Fuel Economy Increase Will Help National Security

While all of Washington is focused on the debt reduction talks, it does seem that there is some work actually happening. On Friday, the President is expected to announce a compromise between automakers and environmentalists.

According to the Wall Street Journal, who first reported this on Tuesday night, the President will announce that corporate average fuel economy (CAFE) standards will see a 5% average annual increase in fuel economy for cars and a 3.5% increase for light trucks, staring in 2016 and lasting through 2021. From 2021 until 2025 both would face a 5% annual increase. This builds upon the announcement of a new rule implemented last year that raised fuel economy standards from 2012 through 2016.

The result of this is that by 2025 - not that long when we're talking about the long lead-time necessary for designing and building cars - the average fuel economy will jump to 54.5 miles per gallon. That is approximately double what it was in 2010, the model year previous to the current one, of 27.5.

This is a big deal.

It is very important for American national security and foreign policy that we use less oil. First, it is important that the United States as a whole uses less oil because the sheer volume of oil imports harms American competitiveness and drives down the value of the dollar. The United States sends hundreds of billions of dollars overseas to pay for oil. The United States consumed over $1.45 trillion worth of oil in 2010, of which $680 billion was spent on imports.

Without these imports, the U.S. trade deficit, which was $497 billion in 2010, would not have existed. That capital could be used for investment at home, and the export of that capital had the effect of driving down the value of the dollar.

Second, it is important for each American consumer that they are less vulnerable to oil price fluctuations. Oil is a volatile commodity. Over the last four years alone, the global price of oil has fluctuated from an average price per barrel of $69 in 2007 to a peak of $147 in July 2008, back down below $35 in January 2009, then back up above $120 per barrel in April 2011. This constant fluctuation harms consumers because it impairs their ability to plan for the long-term by acting as an unplanned tax.

These problems directly impact the security of the United States because every person working on foreign policy knows how vulnerable the American economy and the American consumer are to the rising price of oil. That vulnerability constrains these decision-makers when dealing with oil-producing regimes. There is a good argument to be made (for another blog post) that the United States has acted very differently to Arab countries throughout the Arab Spring, depending on how much oil they produce.

The increases in CAFE standards that the President will announce tomorrow will put the United States on track to reducing its vulnerability to oil-producing regimes. This is an important step that should be applauded.

Number of the Week: 60,000,000

30 days ago, on June 23, the IEA announced a release of oil from its member states' strategic petroleum reserves totaling sixty million barrels of crude. Most of it has been released - but some is still waiting to go to market.

The IEA's stated rationale for the release was to replace the loss of 1.5 mbd of production lost from the ongoing war in Libya.

With this week's 30 day review, the IEA has announced that it will not to release additional oil from reserves.

On June 23, prior to the release, the spot price of a barrel of WTI Crude was $95. The day after the announcement, it fell to $90. Today, WTI is trading above $99.

American Shale Gas is Revolutionizing European Energy Security

For the last three decades, the story of European energy security has been a steadily growing dependence on Russian natural gas. From the time when the Trans-Siberian Pipeline first started delivering gas to Europe in 1983, countries of Europe have grown steadily more dependent on Russian gas. The integration of the former Eastern Bloc into the EU over the last two decades made the problem even more acute, as 40 years of infrastructure was built in order to foster dependence between the Soviet Union and its satellite states. By 2009, Russia was exporting 4.5 trillion cubic feet of gas into Europe, about 25% of Europe's total gas consumption.

The result of that dependence is that Russia has been able to exert its status as a monopolistic energy supplier. Gas shut-offs to Ukrainian pipelines (through which most of Europe's supplies travel) in the winters of 2005 and 2009 caused widespread misery across Eastern Europe as power and heat were shut down in countries like Bulgaria and Romania that are almost totally dependent on Russian imports. Gazprom, and the Russian state, have not been afraid to threaten the stability of these supplies to gain geopolitical power and extract foreign policy concessions.

Now, however, new supplies of shale gas from the United States are reshaping this equation.A new report out from Rice University's Baker Institute, "Shale Gas and US National Security" (pdf) by Kenneth Medlock, Amy Meyers Jaffe and Peter Hartley highlights how increased US production of gas is already undercutting Russia's geopolitical power of European energy. It states that "Russia’s natural gas market share in Western Europe will decline to as little as 13 percent by 2040, down from 27 percent in 2009."

Even without any significant production of shale gas in Europe (yet), a glut of gas produced in the United States is changing Europe's geopolitical energy equation.

Over the last ten years, the United States has gone from essentially zero in 2000 to over 10 billion cubic feel per day by 2010. The graph at left shows how this revolution has affected total US gas production.

This production increase has been enough to change the US from a net importer of gas to a net exporter. Where once the US had been scrambling to build Liquefied Natural Gas (LNG) terminals in the early part of the decade, now those same terminals are being used to export gas. This has freed other large producers, most notably Qatar, to change their exports from the United States to places like Europe or Japan. Not only has this reduced prices, it also has given Europe the redundancy it needs to free itself from Russian gas dominance.

For years, US policy on building energy security in Europe was to foster competition with Russian gas. The focus of this policy was to build a gas pipeline through the 'Southern Corridor' from the Caspian Sea through Turkey and up through the Balkans. It is ironic that now the United States is the exporter that could provide the competition to Russian gas that Europe needs.