INSIGHT: Measuring energy policy before pulling the trigger

27 May 2010 17:11  [Source: ICIS news]

By Joe Kamalick

Business wants to measure energy policies beforehandWASHINGTON (ICIS news)--US business launched a plan this week to measure future risks to the nation’s energy security - a novel proposal to see if energy policies will work before Congress pulls the trigger on a legislative gun inadvertently aimed at the US industrial foot.

The US Chamber of Commerce announced its “Index of US Energy Security Risk”, noting that while every president and Congress since the 1973 Arab oil embargo has sought to increase US energy security and independence, there has been no meaningful way of judging the results of scores of policies, regulations and initiatives.

Karen Harbert, president of the chamber’s Institute for 21st Century Energy, said that US policymakers have lacked a tool “to regularly measure our nation’s progress toward energy security and thus assess the impact of policy decisions”.

Quoting the late management guru Peter Drucker, Harbert said that “If you can’t measure it, you can’t manage it”.

“We haven’t had a tool, something to show us where we’ve been in energy security, where we are now and where we’re headed and what policy decisions are needed, based on past experiences, to get us there,” she said.

The chamber’s energy risk index, she said, will enable policymakers and energy issue stakeholders to better evaluate the likely impact of pending energy legislation or administrative initiatives and, in the out years, to measure the real effect of those policies.

The institute said that an analysis of 37 different government and private sector data sets indicates that the US soon will become increasingly vulnerable to oil and electricity cost increases, insufficient domestic energy capacity and uncertain access to foreign energy resources as China, India and other fast-developing nations increasingly compete for global supplies.

The 37 metrics that make up the index include such measures as the security of world oil, gas and coal reserves, the dependability and costs of US energy imports, energy spending as a percent of gross domestic product (GDP), national energy consumption, commercial and industrial energy efficiency, electricity production and transmission capacity, transportation fuel use and efficiencies, private and government research and development (R&D) spending and energy-related emissions, among others.

With 1980 chosen as the base rating of 100 - when US energy security risk was at its highest due to the Arab oil embargo of 1973, the Iranian revolution of 1978, Russia’s invasion of Afghanistan in 1979 and the onset of the Iran-Iraq war in 1980 - the index measures those metrics from 1970 to the present and projects them forward to 2030.

The index puts the current risk to US energy security at 85.6, largely due to the decline in US energy consumption and imports because of the recession.

But Harbert said US energy risks are on a course to increase sharply over the next five to ten years and could approach the highest-risk mark of 100 by 2018.

She cited rising energy costs as a major risk factor, with the US Energy Information Administration (EIA) projecting significant increases in retail electricity prices and dramatic oil price gains through 2030.

In addition, she said, the nation’s limited electric transmission capacity raises the risk factor because the US is not adding enough new line capacity to meet projected power demand, which likely will result in increased blackouts in the decade ahead.

Finally, greater energy demands and oil purchases by the fast-developing economies of China, India and other emerging nations will drive crude prices ever higher and create uncertainties for US access to dependable foreign oil resources.

Harbert said the index can and will be used to calculate the energy security impact of proposed legislation, such as the Kerry-Lieberman climate change bill, and regulatory initiatives, such as the Environmental Protection Agency’s (EPA) plans to regulate nationwide emissions of greenhouse gases.

However, she said, for such complex legislative and regulatory initiatives, the index will need data input from the analysis of those measures by the Energy Information Administration and others.

The index and its matrix also might be used to measure the possible impact of pending legislation that would give the EPA licensing authority for use of hydraulic fracturing that is crucial for development of vast US reserves of shale gas.

That prospect, for example, poses direct risks to the US petrochemicals industry and downstream chemical makers.

“The last thing we need is for EPA to act as some kind of licensing agent for energy needs and production,” said Jim Cooper, vice president for petrochemicals at the National Petrochemical & Refiners Association (NPRA).

Having a better and quantifiable measure of how such a policy might impact the development - or impediment - of shale gas could be crucial, he said.

The US chemicals sector is doubly vulnerable to energy costs, availability and volatility because the industry relies on natural gas for about 50% of its raw material feedstock and as a major fuel for its energy-intensive manufacturing processes.

Cooper noted that US federal policies already in place and many of those contemplated on Capitol Hill affect natural gas pricing, in part by inducing fuel switching from coal to natgas among electric utilities that are under pressure to reduce their emissions and carbon footprint.

Lawrence Sloan, president of the Society of Chemical Manufacturers and Affiliates (SOCMA), cautioned that with ill-considered energy policies “The US will further reduce its global competitiveness vis-à-vis foreign chemical manufacturers who have access to cheaper supplies, particularly in the Middle East”.

Missteps in policymaking, he said, will lead to “continued escalation of energy prices and will continue to squeeze profit margins of both the petrochemical industry and downstream commodity and batch chemical producers”.

That may well be the ultimate and rock-hard measure of energy policy decisions - whether the US continues to export chemical and other production capacity overseas, or wisely ensures the very survival of the broad US manufacturing sector.

The trouble with that end-game measure is that if a negative outcome is determined, by that time there won’t be a way to reverse it.

($1 = €0.82)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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