By November 23, 2016 Read More →

Opinion: To build energy independence, Trump needs to embrace Obama’s fuel economy rules

Energy independence

During the presidential election, President-elect Donald Trump promised his administration would achieve energy independence by ramping up supply. But that may not be enough. The Trump administration may also have to adhere to the Obama administration’s fuel economy standards. Reuters photo by Carlo Allegri.

Energy independence not accomplished merely by more drilling

By Jason Bordoff

Nov 23 (Reuters) – Since the Arab Oil Embargo four decades ago, every president has promised to wean the United States off the need for foreign oil.

President-elect Trump is no different, promising in his speeches and transition plans to achieve “energy independence.” His rhetoric to date has focused on ramping up U.S. oil supply – “drill, baby, drill.”

But that’s not enough. If he really wants to achieve independence, he must continue on the Obama Administration’s path of raising fuel economy standards to cut oil use.

The U.S. has slashed net petroleum imports in the past decade, from 60 per cent of U.S. consumption in 2008 to just 24 per cent last year. As is widely known, the shale revolution was a major reason, with total U.S. oil production rising from 5 million barrels per day (b/d) in 2008 to a peak of 9.6 million in April 2015 before falling off again after the oil price crash.

Less acknowledged, however, is the role of lower oil demand in curbing U.S. oil imports. Oil use in 2015 was 21 per cent – more than 5 million b/d – below the level that was projected by the U.S. Energy Information Administration (EIA) in 2005.

A recent study by the White House Council of Economic Advisors (CEA) explained that this petroleum consumption “surprise” was actually a larger factor in reducing U.S. oil imports below what was expected than was the shale boom.

To continue driving down oil demand, the Obama Administration hiked fuel economy standards for passenger vehicles, the first time in more than 30 years they had been raised, and established fuel economy standards for trucks for the first time. These higher fuel economy standards will reduce U.S. oil use by more than 2 million b/d by 2025 – and more beyond that, as older cars are replaced with newer, more efficient ones.

As part of the deal struck with the auto industry, however, the Obama Administration agreed to reassess the fuel economy targets in 2018. As this date approaches, automakers are mobilizing to weaken the standards, arguing that there is little consumer demand for more fuel efficient vehicles with lower gasoline prices.

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The Trump Administration has signalled support for the car companies, with a senior Trump advisor after Election Day promising a comprehensive rethinking of all federal regulations – including “a review of the fuel-economy and emissions standards to make sure they are not harming consumers or American workers.”

But scrapping the fuel economy rules would actually undermine Trump’s goal of energy independence. Including the gains from high fuel economy standards, the EIA projects that U.S. net petroleum imports will continue declining from 4.6 million b/d last year to 3.3 million b/d in 2025.

President-elect Trump promises to grow U.S. oil supply faster than projected by opening new areas to drilling and scrapping many environmental rules. Even if he succeeds in doing so, it will not be possible to zero out oil imports through more supply alone.

EIA projections show it is possible to zero out oil imports by 2025 in the agency’s “high resource” scenario, which reflects higher recovery rates and lower production costs due to technological improvements, not less government regulation.

Indeed, in the past several years, the EIA’s “high resource” scenario has more closely tracked actual U.S. shale production, as shale continues to surprise most analysts with its growth and resilience.

Even if Trump’s policy changes can help hike U.S. output, however, reducing oil demand is still necessary to have any hope of achieving oil independence. Without higher fuel economy standards, Trump would not only need to raise U.S. oil supply as much as in the “high resource” scenario, but also add more than 2 million b/d by 2025 beyond that to compensate for the oil savings fuel economy would have otherwise delivered.

Moreover, even if it were possible to eliminate oil imports through supply alone, reducing oil use is a smarter way to achieve independence. Prices at the pump are set in a global market whether the U.S. imports oil or not. So consumers feel the brunt of oil price shocks even if we do not import oil. Reducing the oil intensity of our economy is thus the best way to protect businesses and households from the economic pain of higher oil prices.

Curbing oil has large economic and geopolitical benefits, not to mention climate change. But we can’t drill our way out of the need for foreign oil. Even under the most aggressive scenarios, achieving oil independence means we are going to need to use less of it too. If Trump wants to keep that campaign promise, he needs to double down on the Obama Administration’s fuel economy standards and embrace other policies to slash oil use.

(Jason Bordoff; @JasonBordoff; Editing by Marguerita Choy)

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