Fossil Fuels

This post is co-authored by Sagatom Saha, research associate for energy and foreign policy at the Council on Foreign Relations. Read "The Impact of Removing Tax Preferences for U.S. Oil and Gas Production," a Discussion Paper from CFR’s Program on Energy Security and Climate Change in the Center for Geoeconomic Studies. Last week, CFR published a paper weighing in on the decades-long debate over tax preferences for U.S. oil and gas production (the first tax preference is actually over a century old, and tax reform has been a contentious fixture in Congressional budget battles since the 1970s). Advocates for reform argue the preferences hinder climate goals and waste $4 billion a year. Defenders of the tax preferences argue that repealing them would decimate domestic oil and gas production, jeopardizing U.S. energy security, jobs, and the economy. To assess these dueling arguments, Gilbert Metcalf, professor of economics at Tufts University, quantifies the effects of removing the three major tax preferences for U.S. oil and gas production (expensing of intangible drilling costs, percentage depletion, and the domestic manufacturing tax deduction). He finds that: Domestic oil drilling activity could decline by roughly 9 percent, and domestic gas drilling activity could decline by roughly 11 percent, depending on natural gas prices. These declines in drilling would in turn lead to a long-run decline in domestic oil and gas production. As a result, the global price of oil could rise by 1 percent by 2030 and domestic production could drop 5 percent; global consumption could fall by less than 1 percent. Domestic natural gas prices, meanwhile, could rise between 7 and 10 percent, and both domestic production and consumption of natural gas could fall between 3 and 4 percent. This might mean an increase of two pennies per gallon of gasoline at the pump and seven dollars per month for an average household’s electricity bill—small effects compared to recent variations in prices. To date, no study that was transparent about its methodology had rigorously assessed how oil and gas firms might respond to tax reform. In particular, some previous studies had oversimplified the problem, assuming that the $4 billion in lost annual government revenue equaled the value of the preferences to firms. But since tax preferences increase firms’ immediate cash availability, they are even more valuable to the firms. On top of this, previous studies failed to hone in on marginal effects—that is, how the presence or absence of tax breaks affect which projects firms will consider profitable enough to drill. Recognizing that this paper improves upon past studies, The New York Times’ Eduardo Porter writes: Mr. Metcalf’s analysis is the most sophisticated yet on the impact of government supports, worth roughly $4 billion a year. Extrapolating from the observed reaction of energy companies to fluctuations in the price of oil and gas, he models how a loss of subsidies might curtail drilling and thus affect production, prices and consumer demand. After quantifying the minimal effects tax reform would have on oil and gas prices, production, and consumption, Metcalf concludes that its direct effects on U.S. energy security, greenhouse gas emissions, and economic health are also limited. But eliminating subsidies to fossil fuel producers can strengthen U.S. credibility and leverage in international climate diplomacy. In 2009, the G20 countries made a historic agreement to phase out fossil fuel subsidies. Yet the 2016 G20 energy ministerial recently concluded with a disappointing announcement that made no mention of a concrete timescale for achieving this goal. U.S. fossil fuel subsidy reform could help break the logjam. For example, the United States and China will each publish peer reviews of the other’s fossil fuel subsidies at the G20 general meeting in September, and U.S. action to repeal its own subsidies may spur China to make similar efforts. It would also strengthen U.S. leadership to call on other developed and developing countries to remove both producer and consumer fossil fuel subsidies that drive up emissions around the world.

This guest post is co-authored by Sarang Shidore, a visiting scholar at the LBJ School at the University of Texas at Austin, and Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at UT Austin. India is among the fastest-growing large energy consumers in the world. According to the IEA, India’s share of primary energy demand accounted for about 5.7% of the global total in 2013, and with its energy demand set to increase by 30%, India’s share of the global total could be nearly 7% by 2020.  Reining in greenhouse gas emissions from its fast-growing economy will be crucial to combat global climate change. Though it has laid out an ambitious roadmap to scale up renewable energy over the next decade, the bulk of Indian electricity generation is still expected to come from burning coal, and oil is widely expected to remain the dominant source of transportation fuels for the foreseeable future. Natural gas penetration in India, however, is extremely low compared to that in many major economies (see figure), with the exception of China. This is concerning, since natural gas could bring substantial benefits to India and the world. Compared with burning coal or oil, burning natural gas releases significantly lower greenhouse gas emissions per unit of energy (provided that methane leakage from natural gas production and delivery is limited). Natural gas power plants also produce lower levels of pollutants harmful to human health, compared with coal-fired power plants—this is particularly important given India’s high urban air pollution levels. And natural gas could be a bridge fuel in the transition to renewable energy because natural gas power plants can provide flexible, or peaking, power that makes it easier to integrate unpredictable wind and solar energy into the power grid. Indeed, in the United States a major revolution in producing low-cost shale gas has contributed to an electricity transition away from coal and toward renewable energy. So it is important to understand the barriers for natural gas adoption in India and examine public policy options to reduce them. Natural Gas consumption in India compared with that in other major economies (Compiled by authors with data from EIA, 2012). What’s Holding Natural Gas Back? Increasing the production and consumption of natural gas has faced a number of barriers in the Indian market. Most evidently, India’s conventional gas reserves are estimated to be relatively modest at about 1.4 trillion cubic meters, only 0.7% of the global total. Moreover, exploration and exploitation activities have been sub-optimal at best, and producers have considered deep water reserves economically unviable until recently. Low production is largely due to Indian government regulations that limit the gas price that domestic producers can charge in the domestic market. Some analysts have argued forcefully for a higher domestic gas price to incentivize production and attract greater private investment in the upstream gas market.  In addition to India’s limited conventional reserves, some unconventional gas reserves exist in the form of shale gas and coal-bed methane. Multiple barriers, such as water and land availability, have impeded shale gas production, though there is good potential for exploiting coal-bed methane. Compounding the lack of domestic reserves, international pipelines have stalled. Projects such as the Iran-Pakistan-India, Myanmar-Bangladesh-India, Oman-India, and Bangladesh-India have stalled for a number of reasons related to cost, technology, and international and domestic politics. Prospects for the only viable pipeline currently on the drawing board, the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, remain uncertain due to the deteriorating security situation in Afghanistan. In general, it is unlikely that international pipelines can deliver substantial gas supplies to India, at least over the next 10–15 years. Liquefied Natural Gas (LNG), which can be shipped around the world, is another major route for expanding gas supplies. LNG provides flexibility and shorter time horizons in contracting with active markets in both long-term and spot, or immediate, trading. However, high prices have traditionally made LNG unattractive for India. Historically, Asian countries have had difficulty procuring affordable LNG because of the so-called “Asian premium” in landed gas prices. Typical LNG prices were in the neighborhood of $16 per MMBtu [million British thermal units, a unit of energy] until recently. This was a cost far too high for the Indian electricity and other demand markets to bear—for example, gas-powered generation is competitive with generation from imported coal only at a gas price somewhere below $5 per MMBtu. India also suffers from a deficiency of infrastructure for domestic deployment of natural gas. India has delayed constructing LNG infrastructure to receive supplies from abroad, and new builds are ongoing. Though key regasification facilities (that convert LNG to pipeline gas) at the ports of Dahej, Hazira, Dabhol, and Kochi are operational, they can handle only  about 20 mmtpa (million metric tonnes)/year at the moment, which represents about 30% of current gas consumption. Given that domestic production increases will fall well short of demand even under optimistic scenarios, a major expansion of gas consumption will require a major expansion of LNG import capacity. India has ambitious expansion plans to raise its import capacity to 47.5 mmtpa/year by 2022, which will represent about 45% of IEA’s projected gas consumption for India in that year. However, substantial delays in large infrastructure projects are the norm in India. Moreover, once LNG is received in Indian ports, it still needs to be transported to major demand centers that can be far away. In general, gas transport is more challenging than oil transport, and pipelines are the best solution for moving large quantities of gas across country as large as India. Southern and eastern India are poorly served by pipelines. Critical projects such as the Kochi-Mangalore-Bangalore pipeline have been delayed owing to land acquisition issues. And infrastructure (e.g. filling stations) for Compressed Natural Gas (CNG) for transportation and city gas for domestic use is limited and could be expanded to many more Indian cities. Market Shifts Are Improving India’s Gas Prospects Low prices are making gas more attractive. A major development in gas markets in Asia has been the recent crash in LNG prices, which are now trading in the neighborhood of $5/MMBtu. It is undoubtedly risky to plan long-term energy transition strategies based on short-term market vagaries. However, there is good reason to believe that low LNG prices in Asia will persist, given new sources of gas supply. The United States recently began shipping LNG to India, and Australian gas will be delivered beginning late 2016. If the US-Iran nuclear deal continues to facilitate Iran’s entry into global markets, then Iran’s LNG supplies, expected on the global market post-2020, would further increase global supply. And East Africa is an additional major future source for LNG on the horizon. Furthermore, structural factors are putting downward pressure on prices. Two major developments in LNG markets are now well underway that could reduce LNG prices moving forward. One is the steady decline of traditional LNG contracts that index natural gas pricing to oil prices, which could erode the “Asian Premium." The other is a simultaneous dynamic of slowing demand growth in key countries like Japan and South Korea and accelerating supply from new sources such as the US and Australia. Both factors are exerting downward pressure on medium-term LNG prices which could persist for the longer term, shifting deals toward shorter-term, more flexible transactions. India has been quick to react to these changes, having renegotiated an earlier deal with Qatar to bring its contracted price from $12-13 per MMBtu to $6-7 per MMBtu—a reduction of about half. The Modi government is in talks to import LNG from the Chevron-led Gorgon project in Australia. India is also in preliminary talks with other Asian countries to create a buyers’ alliance that can jointly negotiate an extended regime of lower prices with key suppliers. India has also achieved some domestic pricing reform. As of 2016, India now incentivizes production from deepwater wells at a higher price than before of $6.61 per MMBtu. This has helped close the gap between regulations and the position of Indian producers such as Reliance, which recently withdrew a key arbitration proceeding against the Indian government on stalled production at a major gas field. Finally, given citizens’ increasing anger over worsening air quality in New Delhi and elsewhere, recent court rulings in India have banned diesel vehicles in a few cities, providing new market opportunities for CNG use in the transportation sector. Regulatory Reform can HELP Gas Turn Around The government’s recent Hydrocarbon Exploration Licensing Policy (HELP) attempts to reform the previously unwieldy system by streamlining license procedures, allowing developers to define acreage of exploration fields, moving from a profit-sharing to a revenue-sharing model, and allowing “pricing freedom” to new gas finds subject to a cap determined by a complex formula. This cap turns out to be quite low in an era of low fossil fuel prices. However, more regulatory reforms are needed to incentivize domestic production. Most analysts have argued for greater pricing freedom, in the range of $6-$14 per MMBtu, depending on the type of gas field in question. However, it is also clear that gas at these prices cannot compete with coal for electricity generation. They will also greatly increase fertilizer subsidies. There are major political barriers to reducing or eliminating the fertilizer subsidy regime, which directly benefits farmers, who compose more than half of India’s voters. Thus, India has three policy choices. The first is to prioritize domestic production through an across-the-board pricing reform, reflecting domestic market dynamics. This has the advantage of increasing energy independence and building in greater price predictability. However, this option will substantially increase the fertilizer subsidy burden, though higher government royalties that would accrue in a higher price regime could offset some of this increase. Barring politically difficult power tariff increases, this also means compromising gas-fired grid-based electricity expansion, which in turn would have a negative effect on renewables growth. A second choice has emerged in the wake of the recent dramatic drop in LNG prices in Asia. India could bet on a sustained low price LNG environment and focus almost entirely on increasing gas imports to meet future demand rise. This option requires more aggressive gas port and pipeline infrastructure goals and their on-time completion and energizing pipeline projects such as TAPI. It however carries the risk that Asian gas prices could sharply increase at some point in the future due to geopolitical or other factors endangering Indian energy security. The third option, and the one we recommend, is to seek the middle ground—undertake selective but deeper pricing reform, perhaps for the more challenging ultra-deepwater fields and coal-bed methane, but also pull out all stops to ensure that ambitious LNG and pipeline infrastructure plans meet stated deadlines to enable accelerated imports. Existing subsidy regimes would largely remain intact, but deregulated markets in piped gas, CNG, captive power plants, and industrial sectors could absorb much of the price increase, especially if the state acts to facilitate large demand volumes for gas in the domestic and transport sectors. This will require a major build-out of gas infrastructure (such as pipelines to homes and CNG filling stations) to generate the requisite demand at these prices. It will also require strong domestic regulations to limit methane leaks from production and transport sites, lest the climate benefits of methane over coal disappear. Additionally, the government should consider including the steel sector within the “Tier 1” list of sectors to which domestic gas is released first. Steel manufacturing is a major source of India’s carbon emissions, and there are substantial climate and air quality benefits in encouraging it to use natural gas rather than coal. Additional Policies and International Coordination Are Also Important The diesel vehicle ban promulgated by the National Green Tribunal, India’s top environmental court, must be supported strongly. Not only should the government abandon its current opposition to extending the ban to other cities, but it should also proactively support its extension. This will not only have major air quality benefits, but will also enable demand for natural gas in the transportation sector to take off, a critical condition for the regulatory reforms listed above to become viable. The buyers’ alliance initiative from the Modi government is an excellent idea. Major consumers such as South Korea, Japan, Thailand, and even China could be included in these discussions. If Asian LNG prices converge strongly with landed prices in Europe, there is also the future possibility of including EU states in this conversation. The United States can significantly promote greater adoption of natural gas in India. It can participate in  plurilateral talks on coordination of gas buyers and continue to publicly disseminate information on air quality as a public health issue. The US can also leverage some of its recent experience on quantifying and regulating methane leakage to help India establish an effective policy framework. And quiet U.S. diplomacy can pay off when pursued appropriately, exemplified by India’s shift in stance on bringing HFCs [hydrofluorocarbons, potent greenhouse gases] under the Montreal framework. Though enhancing India’s consumption of natural gas will inevitably mean greater imports, compared with domestically abundant coal, there are enormous benefits from increasing adoption of natural gas that can aid India’s development and public health as well as global efforts to combat climate change. Some might question whether expensive investments in natural gas will come at the expense of a renewable energy revolution. In fact, the reality is quite the opposite—barring a low-cost, grid-scale storage technology breakthrough, a major revolution in wind and solar energy cannot be achieved without adequate flexible power sources to meet peak load power demand. Natural gas and hydropower provide by far the best source of peaking power. With major constraints to hydropower’s expansion in India, gas-fired plants are essential to India’s achievement of the ambitious renewables targets it committed to in the Paris climate agreement last year.

International attention has been focused on the devaluation of the national currency, the naira, but there have been important security developments meanwhile. Militants, called the “Niger Delta Avengers" (NDA), have attacked oil infrastructure, resulting in a decline in production, with estimates ranging from 40 to 60 percent. As profits from oil and gas account for more than 90 percent of Nigeria’s foreign exchange and more than 70 percent of the government’s total revenue, the events have harmed the Nigerian economy. In the meantime, Boko Haram in the Northeast is far from destroyed. It continues to carry out operations, though on a reduced scale. There is anecdotal evidence that Abuja is shifting military resources from the fight against Boko Haram to the Delta. There is concern that if military pressure is reduced, Boko Haram will surge. Against this backdrop, on June 21, Voice of America carried a report according to “a senior official at the state-owned oil company” that the Nigerian government has reached a cease-fire with the NDA. However, on Twitter the NDA are saying: “The NDA High Command never remember having any agreement on cease-fire with the Nigeria government.” The Minister of State for Petroleum is in the Delta at present. He wants to negotiate rather than use force. The incoming secretary general of the Organization of Petroleum Exporting Countries, Mohammed Barkindo, a Nigerian, says, “The government, I understand, are negotiating, they are discussing and we are beginning to see the positive results.” Some conclusions can be drawn. The government appears intent on negotiations, at least at present, rather than the use of military force. This is positive. Army and police methods in the Northeast were a driver of Boko Haram recruitment, and that pattern might well be repeated in the Delta if the government tries to destroy the NDA by force. But, it is unclear whether the NDA will negotiate. It is also uncertain which individuals are authorized to speak for the NDA, who are likely to be loosely organized and locally based. Too, anecdotes that the government is moving military forces into the Delta as a precaution if the negotiations fail are credible. Also, in the Northeast, a general from Niger on June 21 said that a multinational force “has begun operations against Boko Haram along the border between Niger and Nigeria,” according to Reuters. “The operations have as their objective (to end) the occupation of all the zones currently occupied by Boko Haram. Our role is to firmly secure the border,” said Niger Brigadier-General Abdou Sidikou Issa. If this is a significant effort, it might help cover the transfer of Nigerian military assets to the Delta. Finally, President Muhammadu Buhari has appointed new Acting Police Inspector General (AIG) Ibrahim Kpotun Idris. His predecessor has retired because he reached the age limit for the position. The new AIG has been an assistant inspector general of police. While sketchy news reports do not indicate whether this appointment represents a housecleaning, one is sorely needed within the police. The police are a national, not local, body, comparable in some ways to the gendarmerie in France. They have been widely accused of human rights abuses which are a driver of public support or acquiescence for Boko Haram and the NDA.

This post is co-authored by Sagatom Saha, research associate for energy and foreign policy at the Council on Foreign Relations. Read the report from a recent CFR workshop on oil price volatility. The workshop, hosted by Michael Levi and Varun Sivaram, was made possible by the support of the Alfred P. Sloan Foundation. Last month, CFR’s Greenberg Center for Geoeconomic Studies convened a workshop to discuss the causes, consequences, and policy implications of oil price volatility. Most of the roughly forty experts in attendance agreed that volatility—which the workshop defined as price swings in either direction of up to a year—will persist for the foreseeable future. They also broadly agreed that at least some instances of volatility have serious economic and geopolitical consequences. But when it came to proposing policy measures to reduce volatility, controversy replaced consensus; few participants rallied around any recommendation, warning of side effects from trying to manage oil prices. In fact, the only policy recommendations that did attract widespread support were ones that reduced the U.S. economy’s exposure to oil markets by lowering consumption, the only surefire way to decrease the risks from volatility. These discussions happened against the backdrop of a changing global energy landscape. In particular, participants reflected on future sources of “swing supply” to balance supply and demand and moderate oil price volatility. Uncertainty over whether Saudi Arabia has abdicated its historical role as swing supplier and if U.S. shale oil can instead play that role suggests that there is no end to volatility in sight. But, as the workshop report notes, “Given Saudi Arabia’s large spare production capacity—still the world’s biggest—most workshop participants still see the kingdom playing some role as the producer of last resort.” Figure 1 from the report on CFR’s oil price volatility workshop Having established that volatility is likely to persist, the workshop explored its economic and geopolitical consequences at home and abroad. Although the academic literature more commonly focuses on the effects of oil price levels—i.e., high or low oil prices—participants honed in on the effects of price volatility independent of price level. The workshop report elaborates: Even low [oil] prices, if paired with volatility, do not necessarily lead to an economic boost [in the United States], some participants suggested. Fluctuating prices can make consumers wary of spending, thus dampening any stimulus effect of lower oil prices. …For oil-exporting countries, some participants noted that price volatility, more than the price level, is particularly problematic. That is because, as one participant put it, it is easier to build a budget that works with oil at $50 per barrel than one that works when oil zooms between $20 and $80 a barrel. But participants were hard-pressed to provide recommendations to U.S. policymakers for how to reduce the volatility of global oil prices. For example, Columbia’s Jason Bordoff wrote a post for this blog arguing that the United States should not use its Strategic Petroleum Reserve (SPR) as a “Federal Reserve of Oil” to buffer global price volatility on a regular basis. Such a strategy would have grave side effects, including muting price signals to producers and consumers and depleting the SPR, impairing its intended ability to counteract major oil market disruptions. The workshop also explored ways to reduce the elasticity of oil supply and demand—at least theoretically, more price-responsive demand and supply should reduce price volatility. But targeting elasticity can yield impractical policy proposals, like taxes on producers that increase as their production decreases. And some policies that enjoy broad support, like U.S. fuel economy standards, might actually be undesirable if evaluated only by the effect on demand elasticity: Efficiency standards that make the automobile fleet cleaner can actually end up decreasing elasticity and increasing oil price volatility, one participant noted. If cars get better mileage, gasoline prices will matter less to drivers, and consumers will not cut down consumption. Even if more efficient U.S. cars can increase oil price volatility, the effect is likely washed out by the salutary effects of consuming less oil. (Indeed, we recently studied U.S. fuel economy standards and found that the benefits far outweigh the costs.) This does not mean that reducing U.S. oil consumption will mitigate all of the risks of oil price volatility—around the world, volatility still threatens U.S. economic and geopolitical interests. And it is not always a bad idea to try and increase elasticities—the United States should advocate for global reform of fuel subsidies that can insulate major economies from the price signals of oil markets. But to reduce the effects of oil price volatility on the U.S. economy, it is likely best to reduce U.S. exposure to the global oil market rather than attempt to tame it.

Michel Temer’s first month as interim president has not been the stuff of dreams. Even though important elements of urgently needed economic reforms have advanced, impeachment politics continue to cast a long shadow, corruption investigations continue to percolate, and Temer’s legitimacy remains under constant assault. As impeachment continues to move forward in the Senate, Dilma Rousseff and her supporters have pulled out all the stops. Actors at Cannes and other cultural events have protested the alleged coup, demonstrators have hit the streets alongside former President Lula, and perhaps looking for a wedge that might drive moderates to her side, Rousseff has suggested that if reinstated, she would call for new elections. Public support for impeachment has fallen slightly, although most Brazilians say they would rather not see Rousseff return and chances are still better than not that she will be convicted by the Senate in August. But Rousseff’s supporters know that their own long-term political fortunes depend on questioning the legitimacy of impeachment, and fence-sitting senators seem to be using the uncertainty surrounding support for impeachment to extract a pound of flesh from the interim president. Temer has built a defensive cabinet, following the time-tested recipe of appointing ministers who faithfully represent the majority legislative coalition. They are complemented by a parallel kitchen cabinet of technocrats in the Finance Ministry, the National Development Bank (BNDES), Banco do Brasil, Treasury, and state-owned enterprises. The bifurcated cabinet may help to ensure Temer’s survival, but it also helps to explain the ambiguous results of the last month: progress on fiscal reforms, such as more realistic fiscal targets and the DRU law (which reallocates tax revenues in favor of the federal government), but also important setbacks, such as a tone deaf congressional push for higher civil service wages. Most damaging, of course, is that Temer’s allies, especially within the PMDB party, are a constant embarrassment: wiretapped conversations between a defendant in the Lava Jato case and party heavyweights Renan Calheiros, José Sarney, and Romero Jucá, suggested an effort to undermine anticorruption efforts and confirmed many Brazilians’ worst suspicions about the Temer coalition. Recognizing his own tenuous support and the likely political confusion of coming months, Temer appears to be governing largely symbolically, announcing a number of high-impact measures that require little legislative support, such as reducing the number of ministries, creating a new concessions program, rebuilding regulatory agencies, and reviewing the rules on Petrobras’ participation in the pre-salt oilfields. The most important major legislative initiative announced by the government is social security reform, but debate over the specifics of the proposal is unlikely before municipal elections in October, given that Temer cannot afford a divisive battle while Congress is still fighting the impeachment battle or distracted by electoral politics. The best news in the short term is that the Temer administration is reportedly planning to back a series of accountability reforms proposed by the Ministério Público prosecutorial service, presumably to help it to recover some modicum of credibility in the anticorruption effort. Multiple corruption investigations continue to destabilize the political world. A plea bargain by former OAS executive Leo Pinheiro included allegations of campaign finance violations by Marina Silva, one of the few prominent politicians as yet untainted by the Lava Jato case. Rumors of a plea bargain by construction magnate Marcelo Odebrecht and the investigation of former President Lula’s involvement in the Petrobras scandal have Brasília abuzz. The Zelotes investigation of tax evasion seems to have moved into a new phase with the indictment of the president of one of Brazil’s largest private banks, Bradesco. The possible removal of Eduardo Cunha from the Chamber of Deputies presidency continues to generate sparks in Congress, and there is (as yet unfounded) speculation that Cunha might try to save his skin through a plea bargain of his own. Meanwhile, the impeachment trial will move into higher relief beginning next week, as the defense presents its case and President Rousseff is scheduled to testify. In sum, the coming weeks and months are likely to remain full of drama and tension, with a distracted political class focused less on governance than survival. In the background, almost as an afterthought, will be efforts to address the multiple economic challenges the country faces: heavily burdened state companies, the threatening fiscal deficit, and the critical situation of Brazil’s state governments.

This guest post is authored by Jason Bordoff, professor of professional practice and founding director of the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. For more on the causes, consequences, and policy implications of oil price volatility, read the report from a recent CFR workshop. Oil price volatility—sharp price swings in either direction over a short timespan—can harm economies, provoke political instability, and exacerbate poverty. Moving forward, oil price volatility may increase if Saudi Arabia and the rest of OPEC continue to abstain from efforts to manage the market and hold very little spare capacity to cushion the price impact of global supply disruptions, and if the role of shale as a short-cycle source of supply remains uncertain, as Bob McNally argues in a forthcoming Center on Global Energy Policy book. Although few countries are capable of materially influencing global oil markets, CFR posed the question in a recent workshop whether the United States may be able to smooth the fluctuating price of oil by using its Strategic Petroleum Reserve (SPR), an emergency fuel storage of oil maintained by the United States Department of Energy. But just because the SPR can be used in this way does not mean that it should. In fact, policymakers should avoid using the SPR as a “Federal Reserve of Oil” that actively manages the market on an ongoing basis. This would mute important market price signals to consumers and producers, exceed the competence of U.S. authorities, and create pernicious political temptations to cushion consumers from high fuel prices. Rather, the United States should only use the SPR in infrequent circumstances to protect the U.S. economy from major supply disruptions around the world. What is the SPR? Congress created the SPR in the Energy Policy and Conservation Act (EPCA) of 1975 in the wake of the Arab Oil Embargo to insulate the United States from future petroleum supply disruptions. As a member of the International Energy Agency (EIA), the United States is required to hold stocks of crude oil and/or petroleum products equivalent to ninety days’ worth of net imports for use in an emergency. These stocks can be held either in private inventories or directly by the government. As of February, the SPR contained contains the equivalent of 137 days of net import cover. That figure has risen in recent years in response to both surging oil supply and lower oil demand, dramatically reducing the nation’s dependence on imports. Presently, the SPR holds 695 million barrels of crude oil, with capacity to hold 714 million barrels. EPCA defines the circumstances in which the SPR may be used. Generally, there are three possible types of drawdowns [1]: 1. Full drawdown: The president can order a full drawdown of the reserve to counter a "severe energy supply interruption." 2. Limited drawdown: Up to thirty million barrels if the president finds there is “a domestic or international energy supply shortage of significant scope or duration.” 3. Test sale or exchange: The secretary of energy is authorized to carry out test drawdowns and distribution of crude oil from the SPR not to exceed five million barrels. The New Oil Market Means the SPR Serves a Different Purpose However, the EPCA drew up the SPR under a very different reality than today’s. In the 1970s, oil price controls existed in the United States, and most internationally traded oil was sold under long-term contracts. As a result, a disruption in contracted shipments could result in a physical shortage for the buyer because neither strategic and commercial stockpiles nor a large spot market existed at the time. In the intervening years, the oil market has become the largest and most liquid commodity market on earth with vibrant futures markets. Almost all oil is globally traded for a price indexed to benchmark crude prices and mature pricing hubs in regions including Europe (Brent), the United States (WTI), and the Middle East (Dubai).[2] Given how the oil market has changed, the consequence of a supply disruption anywhere is a price increase everywhere. Hence, the risk against which the SPR needs to guard today is global. A supply disruption from anywhere causes domestic prices to spike regardless of whether U.S. refineries import from the disrupted countries. The effect on prices of such a disruption can be tempered by additional supply released from strategic stocks through coordinated action by countries, as well as by commercial supplies and spare capacity. An increasingly important role for SPR policy may also be managing market expectations.[3]  Markets react very quickly to anticipated supply and demand changes, which can sharply affect price movements. In 2012, for example, the effect on the world oil price of sanctions on Iranian oil sales and other geopolitical fears was tempered, at least in part, by a perception in the market that the United States and other IEA members might release stocks from the SPR if prices rose too far.[4] In the summer of 2012, both the G-20 and G-7 issued statements intended to signal that they might tap strategic oil stocks if necessary.[5] Policymakers sent other signals to this effect as well, such as the reported conversation in March 2012 between President Obama and Prime Minister David Cameron about using strategic oil stocks.[6] As a result, numerous analysts cautioned that the Obama Administration might release SPR crude if oil prices rose above roughly $120 per barrel. Should Policymakers Use the SPR To Mitigate Oil Price Volatility? The answer depends on the cause and duration of the volatility. For short-term price spikes due to supply disruptions, the use of strategic stocks can mitigate the concomitant economic harm until the market disruption is resolved. These disruptions may be driven by natural disasters like hurricanes or the recent wildfires in Canada, by geopolitical events like wars, or even domestic events like labor strikes. Such use of the SPR is consistent with the changes to the global oil market over the past forty years discussed above. In today’s market, the SPR needs to guard against the risk of a global disruption to crude supply that causes domestic prices to spike rather than supply cut-offs to particular importing refineries. Accordingly, the value of the SPR should be measured less by days of import cover than by the ability of the SPR to add supply to the global oil market to mitigate the economic harm of disruptions. Consistent with this approach, the Quadrennial Energy Review recommends updating the EPCA’s usage guidelines for use of the SPR in the following ways: 1. The definition of a "severe energy supply interruption"—in the event of which EPCA authorizes releases of stocks from the SPR—should include any disruption in the global oil market likely to cause a severe increase in the price of petroleum products, regardless of whether the United States would experience lower oil imports. 2. The President should have the authority to release stocks from the SPR if a severe price increase will likely result from an emergency situation, rather than having to wait until a severe fuel price increase has already occurred. To be effective, the SPR’s infrastructure needs to be modernized, because today it may no longer be able to deliver additional and incremental barrels to the market to address supply disruptions.[7] To ensure SPR crude oil can be effectively accessed in a future supply disruption, the Quadrennial Energy Review estimated that $1.5 to $2 billion is needed “to increase the incremental distribution capacity of the SPR by adding dedicated marine loading dock capacity at the Gulf Coast terminus of the SPR distribution systems, as well as undertaking a life extension program for key SPR components.” By contrast, it would be unwise for the federal government to use the SPR as a “Federal Reserve of Oil” on a regular basis—that is, to try to achieve stable oil prices at all times, even when the oil price volatility is not from short-term disruptions but rather from other structural supply and demand shifts. There are several reasons for this. First, perhaps most importantly, using government oil stocks to prevent price spikes and drops would mute the price signal to producers and consumers that would otherwise address the underlying supply and demand imbalance in the market. In response to high prices over the past decade, producers invested hundreds of billions of dollars in new sources of higher cost oil supply, including the investments and innovation that enabled U.S. shale revolution. Oil demand growth also slowed at the time as consumers responded to higher prices. But in response to the current price collapse, demand has rebounded, producers have slashed capital expenditures, and production is falling in the United States and other countries like China, Mexico and Colombia. By muting these price signals to consumers and producers, the SPR could slow the market’s ability to correct itself, risking a prolonged imbalance between supply and demand and depletion of the limited stocks in the SPR. Second, it is not clear whether the U.S. government (or any entity, for that matter) has the necessary expertise to ascertain the causes of near-term oil price volatility, assess the role of supply and demand dynamics vs. other factors like financial speculation, and understand the effects of geopolitical and market conditions in important producing countries. Leading market analysts consistently demonstrate their inability to predict price movements and often confess difficulty in explaining current market shifts. The U.S. government may have officials with experience analyzing the global oil market (as with the current Administrator of the EIA), but often that is not the case, especially among the political appointees making the ultimate decision about SPR use. Third, explicitly using the SPR to mitigate price volatility would likely lead to intense political pressure being brought to bear on policymakers to cushion high gasoline prices (conversely, producing states and firms may discourage policymakers from permitting very low prices, as in today’s environment). High gasoline prices, especially in an election year, often become hot-button issues and lead to calls to tap the SPR. Fourth, unless the US intends to manage the global markets only with its domestic SPR, it is unlikely that IEA countries can agree to release the SPR quickly enough to address short-term oil price volatility. We have seen examples of quick action in the past, such as after Hurricane Katrina, but also cases in which such coordination takes time. In 2011, for example, the Libyan civil war led to a disruption in oil supply in February, but the IEA-coordinated release did not occur until June, in large part due to the time necessary to build support among IEA member countries. In theory, this concern could be addressed by creating an international board to assess market conditions and make recommendations about strategic reserve use to mitigate volatility. Yet that would require (1) IEA members to agree that such use of strategic stocks was sensible; (2) the United States to cede decision-making authority to an international body, which would generate severe opposition; and (3) IEA countries that meet their strategic reserve requirements through private sector inventories, not government-held stocks, to overcome the challenge of coordinating private inventory releases. Fifth, at roughly 700 million barrels, the current SPR may well not be large enough to effectively mitigate oil price volatility in a global market that consumes about 95 million barrels of oil every day. It is unclear exactly how much additional supply would have had to be put on the market from 2011 to 2014 to keep prices at an “acceptable” level rather than in excess of $100 per barrel, but, depending on the extent of the market shortfall, the U.S. SPR could be run down rather quickly. This concern may be addressed by drawing on stocks in other IEA countries, and by building new mechanisms to coordinate stock releases with non-IEA countries that are now holding very large stockpiles, like China. Yet such a coordination mechanism, as noted in the prior point, would come at the expense of timeliness or U.S. autonomy. Sixth, any supply additions to mitigate oil price spikes could be offset by OPEC producers if they wanted to support higher prices. While the ability of OPEC to coordinate, or the willingness of Saudi Arabia to cut production on its own, seems lacking at present, it is possible that OPEC could yet try to reassert its role as a market manager. A Guard Against Global Disruption, Not the Federal Oil Reserve Oil price volatility is harmful to the macro economy and to consumers, and it may be more likely moving forward than in the past because of changes in the behavior of oil producing countries and the emergence of U.S. shale as a short-cycle source of oil supply. Given how the oil market has changed over the past several decades, the SPR today guards against a different risk than it did initially. In today’s market, the risk against which the SPR needs to guard is a global disruption to crude supply that causes domestic prices to spike rather than supplies being cut off to particular importing refineries. Whether the SPR should be used to mitigate oil price volatility depends on the cause and duration of the volatility. In the event of short-term price spikes due to temporary supply disruptions, the use of strategic stocks can mitigate the concomitant economic harm until the market disruption is resolved. By contrast, using the SPR on a regular basis to try to achieve more stable oil prices—a “Federal Reserve of Oil” model—would be ill-advised for many reasons. These include preventing consumers and producers from responding to structural supply and demand shifts; political, market expertise, and SPR governance limitations; and potential producer country responses. Appendix [8] The circumstances that might require the use of the Strategic Petroleum Reserve are defined in the Energy Policy and Conservation Act (EPCA).  Generally, there are three possible types of drawdowns envisioned in the Act: Full drawdown: The President can order a full drawdown of the Reserve to counter a “severe energy supply interruption.” EPCA defines this as “a national energy supply shortage which the President determines – a. is, or is likely to be, of significant scope and duration, and of an emergency nature b. may cause major harm on national safety or the national economy; and c. results, or is likely to result, from (i) an interruption in the supply of imported petroleum products, (ii) an interruption in the supply of domestic petroleum products, or (iii) sabotage or an act of God.” EPCA also states that a severe energy supply interruption “shall be deemed to exist if the President determines that – a. an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; b. a severe increase in the price of petroleum products has resulted from such emergency situation; and c. such price increase is likely to cause a major adverse impact on the national economy.” Limited drawdown: If the President finds that - a. a circumstance, other than those described [above] exists that constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration; and b.  action taken....would assist directly and significantly in preventing or reducing the adverse impact of such shortage" then the Secretary may drawdown and distribute the Strategic Petroleum Reserve, although in no case: 1) in excess of an aggregate of 30,000,000 barrels, 2) for more than 60 days, or 3) if there are fewer than 500,000,000 barrels....stored in the Reserve. Test Sale or Exchange: The Secretary of Energy is authorized to carry out test drawdowns and distribution of crude oil from the Reserve. If any such test drawdown includes the sale or exchange of crude oil, “then the aggregate quantity of crude oil withdrawn from the Reserve may not exceed 5,000,000 barrels during any such test drawdown or distribution.” [1] "The Energy Policy and Conservation Act (P.L. 94-163, 42 U.S.C. 6201)", enacted December 22, 1975. [2] Jason Bordoff and Trevor Houser, “Navigating the U.S. Oil Export Debate,” Columbia University’s Center on Global Energy Policy, January 2015. [3] Michelle Billig Patron and David L. Goldwyn, “Managing Strategic Reserves,” in Energy and Security: Strategies for a World in Transition (2nd edition), edited by Jan H. Kalicki and David L. Goldwyn, Woodrow Wilson Center Press, 2013. [4] See, e.g., Blake Clayton, “Is the White House the New Federal Reserve of Oil?,” Forbes, October 12, 2012; Izabella Kaminska, “SPR talk as QE3 expectation management,” Financial Times, September 3, 2012. [5] "G7 urges oil supply boost, says ready to call for IEA action," Platts, August 29, 2012; "G20 says vigilant on oil, ready to take measures," Reuters, June 19, 2012. [6] Guy Chazan et al., “Crude Tumbles as Leaders Discuss Supplies,” Financial Times, March 15, 2012; Matt Falloon and Jeff Mason, “Obama, UK’s Cameron Discussed Tapping Oil Reserves: Sources,” Reuters, March 15, 2012. [7] Testimony of Jason E. Bordoff before the Senate Committee on Energy and Natural Resources, October 6, 2015. [8] U.S. Department of Energy, "SPR Quick Facts and FAQs."

Oil is the property of the Nigerian state. Most of it is produced through partnerships between the Nigerian National Petroleum Corporation, which is owned by the state, and private oil companies. Oil provides the Nigerian state with about 70 percent of its revenue and roughly 90 percent of its foreign exchange. President Muhammadu Buhari’s current national budget is expansionary, not least because of the struggle against Boko Haram. The budget is based on the production of 2.2 million barrels per day at $38 per barrel. He has also declined to officially devalue the national currency, the naira, which trades at an official rate of about 200 to the U.S. dollar and about 345 to the U.S. dollar on the black market. On May 16, Minister of State for Petroleum Resources Emmanuel Kachikwu reported in the lower house of parliament that oil production has fallen by almost 40 percent, from the budgeted 2.2 million barrels a day to 1.4 million. According to the Voice of America, Kachikwu said the loss is the result of “incessant attacks and disruption of production in the Niger delta." The “face” of the attacks on oil infrastructure is a group that calls itself the Niger Delta Avengers (NDA). Little is known about NDA, though it has some similarities with groups that attacked oil infrastructure from 2005 to 2009, until they were bought off by a government amnesty that included payoffs to leaders and retraining programs for militant foot soldiers. President Buhari has reduced the scope of amnesty payments. President Buhari has moved vigorously against corruption, and is seeking the repatriation of stolen funds placed abroad. Nevertheless, his government, like its predecessors, is dependent on oil revenue. And the demands are great: definitively defeat Boko Haram and begin the reconstruction of the devastated northeast of the country.

Below is a visualization and description of some of the most significant incidents of political violence in Nigeria from May 14, to May 20, 2016. This update also represents violence related to Boko Haram in Cameroon, Chad, and Niger. These incidents will be included in the Nigeria Security Tracker.   May 14: Nigerian troops repelled a Boko Haram attack in Gwoza, Borno, killing two militants. May 15: A cult clash resulted in the deaths of six in Ogba/Egbema/Ndoni, Rivers. May 19: A cult clash resulted in the deaths of five in Emuoha, Rivers. May 20: Militants blew up a pipeline in Warri South West, Delta. There were no casualties. May 20: Boko Haram militants killed six in Bosso, Niger. May 20: Sectarian violence resulted in the deaths of two in Ikole, Ekiti. May 20: In Kogi, two All Progressives Congress representatives were kidnapped in Lokoja and two judges were kidnapped in Idah.

According to Bloomberg, militant attacks on the oil infrastructure in the Niger delta have resulted in the lowest level of production in Nigeria in twenty years, falling below 1.7 million barrels a day. As such, Nigeria is no longer Africa’s largest oil producer; Angola is. Bloomberg, citing the International Energy Agency, estimates that the Nigerian government could lose $1 billion in revenue by the end of May. It appears that some of the oil companies are withdrawing “non-essential” workers out of concern for their safety. The Buhari administration is concerned. There are reports that at the direction of President Muhammadu Buhari, Vice President Yemi Osinbajo on May 8 met with Army and Navy “security chiefs,” the Minister of State for Petroleum, and “other officials.” Separately, he met with the governor of Bayelsa state (a major oil producer), and at least one traditional leader. The southeast caucus of President Buhari’s All Progressives Congress urged the militants to give the president time to address their grievances. It also said that militant anger should be directed against former President Goodluck Jonathan, who failed to address the long-standing problems of the region. The hitherto largely unknown Niger Delta Avengers (NDA) claim responsibility for the attacks. There is speculation that militants involved in the last round of attacks, from 2006 to 2009, are also somehow involved. However, former militant leader Government Ekpemupolo, alias ‘Tompolo,’ specifically denies his involvement. The NDA may represent a new generation of militants. The 2006-2009 attacks on oil infrastructure ended with an “amnesty” established by President Umaru Yar’Adua and continued by his successor, Goodluck Jonathan. The amnesty ostensibly involved the militant surrender of weapons, and training programs for former militants—with allowances. In addition, it is all but an open secret that the government paid off former militant leaders, in some cases with government contracts to “protect” the oil infrastructure. Bloomberg says, “The militants have been frustrated by current President Muhammadu Buhari’s decision to scale back the allowances.” This is credible. Delta grievances are widespread and very long standing. In essence, the region resents that it does not receive a larger share of the revenue from the oil and natural gas that it produces. In addition, the oil and gas industry is held to be responsible for the massive pollution of the environment, depriving farmers and fishermen of their livelihood. Though it produces so much wealth, the region is remarkably under-developed in terms of infrastructure. However, the world-wide fall in petroleum prices combined with attacks on the oil-producing infrastructure means that the Buhari government has less revenue with which to address such grievances.

Confronting Nigeria’s culture of corruption was a primary campaign theme of Muhammadu Buhari’s successful campaign for the presidency. Since taking office, he has fired numerous high officials widely regarded as corrupt, made a reputation for incorruptibility a prerequisite for high appointments (though there have been exceptions), and directed the Economic and Financial Crimes Commission to launch investigations into the allegedly corrupt behavior of numerous high-ranking military and civilian officials. Those arrested have included the former national security advisor, Sambo Dasuki and Delta warlord Tompolo. However, the highest profile arrest was that of Diezani Alison-Madueke, the minister of petroleum in the Goodluck Jonathan administration, in London as a result of a British investigation. Nevertheless, President Buhari’s anticorruption campaign has already gone further than that of any of his predecessors since the resumption of civilian government in 1999. The Buhari administration is continuing to raise the corruption ante. It has just negotiated an agreement with the United Arab Emirates (UAE) on mutual legal assistance on criminal and commercial matters and on extradition and the transfer of sentenced persons. (The package also included agreements on taxation and trade promotion.) These new agreements provide a mechanism for the repatriation to Nigeria of stolen funds from the UAE and the extradition of Nigerians who have fled there. The Nigerian media is reporting that “panic” among “corrupt” Nigerian officials, whom, it has long been thought, have favored the UAE as a place to park ill-gotten gains. The UAE is a popular destination for wealthy Nigerians because of its highly developed infrastructure and luxurious accommodations. The Premium Times cites an investigator who maintains that at least $200 billion stolen from the Nigerian treasury has been “stashed in banks and invested in properties in Dubai and Abu Dhabi.”

President Muhammadu Buhari successfully ran for the presidency on an anti-corruption ticket and a promise to restore security by destroying Boko Haram. His geographical support was based in the north and the west of the country, and he also benefitted from a general sense among the political class that incumbent President Goodluck Jonathan was incompetent and had to go. But, in the predominately south and east of the country, a majority apparently voted for Jonathan and his Peoples Democratic Party’s (PDP) candidates in the National Assembly. Just how large a majority is not clear, as there was election rigging in the region on Jonathan’s and the PDP’s behalf. Nevertheless, the bottom line is that notwithstanding Buhari’s electoral victory, the PDP has not gone away. With its votes in the National Assembly, it remains a powerful political factor that can thwart Buhari’s reform agenda. Since election day, there have been complaints that Buhari’s government is “northern” in character, and that it is not moving to address the genuine grievances in the southern and eastern parts of the country, including the oil patch, that had voted for the PDP. There has been a revival of public sentiment in favor of Biafra, a predominately Christian, Igbo-dominated state that tried to secede from Nigeria and failed in the 1967-70 civil war. In a government misstep that risks inflaming Delta opinion, the Buhari administration has arrested the head of Radio Biafra and denies him bail. Since election day, President Buhari has vigorously pursued an anti-corruption campaign that includes senior associates of the Jonathan administration in its dragnet. Many of those arrested or under investigation are Christians from the areas that voted for Jonathan and the PDP. It should be no surprise that there are complaints that the Buhari government is selective in its investigations and prosecutions to the detriment of southern Christians, though, in fact, northern Muslims (including the former national security advisor and a close associate of Buhari himself) have also been caught in the anti-corruption dragnet. Last week, the Abuja High Court ordered the arrest of the warlord Government Ekpemupolo (or Tompolo), one of Jonathan’s more disreputable political allies from the oil patch, for corruption. Apparently as a result of the arrest, Niger Delta militants over the weekend attacked oil and gas pipelines that shut down two of Nigeria’s four refineries. Long out of operation, the four refineries had recently been revived as part of the Buhari administration’s effort to reduce Nigeria’s dependence on imported refined petroleum products. During the last round of unrest in the oil patch under the 1999-2007 Obasanjo administration, militant attacks on the oil infrastructure significantly cut production and reduced government revenue. The Yar’Adua and Jonathan administrations in effect bought off militant leaders, like Tompolo, through government contracts and office. Ex-war lord and man of violence, Tompolo faces credible charges. But, he is also seen by some in the Delta as a Robin Hood by a region that is feeling marginalized. As the anti-corruption campaign unfolds, it should be anticipated that Delta restiveness and associated attacks on the oil infrastructure will continue.