth originating in Venezuela, an OPEC member

(See Table 2).

6

 

5

Data Source: EIA (2011) Monthly Energy Review, February 28. Data are for 2010, crude oil and lease condensate, 

excludes natural gas plant liquids. MER Table 11.1b, http://www.eia.gov/totalenergy/data/monthly/#international.

6

U.S. Department of Energy, Energy Information Administration, (2004) “Global Oil Supply Disruptions Since 

1951.”
3

Table 1a: Top 12 Exports (MMBD)

Note: Both crude oil and products are in physical barrels.

Rank/Year 2005 2006 2007 2008

1 8,699 8,454 8,250 8,669

2 6,798 6,845 7,043 7,044

3 3,132 3,085 2,901 2,791

4 2,791 2,858 2,826 2,722

5 2,714 2,791 2,728 2,503

6 2,494 2,579 2,423 2,488

7 2,403 2,514 2,372 2,157

8 2,305 2,219 2,130 1,947

9 2,108 2,132 1,913 1,880

10 1,815 1,873 1,757 1,767

11 1,637 1,818 1,690 1,751

12 1,617 1,522 1,618 1,581

% of World 60% 59% 59% 59%

Table 1b: Top 12 Petroleum Exporters

Note: Exports of both crude oil and products.

Rank/Year 2005 2006 2007 2008

1 Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia

2 Russia Russia Russia Russia

3 Venezuela Venezuela Iran

United Arab 

Emirates

4 Iran Iran Venezuela Iran

5 Norway United Arab Emirates United Arab Emirates Kuwait

6 United Arab Emirates Norway Kuwait Venezuela

7 Kuwait Kuwait Norway Norway

8 Nigeria Nigeria Nigeria Nigeria

9 Mexico Mexico Mexico Angola

10 Canada Canada Canada Iraq

11 Netherlands Netherlands Angola Canada

12 United Kingdom United Kingdom Iraq Singapore

Source: EIA, International Energy Statistics website. URLs: 

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=54&aid=4&cid=regions&syid=2005&ey

id=2009&unit=TBPD (Products) and 

http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=57&aid=4&cid=regions&syid=2005&ey

id=2009&unit=TBPD (Crude Oil)
4

Table 2: Global Oil Supply Disruptions From 1951 to 2004

Description of Disruption

Rank 

(Average 

Gross 

Shortfall) Dates

Average 

Gross Supply 

Shortfall 

(MMBD)

Iraq-Kuwait War 1 08/01/90 - 10/31/90 4.6

Iranian Revolution 2 11/01/78 - 04/30/79 3.5

Outbreak of Iran-Iraq War 3 10/01/80 - 12/31/80 3.3

OPEC (ex. Iraq) cuts production 4 04/01/99 - 03/31/00 3.3

October Arab-Israeli War 5 10/01/73 - 03/31/74 2.6

Venezuelan Oil Strike 6 12/01/02 - 02/28/03 2.1

Suez War 7 11/01/56 - 03/01/57 2

Six Day War 8 06/01/67 - 08/01/67 2

Iraq War 9 03/01/03 - 08/31/03 1.9

Libyan Price Controversy 10 05/01/70 - 01/30/71 1.3

Exxon Valdez Accident 11 03/24/89 - 04/06/89 1

Norwegian Oil Workers Strike 12 05/01/96 - 06/01/96 1

Iranian Fields Nationalized 13 03/01/51 - 10/31/54 0.7

Syrian Transit Fee Dispute 14 12/01/66 - 03/01/67 0.7

Damage at Saudi Oilfield 15 05/01/77 - 05/31/77 0.7

Algerian-French Nat'l Struggle 16 04/01/71 - 08/31/71 0.6

Continued Unrest in Iraq 17 09/01/03 - 10/31/06 0.5

Nigerian Civil War 18 07/01/67 - 10/31/68 0.5

Lebanese Political Conflict 19 03/01/73 - 05/01/73 0.5

UK Cormorant Offshore Platform 20 04/01/89 - 06/30/89 0.5

Civil War in Lebanon 21 04/01/76 - 05/31/76 0.3

UK Piper Alpha Offsh. Plat. Explosion 22 07/01/88 - 11/30/89 0.3

Nigeria Unrest 23 03/01/03 - 08/31/03 0.3

Local Protests in Nigeria 24 03/01/98 - 12/01/98 0.3

Local Protests in Nigeria 25 03/01/97 - 04/01/97 0.2

UK Fulmer Float. Stor. Vess. Acc. 26 12/01/88 - 03/31/89 0.2

Unilateral Embargo on Iran 27 08/01/95 - 09/01/95 0.2

Source: U.S. Department of Energy, Energy Information Administration, (2004) “Global Oil 

Supply Disruptions Since 1951."
5

1. 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 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 conditions. The 

definition and methodology for estimating the oil import premium are presented in Leiby (2008),7along 

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 rebenchmarking of reference oil market conditions through 2035 to conform to the latest Annual Energy

Outlook of the U.S. Energy Information Administration (AEO2012 Early Release, Reference case8). In

addition, European Union (EU) oil demand assumptions are modified to account for recent EU policies 

related to the EU Emissions Trading Scheme (ETS).

2. 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.9 The approach estimates the incremental benefits to society, in dollars per barrel, 

of reducing U.S. imports.10 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.

 

7

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.

8

U.S. EIA 2012. Annual Energy Outlook 2012 with Projections to 2035, Early Release, Jan 23, 2012, 

http://www.eia.gov/forecasts/aeo/er/index.cfm, accessed 3/30/2012. NEMS case is ref2012.d020112c.

9

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.

10 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.”
6

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.11 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. 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

We develop a revised time path for the light-duty vehicle energy security premium over a longer

horizon, from 2017 to 2050, under the updated oil market projections embodied in the U.S. Energy 

Information Administration’s 2012 Annual Energy Outlook (AEO2012). This is the primary change from 

previous estimates. Values after 2035 were based on simple extrapolation, since AEO projections are 

unavailable after 2035. Based on the AEO2012 projection, evolving market conditions alter some of the 

factors influencing the oil import security premium. In particular, the Annual Energy Outlook projects

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.

 

11 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 rule, 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.
7

The following Table 3 compares keys assumptions that differ in these estimates compared to 

those used in the prior fuel economy/GHG rulemaking.

Table 3: 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 

(AEO2012

Reference Case) 

2017

Current Study/ LDV2017 Rule 

(AEO2012

Reference Case) 

2020

Current Study/ LDV2017 Rule 

(AEO2012

Reference Case) 

2025

Oil Price (2010$/BBL) $57.02 $113.19 $115.96 $121.23 

U.S. Oil Imports 12.561 8.218 7.730 7.670

U.S. Oil Demand 22.189 19.738 19.771 19.797 

OPEC Supply 34.429 38.532 39.692 42.200 

U.S. GDP (bill 2010$)

$16,297 $17,851 $19,194 $21,710 

Oil Share of GDP 2.83% 4.57% 4.36% 4.04%

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.

12

 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 LDV-2017 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. 

Results

 

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

Research Service, January, 2010
8

Table 4 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 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 for 2017 and at 5-year 

intervals between 2020 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 about 2.1 percent through 2035. It amounts to 4.2% of U.S. liquid fuels demand in 2025, 

growing to 11% by 2035.

13

The total current premium for 2017 is about 37 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 99% per 

cent higher projected oil prices, 12% higher OPEC supply, and a 61% higher value share of oil 

expenditures in GDP (see Table 3). Each of these factors would tend to increase the security premium. 

Offsetting these drivers are projected reductions in oil consumption and import levels of 11 per cent and 

35 per cent, respectively, compared to those projected for the prior study period by AEO2007. Under 

AEO2012, for years after 2017, the EIA-projected real oil price, GDP, and OPEC supply continue to grow. 

Oil consumption grows very slowly and oil imports are projected to decline an additional 4% by 2025. 

Oil value share in the U.S. economy peaks in 2020 and then slowly declines, but stays well above the

levels observed historically between 1985 and 2007. Together, these conditions yield an oil security 

premium that dips slightly after 2015 but gradually increases from 2020 through 2035.

 

13 Source for projected liquid fuels demand is AEO2012, Table 21. International Liquids Supply and Disposition. 

Estimates of projected fuel savings from the rule are from EPA.
9

Table 4: Summary Results – Comparison of Current and 2008 Report

Effect / Study Prior Analysis:

ORNL 2008 Report

(2010$/BBL, average for 

2006-2015)

Current Analysis:

LDV 2017 Rule Analysis

(2010$/BBL, for example year 

2017)

Monopsony Component $8.20

($3.07 - $14.37)

$10.78

($3.61 - $18.38)

Macroeconomic Disruption/ 

Adjustment Costs

$5.08

($2.33 - $8.19)

$7.43

($3.59 - $10.76)

Total Mid-point $13.28

($7.38 - $19.87)

$18.22

($10.02 - $26.00)

Results in 2010$. 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 rule, ORNL estimated energy security premiums for the years 2017 and for 2020 to 2035

in five-year intervals. These premiums are presented in Table 5 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.

Table 5: Energy Security Premiums in 2017 through 2050 ($2010/BBL)

Effect 2017 2020 2025 2030 2035 2040 2050

Monopsony 

Component $10.78 $10.02 $9.77 $9.28 $9.73 $9.73 $9.73 

(3.61 -18.38) (3.35 -17.09) (3.25 -16.69) (3.1 - 18.03) (3.24 - 16.68) (3.24- 16.68) (3.24- 16.68)

Macroeconomic 

Disruption/ 

Adjustment Costs $7.43 $7.63 $8.26 $8.77 $9.46 $9.46 $9.46 

(3.59 - 10.76) (3.71 - 11) (4.03 - 11.92) (4.33 - 12.6) (4.72 - 13.61) (4.72 -13.61) (4.72- 13.61)

Total Mid-Point $18.22 $17.64 $18.03 $18.05 $19.19 $19.19 $19.19 

(10.02– 26.0) (9.83 – 25.0) (10.15-25.47) (10.29 - 25.2) (10.94-26.78) (10.94-26.78 (10.94- 26.78)

Results in 2010$. Columns report mean estimate and ranges resulting from Monte Carlo Simulation. Optimal 

premium from AEO2012 Early Release reference path. Ranges span 90% of simulation outcomes. Source: Leiby/ORNL 

security premium analysis, April 11, 2012 runs.
10

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 macro-disruption component of the 

energy security premium is essentially unchanged.

14 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.

 

14 Small changes of ~$0.05/BBL in the mean can be attributed to random sample variation in the simulation.
11

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.

U.S. Department of Energy, EIA 2004. “Global Oil Supply Disruptions Since 1951."

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/.

U.S. EIA 2012. Annual Energy Outlook 2012 with Projections to 2035, Early Release, Jan 23, 2012, 

http://www.eia.gov/forecasts/aeo/er/index.cfm, accessed 3/30/2012
12

Tables and Graphs

$0.00 

$5.00 

$10.00 

$15.00 

$20.00 

$25.00 

2015 2017 2020 2022 2025 2030 2035 2040 2045 2050

2010$/BBL

Oil Import Premium Components ($/BBL)

Monopsony Component 

Mean

Disruption Component Total 

Mean

Total Mid-Point Mean