The Fuse

SAFE Responds to Criticisms of Research on Military Costs of Protecting Global Oil Supply

by Jonathan Chanis | September 30, 2018

The reaction to SAFE’s recently-published paper “The Military Costs of Protecting the Global Oil Supply” has been overwhelmingly positive. However, while there is always space for differences of analysis, one particularly negative reaction to the paper stood out, largely because the critique misrepresented the report’s core arguments and failed to appreciate how the regulatory process for determining Fuel Economy Standards works. While SAFE’s full response to the proposed changes to the Fuel Economy Standards will be submitted to the government by the October 26, 2018 comment period deadline, we would like to take this opportunity to address some of the criticisms that have arisen.

SAFE works to promote sound energy policies both through the use of market-based policy mechanisms and smart regulation.

First, SAFE is not a “pro-regulatory” advocacy group. SAFE works to promote sound energy policies both through the use of market-based policy mechanisms and smart regulation. Our group is very supportive of increasing domestic oil production. However, in the matter of reducing oil consumption, the international market for oil is not free or fair, necessitating policy intervention to drive solutions. In fact, efforts by some academic economists or policy analysts to depict the global market as capable of protecting U.S. energy security fail to understand this major distortion. The pernicious impact some foreign producers and the Organization of the Petroleum Exporting Countries (OPEC) have on the market is significant. Consequently, it is dangerous to rely only on the free market when the market for oil supply is rigged against American and global consumer interests by an oil cartel and their national oil companies. Those who argue that the current structure of the oil market can guarantee American energy security are ignoring historical precedent.

Saying that 7.4 billion people benefit from the U.S. payment is not the same as saying 7.4 billion people pay the United States to ensure the continued availability of global oil.

Second, the critique suggests that SAFE used the wrong denominator when it divided the cost of oil protection by only the 19.3 million barrels per day (Mbd) consumed in the United States. Instead, the critique argues that global consumption of 98 Mbd is a more appropriate figure, making the cost per gallon closer to 5 cents instead of 28 cents. First, it should be noted that this logic at least accepts SAFE’s argument that there is a cost. However, using the global figure is inappropriate. There are 7.4 billion people in the world, but only those living in the United States pay the taxes that almost single-handedly safeguard the global oil supply. So, using a global number only highlights the inequity of the payments. Saying that 7.4 billion people benefit from the U.S. payment is not the same as saying 7.4 billion people pay the United States to ensure the continued availability of global oil.

There is no indication in this 2018 NPRM or PRIA that the agencies will change the evaluation criteria and include a cost of oil defense in the cost-benefit analysis.

Third, the critique suggests that SAFE created a “…straw man, a caricature” of the EPA and NHTSA position because EPA and NHTSA “…do not assume that the U.S. cost of defending global oil supplies is zero.” But, in fact, as was clearly stated in the 2018 Preliminary Regulatory Impact Analysis (PRIA), the agencies do “..not assign a value to the military security benefits of reducing fuel consumption”  Moreover, this has been the consistent position of the agencies for the last three rounds of rulemaking and it can be found in the 2012 and 2016 rulemakings, and in the 2017 Midterm Evaluation. The agencies do discuss military costs in their “sensitivity analysis,” but this is meaningless since it is the cost-benefit analysis which determines the outcome. There is no indication in this 2018 NPRM or PRIA that the agencies will change the evaluation criteria and include a cost of oil defense in the cost-benefit analysis.

Additionally, the critique suffers from a mistaken understanding that the fuel economy standards only make “marginal adjustments in annual U.S. fuel consumption.” This is incorrect. As the EPA/NHTSA’s own work makes clear, the 2022-2025 program will reduce fuel demand by over 65 million barrels per year in 2025, and approximately 350 million barrels per year in 2040. This is hardly marginal.

Picking up on erroneous analysis in the NPRM, the critique asserts that there is “…no relationship between fuel economy standards and military spending” and that “any increases in oil consumption resulting from the Trump auto rule are too small to have any predictable or quantifiable effects on military spending.” SAFE will more fully address this mistaken assertion in its full submission, but there is a clear connection between motor fuel consumption and military spending once one accounts for the end of the Cold War, the relatively late start date (1974) for the development of a market-oriented mechanism for allocating petroleum, and the costs of three wars in the greater Middle East. The Persian Gulf focus of the Carter Doctrine, the development of the Rapid Deployment Joint Task Force, and the whole evolution of the U.S. military posture since 1979, indicates that there is a connection between military spending and U.S. oil dependence. Furthermore, the peerless four-star military members of SAFE’s Energy Security Leadership Council unequivocally also stated so. In their expert opinion, reducing dependence on gasoline-powered vehicles over the next decade will have “predictable” and “quantifiable effects on military spending.” While it may not reduce total defense spending, it is the opportunity cost for using these resources for other military priorities which is important.

Even if the United States does become a net exporter of petroleum, it will still need to import large amounts of foreign crude oil to optimize its refinery system and a foreign supply disruption would have a large and negative impact.

Finally, the critique asserts that domestic U.S. production “is projected to overtake U.S. consumption of fuel and other products refined from petroleum within the next decade.” First, most of these projections have several other variants where the U.S. is not self-sufficient in petroleum production and consumption. In fact, the Energy Information Administration has three cases where the U.S. is a significant net importer of petroleum, and only two where it is a net exporter. Second, even if the United States does become a net exporter of petroleum, it will still need to import large amounts of foreign crude oil to optimize its refinery system and a foreign supply disruption would have a large and negative impact. And third, the United States remains tethered to the global oil price and, therefore, its economy will still be highly vulnerable to any sudden spike in price.

SAFE’s analysis of the military cost of protecting the global oil supply is based on deep factual knowledge about the functioning of global oil markets and the American military role in protecting the global oil supply. SAFE is eager to engage with people who hold contrary views in order to deepen our understanding of this issue. It is critical that discussions are based in established knowledge regarding the oil market, military spending, and fuel economy regulations.

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