The Value of Energy Security
Energy security is on everyone’s mind.
After incredulously watching Russian military shoot at Europe’s largest nuclear facility, which supplies 20% of Ukraine’s electricity, I am having a hard time concentrating on anything like writing a blog post. The suffering of the people of Ukraine is beyond measure and completely unprovoked. The damages imposed by war, which populations across the world continue to experience – the loss of life, violence and destruction of infrastructure – was vividly relayed to me by my grandparents. They lived through World War II in central Europe and it scarred them to their dying days. My thoughts are with the people of Ukraine. If you want to help, a Cal alumna (and rockstar) is organizing a number of meaningful efforts. If you want to send some money, there are resources here and here.
Source: World War II UK Fuel Economy appeal
As a consequence of this aggression, energy security is on everyone’s mind. My father in Northern Bavaria hoarded heating oil last week, folks in Europe are asked to turn down their furnaces and put on sweaters, and prices for natural gas and gasoline are skyrocketing. Why is that? It’s pretty simple, the fossil fuels so many economies rely on, no matter how free or democratic they are, are often found in places that are not. Countries develop infrastructure to transport fossil fuels (e.g. pipelines, shipping routes and processing facilities) to get the carbon molecules their citizens and firms depend on. But it’s important to remember that if a despot sits at the other end of that pipeline and gets pissed off at you, he may cut you off. So you’re a bit like a junkie who depends on their dealer (who is rarely a nice person) for your next dose. If your dealer cuts you off, you’re in trouble. In the case of energy security you start worrying about keeping the lights on and the furnace warm.
Conceptually this is easy to understand, but how should we value this “energy security”? When I do my careful reading about the social cost of carbon it often appears alongside an estimate for the energy security “externality”. I had trouble trying to piece together in my mind how this is an externality one could quantify. So I read Gib Metcalf’s excellent piece on the economics of energy security (free earlier version here). Gib is one of the finest minds in our field (and a fellow UMASS alumn). With laser sharp precision he injects some clear economic thinking into what the issue and the solutions are – from an economic perspective.
What Energy Security Is and Isn’t
So let’s define what we mean by energy security first. Gib uses the Congressional Budget Office’s definition which is “the ability of households, businesses, and government to accommodate disruptions in supply in energy markets.” Bam. Simple and clear. There are some other definitions floating around, many of which I do not like, because they are so often wishy washy. Science, people. You don’t want a hand wavy surgeon. So what did I learn from this piece:
- Many folks think that simply stopping reliance on energy imports will fix things. But it won’t, because oil markets are flippin’ global. If there is a supply shock elsewhere in the world, your local prices will rise as producers sell their wares in global markets. There are of course big differences between natural gas and oil here, but I may blog on this another time. Back to the junkie – buying drugs from the nicer (maybe more expensive) dealer on your own block versus the scary pusher on the next block won’t make you better off. The answer is consume less (or none, but I’ll get to that).
- Energy security is not an externality in the way we usually talk about it. WHUUUUT? Did Max eat the whole bag of gummies? Nope. When we talk about taxing our way out of externalities, we usually talk about the non-pecuniary kind! In that case someone is imposing a direct cost (or benefit) on someone else without internalizing it. This is simply not the case here as energy security is “only” a pecuniary externality. Which means, drumroll, that for once a tax is the wrong prescription here! So if you see proposals for an explicit energy security tax, you will hear me groan. But Max, does this mean a carbon tax has no energy security benefits? Hold my beer, I will get to that below.
- Low prices to consumers do not protect against supply disruptions and hence should not be a goal of energy security policies. Yes, we all like cheap stuff. I just returned from Costco with two pounds of organic garlic that cost me 3 cents or something. I love it. But in the case of energy, low prices decrease the value of energy efficiency investments and make you very much exposed to big welfare losses when prices are suddenly high! That 48 gallon gas tank on your inefficient Ford Super Duty you use to drop Timmy off at daycare is really expensive, while Meredith smiles all the way to Giannini in her efficient 2007 Prius and Gernot is sending snark your way from his high saddle on the lower West Side Bike path.
Increasing Energy Security
The paper goes through a number of non-economic considerations, which are of course important and I would encourage you to read the paper! But I want to get to the solutions part. If a tax is not the right prescription, what is? Easy.
- Pushing on instruments to decrease the energy intensity of sectors is key. The perfect cocktail here starts with a healthy dose of pricing the actual externalities of fossil fuels, and pushing on cost effective policies that improve the energy efficiency of the economy, which brings us back to the famous energy efficiency gap literature aptly summarized here. R&D certainly plays a key role here. If we can get the same service, while consuming less energy, we feel less pain when energy supplies are disrupted.
- Diversifying the portfolio of fuels is another suggestion. If you rely on a single fuel its source gets disrupted, you are more screwed than if your economy relies on a variety of fuels. This is of course easier said than done. I see you Hawaii and Japan.
- Investing in infrastructure to make sure fuels can get there in times of need is another key aspect. This includes pipelines, but is mostly going to involve the complex task of grid planning and running big wires to plan for times of local shortages in a future grid that powers a largely electrified economy.
- Stockpiling. Most economists are not huge fans of the Strategic Petroleum Reserve, but the government can of course buy fossils when prices are low. My understanding is that in the case of oil, this is largely political ribbon cutting since in order to affect global pieces, you would have to stockpile unfeasibly large amounts of oil.
I will make Gib’s last point my conclusion. The solution to this is to get off the junk as quickly and efficiently as we can. Not cold turkey, but quickly. In the long run, countries with significant resources of renewable energy will likely reap massive energy security benefits by exploiting those and not having to rely on the despots of the world to keep the lights on. This is an agenda item that the climate parts of Build Back Better were key to. Not doing anything along these lines puts America’s energy security at risk, no matter your political preferences.
On a personal note, hug your kids if you have them. Call your family and check in on them. We are all rattled by what is going on in Europe, Syria and simply too many places on top of the pandemic. If you need to chat, reach out to someone (including me). And help however much you can.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Auffhammer, Maximilian. “The Value of Energy Security” Energy Institute Blog, UC Berkeley, March 7, 2022, https://energyathaas.wordpress.com/2022/03/07/the-value-of-energy-security/
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Maximilian Auffhammer View All
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.
Energy Institute Blog 
Very nice review of economics involved in energy security. I do recommend that a a healthy dose of pricing the actual externalities for all energy sources,(not just fossil fuels) and pushing on cost effective policies that improve the energy efficiency of the economy. I observe that our present head long dive in all electric lacks this disciplined approach.
“As a consequence of this aggression, energy security is on everyone’s mind. My father in Northern Bavaria hoarded heating oil last week…pushing on instruments to decrease the energy intensity of sectors is key. The perfect cocktail here starts with a healthy dose of pricing the actual externalities of fossil fuels…”
Maximilian, sounds like you’ve bought into the oil industry’s successful (but morally questionable) attempt to synonymize “oil” with generic “energy”. Effective as it may be in terms of marketing, they aren’t one and the same.
“The solution to this is to get off the junk [fossil fuels] as quickly and efficiently as we can. Not cold turkey, but quickly. In the long run, countries with significant resources of renewable energy will likely reap massive energy security benefits…”
So…”replacing the most secure and predictable sources of energy with the least secure, most unpredictable sources will likely reap massive energy security benefits.” Come again? But your introduction is revealing:
“After incredulously watching Russian military shoot at Europe’s largest nuclear facility, which supplies 20% of Ukraine’s electricity, I am having a hard time concentrating on anything like writing a blog post.”
Forget about invading forces, forget about the electricity itself, dwell upon the imagined catastrophe of southern Ukraine evaporating into a mushroom cloud – as hyperbolized by CNN, CBS, MSNBC, and every other popular media outlet. Though you’re in good company, the hysteria generated by this minor event only illustrates the pervasive ignorance of how electricity is generated at a nuclear plant, of nuclear energy’s potential dangers, and of its limitless benefits. Why?
• The attack at Zaporizhzhia was directed on an administrative building 150 yards from the nearest reactor.
• Only one of six reactors was operational at the time.
• No rocket launched from a mobile platform would be capable of breaching the containment structure surrounding the plant’s VVER-1000 reactors. They are surrounded by 4-foot-thick walls of steel-reinforced concrete.
• If one struck outside containment, and was able to destroy both redundant cooling systems of a reactor, and it melted down – unlike either Chernobyl or Fukushima (but very much like Three Mile Island), the domes covering Gen 2 reactors are specifically hardened to resist the pressure of a rocket attack from the outside and prevent the escape of radioactivity from inside. They’re labeled “containment” for a reason.
• At worst, radioactive gases might need to be vented to prevent a buildup of pressure. Like at Three Mile Island, where the number of casualties was exactly zero.
• If Russian forces truly intended to destroy Zaporizhzhia they would have shelled the entire plant. The attack was obviously directed at security forces so Russian soldiers wouldn’t face opposition while capturing it.
Among the fear porn broadcast by international media was a sole voice of reason. It was U.S. Energy Secretary Jennifer Granholm, who calmly announced: “The reactors are protected by robust containment structures and are being safely shut down.” Predictably, she was ignored.
That Germany is floating the idea of delaying shutdown of its last three plants is a sign of hope. Leaders, it seems, are coming to understand what constitutes true energy security – if thirty years too late.
Indeed. Security of Energy. Food. Jobs. Health. All are crucial. But as we go fixing the supply side, and the potential overhead costs, we should work on the demand side. How much energy is wasted – in its various manifestations; driving, heating-cooling, water, etc. A significant portion of food waste means energy waste – in production, transportation, and disposal. Poor health habits etc. Come up with ‘incentives’ to save, ie lower demand. Perhaps we can’t change human behavior. We have all heard of someone who increases use-waste so that when rationing comes they get a comfortable allocation. Come on economists – micro macro behavioral