Administration Seizes the Reins on Energy Security
Posted May 20, 2009 at 11:16 am 
Filed in: With the introduction of cap-and-trade legislation in the House of Representatives last week, and the ongoing mark-up of comprehensive energy legislation in the Senate, it seems fair to say that congressional efforts to move forward on energy policy are well underway. Leaving aside the merits of both Waxman-Markey and whatever comes out of the Senate Energy and Natural Resources Committee, it is important to recognize that the vast preponderance of the measures being debated by lawmakers are designed to deal with the electric power sector. Cap-and-trade, renewable electricity standards, and interstate transmission siting authority are all designed to impact the way electric power is generated and moved around the country.
To be sure, both the House and Senate have given some attention to transportation issues, electric vehicles in particular. It would be impossible to completely ignore policies that at least peripherally address liquid fuels in some fashion. Oil accounts for about 40 percent of total U.S. primary energy consumption, and 70 percent of U.S. oil demand occurs in the transportation sector. But it largely remains to be seen whether energy security and transportation policy are headline issues in congressional energy legislation this year.
So, it was of tremendous significance that the executive branch took an important step toward improving energy security and environmental sustainability in the transportation sector yesterday. In a Rose Garden press conference, President Obama unveiled a plan to implement new fuel economy standards for cars and light trucks for the period 2012 through 2016. You can read the text of the announcement here on the White House website. There are a number of significant aspects to both the manner in which the plan was announced and the details of the proposed rulemaking itself.
The president was flanked by representatives from Ford, General Motors, Toyota, Honda, Chrysler, BMW, Nissan, Volkswagen, Mercedes Benz and Mazda. (The United Auto Workers were also present.) In the past, many of these companies have had substantial disagreements about the feasibility of increased fuel-economy standards, and during the 2007 debate over the Energy Independence and Security Act (EISA), all but a handful of them vociferously proclaimed that the standards in that law were unachievable.
Oh, how 18 months, a financial crisis, a recession, one (and soon to be two) bankruptcies, and $50 billion in government bailout funds can change things. EISA proposed a 35 mile-per-gallon standard by 2020. The standard was to be implemented at the national fleet level, not for individual companies. This attribute-based approach to standards was designed to let individual companies focus on their competitive advantage and avoid driving each automaker to a similar size mix.
Based on the notice of intent filed by EPA and the Department of Transportation—which you can read here—the administration’s new standard could force companies to reach as high as 35.5 miles-per-gallon by 2016. Some variance may occur, as the new standards are designed to be harmonized with vehicle emissions standards. (For example, some of the required reductions in emissions could be met by designing more efficient air conditioning units in vehicles, which would allow for slightly lower improvements in fuel economy.)
In order to meet these standards, companies will likely need to substantially increase the proportion of their vehicles that rely on advanced technologies, particularly hybridization. To encourage this shift, the proposed rulemaking may offer companies the ability to “claim super credits” for PHEVs and EVs. Essentially, the efficiency ratings of these vehicles could be double counted. This seems like a much more beneficial approach to incentivizing oil savings than the current focus on flex-fuel vehicles, which earn automakers extra credit even though the vehicles rarely run on E-85. (In fact, the new rulemaking may roll back the FFV loophole.)
The administration calculates that the new standards will save roughly 1.8 billion barrels of oil over five years, which translates to about 980,000 barrels of oil per day. That is not an insignificant savings—it’s nearly 15 percent of light-duty vehicle demand and comparable to the oil output of a medium-sized producer like Qatar, Indonesia or Azerbaijan.
Other good stuff:
FT.com on why the expected boom in M&A in the oil industry has yet to materialize.
FT.com on the disconnect between market fundamentals and oil prices.
Bloomberg on the ongoing flare-up in Niger delta violence. Spare capacity is high though, so this is less of an issue today than it might have been a year ago.
The EIA reports that U.S. stocks fell by about 2 million barrels last week, so oil prices bounced today.
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