Fossil Fuels

Introduction U.S. policymakers have been concerned about the country's dependence on imported energy since World War II. Those concerns were highlighted in the 1970s when episodes of sharply rising oil prices led to recessions, economic stagnation, and high inflation. However, recent gains in U.S. oil and natural gas production are changing the dialogue about U.S. energy strengths and vulnerabilities. The "shale revolution" has stimulated tremendous production of oil and natural gas in the United States. The revolution is the product of advances in oil and natural gas production technology—notably, a new combination of horizontal drilling and hydraulic fracturing. These technological advances combined with high oil and gas prices have enabled increased production of the abundant oil and natural gas resources in the United States. Greater availability of domestic energy resources benefits the United States by reducing dependence on imported energy and diversifying the economy.[1] But the boom also brings new vulnerabilities. Examining how changes in U.S. oil and natural gas production may affect individual state economies shows that some of the states providing new energy resources are becoming less economically diversified and more economically vulnerable to energy price declines. Oil Prices and Employment in the U.S. Fossil Fuel Industry Until recently, the U.S. oil and natural gas industry mostly followed the ups and downs of world oil prices, but with a long-term decline that reflected the decreasing availability of U.S. oil and natural gas resources. At the height of the early 1980s oil boom, the five industries most sensitive to oil prices—coal mining, oil and gas extraction, oil field machinery, petroleum refining, and petrochemicals—accounted for 1.6 million jobs, 1.8 percent of total U.S. nonagricultural employment.[2] By 2000, the share of these five industries had dwindled to 0.4 percent of total U.S. nonagricultural employment, only 457,000 jobs. With oil and natural gas prices rising beginning in the early 2000s, employment in the oil and natural gas sector began growing too. The boom in production of oil and natural gas from shale formations became a significant factor after 2008. Figure 1 shows that rising energy prices and the shale boom led to strong growth of U.S. oil and gas employment from 2005 to 2011. Figure 1. U.S. Fossil Fuel–Related Employment Sources: U.S. Bureau of Labor Statistics; author calculations Despite recent gains, however, the fossil fuel industry has a smaller share of U.S. employment than it did in the early 1980s, and the industry's share of national economic activity is relatively small. After the end of the recession, between 2010 and the end of 2012, the industry added 169,000 jobs nationwide, growing at a rate about ten times that of overall U.S. employment. The industry's output shares follow a similar path. The share of oil and gas extraction was 4.3 percent of U.S. gross domestic product (GDP) at its height in 1981, but declined to 0.6 percent by 1999. The share of oil and gas rose to 1.6 percent of GDP in 2011 as a result of the shale boom.[3] Fossil Fuel Industries and State Employment As energy prices and U.S. oil and natural gas production fell from the mid-1980s to the early 2000s, most U.S. energy-producing states diversified away from energy production and energy-intensive industries. In 1982, the states with the greatest concentration of energy-related industries were West Virginia, Wyoming, Delaware, Oklahoma, Louisiana, and Texas.[4] Oil and natural gas accounted for much of the activity except in Delaware, which had a high concentration of the petrochemical industry, and in West Virginia, the heart of coal country. Shares of energy-related employment ranged from 7.3 percent in Texas to 13.7 percent in West Virginia. By 2000, these shares had declined to a range from 2.5 percent to 7.4 percent. Rising oil and gas prices since the early 2000s prompted a resurgence of energy employment. Increased use of horizontal drilling and hydraulic fracturing led to further gains in oil and gas hiring. As of 2011, the states with the highest shares of energy employment were Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming. As shown in Figure 2, energy employment shares increased in all eight of these states from 2000 to 2011.[5] Although there is little oil and gas activity in West Virginia, its coal production grew because coal prices followed the upward trend in oil prices in the 2000s. Despite these gains, however, almost every one of these states depends less on the five main energy-related industries than they did in 1982. Figure 2. State Employment Shares Sources: Author calculations with data from the U.S. Bureau of Labor Statistics Fossil fuel production has been important to these states' recent economic performance. Since the early days of the shale boom in 2006, the four states with the highest rates of employment growth are the states with the highest shares of oil and gas employment (Figure 3). The greatest growth has been in Texas and North Dakota, states with production from shale and the largest production increases. As seen in Figure 3, between 2006 and 2012, U.S. employment declined 0.05 percent per year on average, while employment in North Dakota and Texas grew by 3.4 and 1.5 percent, respectively, the fastest growth in the country. Figure 3. Shale Oil and Employment Growth Note: 2006–2012 yearly employment growth rates; U.S. average annual employment growth of -0.05. Sources: Author calculations; data from U.S. Bureau of Labor Statistics; U.S. Energy Information Administration.   Oil Price Shocks and Regional Economic Activity Because the United States is an oil importer, its economy has been hurt by previous episodes of sharply rising oil prices that resulted from oil supply shocks.[6] Given the oil production increase in the past couple of years, has the response of the U.S. economy to oil price shocks changed? The economic composition of individual states affects their responses to oil price shocks. We find that the economies of forty-two states and the District of Columbia would suffer if oil prices rise. In contrast, the economies of eight states—Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming—would benefit from such increases. To assess the effects of oil price shocks on states' economies, we first estimate the responses of individual industries to changes in oil prices using methods we used in a 1995 paper.[7] As shown in Table 1, the estimated price elasticity of total U.S. employment, based on data for 2000–2011, is -0.02, which means that a 10 percent increase in oil prices reduces U.S. employment by 0.2 percent.[8] Employment in the fossil fuel industries is considerably more responsive to oil price movements than employment in the overall economy is, but the responsiveness is less than we estimated eighteen years ago.[9] These differences are the result of changing relationships between the industries, such as the reduced sensitivity of coal and natural gas prices to oil prices, the closure of some U.S. refineries, and how relative changes in oil and natural gas prices affect the U.S. petrochemicals industry. Table 1. Elasticities of Employment With Respect to Oil Prices[10] To calculate the employment response of each state to an oil price shock, we combine these elasticities with the input-output analysis framework we previously developed and published in 1995 (updated with new multipliers).[11] The framework takes into account the composition of each state's economy, quantitative differences in multiplier effects across states, and the response of individual fossil fuel industries to changes in oil prices. Differences across the states in concentrations of energy-producing and energy-consuming industries account for most of the variation in the response of employment to oil price changes across the states. Differences in multiplier effects also account for some of the variation between states.[12] The results show that a 25 percent increase in oil prices (for example from $100 to $125) would result in a loss of more than 550,000 jobs nationwide.[13] None of the states stand out as being hurt by rising oil prices by much more than the country as whole (Table 2). Several states without much of an oil and gas industry would see somewhat stronger negative effects from rising oil prices than the country as a whole. Table 2. Estimated Employment Response to a 25 Percent Increase in Crude Oil Prices, 2012 Figure 4. Estimated Employment Response to a 25 Percent Increase in Crude Oil Prices, 2012 Sources: Author calculations; data from U.S. Bureau of Labor Statistics and the Wall Street Journal Several states with larger fossil fuel industries see positive effects or a smaller negative effect than the country as a whole. Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming would benefit from rising oil prices. Combined, these eight states would add around a hundred thousand jobs in response to a 25 percent rise in oil prices. Wyoming would benefit most from an oil price spike because it has a small population and a large share of oil and gas extraction employment. Alaska's economy has traditionally depended on the oil extraction industry, has the second highest share of extraction employment among all states, and remains a beneficiary of higher oil prices. North Dakota's fossil fuel industry has grown rapidly since the onset of the shale boom and extraction is now 4 percent of state employment. West Virginia, with a strong coal industry, benefits from higher oil prices, but by less than what we previously estimated in 1995 for 1982 and 1992.[14] Coal prices moved together more tightly with oil prices until the global recession. Although coal prices have slowly trended higher during the recovery, the relationship with oil has weakened. As long as coal prices move with those for oil, the West Virginia economy will benefit from higher oil prices, albeit in a more muted manner than in the past. The Louisiana and Texas economies are helped by rising oil prices, but employment response is less than in some energy states. These two states are home to 40 percent of U.S. refining capacity, and refining is hurt by rising oil prices. In addition, Texas has a large and diverse economy: the share of oil and gas extraction is about 2 percent of state employment, much less than in other energy-producing states. Louisiana and Texas are also home to a substantial portion of U.S. petrochemical production. Rising oil prices help the U.S. petrochemicals industry as long as natural gas prices remain low. If enough domestic natural gas were exported such that U.S. natural gas prices again moved with oil prices, the U.S. petrochemicals industry would no longer benefit from rising oil prices.[15] These employment responses differ substantially from those we previously estimated for 1982, a year at the height of the last U.S. oil and gas boom.[16] For that year, economies of thirteen states would have benefitted from rising oil prices. In addition to the eight states mentioned above, rising oil prices would have aided Colorado, Kansas, Montana, Mississippi, and Utah. Over the past thirty years, the economies in these five states have diversified away from crude oil production, and they no longer respond favorably to rising crude oil prices. Nonetheless, the presence of sizable oil and natural gas industries in these five states mutes their negative response to rising oil prices. State Vulnerability to a Decline in Oil Prices Increased energy prices and technological improvements were catalysts for the U.S. fossil fuel industry's turnaround. Would declining prices reverse those gains? A brief look at history is telling. From 1972 to 1982, when oil prices increased more than tenfold, Texas economic output and employment averaged annual growth rates of 7.5 percent and 5.5 percent, respectively. When oil prices collapsed to about eleven dollars per barrel in 1986, the Texas economy went into a deep recession for two years. Economic output contracted 5.6 percent and employment fell 1.1 percent. Even though oil and gas extraction accounted for 19 percent of the Texas economy in 1981, that share was the second smallest among the eight oil-sensitive states (West Virginia was smallest). As a percentage of state GDP, the oil and gas sector accounted for 49 percent in Alaska, 37 percent in Wyoming, 35 percent in Louisiana, and 20 percent in North Dakota. The 1986 oil price crash also caused a recession in most of these states, with employment declines largest in Wyoming (-5.9 percent) and Alaska (-4.5 percent)—states with the largest oil and gas output shares. The economies of these oil-sensitive states rebounded after 1987, but their growth rates were weaker than that of Texas. Table 3 shows how the fossil fuel industry's output shares contracted after the oil industry peak in 1981 and later expanded with the shale boom, especially in North Dakota, Oklahoma, and Wyoming. The 2012 shares of state GDP from oil and gas extraction should prove even higher, given that oil production has been increasing in these states.[17] If oil prices were to collapse, these states with the highest concentrations in oil and gas extraction would be the hardest hit. Table 3. Share of Oil and Gas Extraction in State GDP This finding is consistent with the results reported in Table 2. Applying our model in the same way for a price decline as for a price increase shows that falling oil prices would cause overall employment losses in Wyoming, Oklahoma, North Dakota, Alaska, Louisiana, Texas, West Virginia, and New Mexico, with the greatest percentage losses in the first three.[18] States like Texas and Louisiana that have downstream oil and gas industries that benefit from falling energy prices such as refining and petrochemicals would be less affected. In addition, states in which natural gas is more prominent than oil are likely to see less harm from falling oil prices. With the recent weakening in the relationship between oil and natural gas prices, a decline in oil prices does not necessarily imply as big a change in natural gas prices as it once did, lessening the effect of an oil price decline. While many states have diversified away from either a heavy reliance on energy consumption or energy production, others have seen and will continue seeing an increasing dependence on energy production as a result of the shale revolution. Economic activity in these states is vulnerable to energy price declines. The smaller and less diversified the state, the larger the vulnerability. This vulnerability will increase with growing oil and natural gas production. Yet most states that currently benefit from falling oil and gas prices will still gain from such developments even if their oil and gas production rises significantly in the coming years. For example, California, Colorado, and Pennsylvania produce a considerable amount of oil and natural gas, but these states would still gain from falling oil prices—even if their oil and gas sectors grew substantially. The California oil and gas sector, for example, would need to be more than 9.5 times larger than it is today for an oil price fall to hurt the California economy. Similarly, the sector would need to be more than 3.9 times larger in Pennsylvania and more than 1.3 times larger in Colorado for oil price declines to hurt the relevant state economies. Conclusion Given that oil is priced on an international market, increased domestic oil production will not do much to lower prices for U.S. consumers, as any gains in U.S. production will be spread across the international market. Greater reliance on domestic oil resources in substitution for imports will reduce the vulnerability of the economy to oil supply disruptions, although not by much. Reduced energy use has lessened the vulnerability of the U.S. economy to oil price shocks. A similar phenomenon is seen at the state level, with many state economies having diversified away from energy-using industries. At the same time, the growing prominence of energy production can make states with small, undiversified economies more susceptible to an economic downturn during an energy price decline. Endnotes ^ See Stephen P.A. Brown and Hillard G. Huntington, "Assessing the U.S. Oil Security Premium," Energy Economics vol. 38 no. C, July 2013, pp. 118–127; and Stephen P.A. Brown and Ryan T. Kennelly, "Consequences of U.S. Dependence on Foreign Oil," Center for Business and Economic Research, University of Nevada, Las Vegas, 2013. ^ U.S. Bureau of Labor Statistics. ^ U.S. sectoral GDP data come out with a lag. The latest data are from 2011. ^ See Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, Second Quarter, 1995. ^ Latest detailed state sectoral data are from 2011, as of this writing. ^ Lutz Kilian provides evidence that rising oil prices that result from demand shocks do not adversely affect U.S. economic activity. See Lutz Kilian, "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review vol. 9 no. 4, June 2009, pp. 1053–1069. ^ Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. ^ This estimate of the overall U.S. employment response is in the range of estimated GDP responses to oil price movements. ^ We previously estimated the oil-price elasticities of employment in coal mining, oil and natural gas extraction, oil field machinery, refining, and petrochemicals at 0.45, 1.01, 1.23, -0.56, and -0.32. See Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. ^ The industry elasticities are obtained from regressions of sectoral employment on WTI crude oil prices, using monthly data for the time period 2000–2011. The total U.S. employment elasticity is taken from empirical work in the economics literature. See Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. ^ Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. We used the RIMS II multipliers for 2010 from the U.S. Bureau of Economic Analysis to update the analysis. ^ See Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995, for an exposition of the model. ^ Previous research on the response of U.S. economic activity to oil price shocks, such as James Hamilton's 2003 paper, finds the U.S. economy responds more strongly to oil price increases than oil price decreases. See James D. Hamilton, "What Is an Oil Shock?," Journal of Econometrics vol. 113 no. 2, April 2003, pp. 363­–98. ^ Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. ^ We showed in 2009 that there is coordinated movement in natural gas prices across the Atlantic, which can be accomplished through LNG shipments. But their results strongly suggest that the coordination of natural gas prices across the Atlantic is facilitated through oil prices, especially given that natural gas contracts in Europe are linked to oil prices. See Stephen P.A. Brown and Mine K. Yücel, "Market Arbitrage: European and North American Natural Gas Prices," Energy Journal vol. 30, special issue, 2009, pp. 167–185. ^ Stephen P.A. Brown and Mine K. Yücel, "Energy Prices and State Economic Performance," Economic Review, Federal Reserve Bank of Dallas, second quarter, 1995. ^ At the time of this writing, the most recent detailed GDP data for the states were from 2010. ^ Because the results for the energy-producing states are dominated by shifts within the fossil fuel industry, applying our model to oil price decreases creates only a slight upward bias to our estimates. That bias increases as we shift our attention toward energy-importing states.

Overview In the past, conventional militaries were plagued by wartime oil shortages that severely undermined their battlefield effectiveness. But could oil shortages threaten military effectiveness in a large-scale conventional conflict today or in the future? Observers commonly assume that the amount of oil consumed today for military purposes is small compared to production and civilian demand, and thus that wartime shortages are unlikely. But this assumption has not been subject to rigorous evaluation in the unclassified literature. In this Energy Report, Rosemary Kelanic argues that it is flawed. The Energy Report analyzes a potential air war between the People's Republic of China (PRC) and Taiwan (also known as the Republic of China or ROC)—to enhance broader knowledge about fuel requirements in wartime. Insight gained from modeling such a conflict makes it possible to provide a rough estimate of potential fuel requirements and assess whether military demand could strain countries' supplies in the present, as it did in the past. Kelanic ultimately concludes that oil and fuel supplies could become significant constraints on China and Taiwan in the event of war. She also argues that this prospect helps illuminate Chinese oil security strategies, including strategic stockpiling and efforts to diversity supply routes for imported oil.

Federal lawmakers should overturn the ban on exporting crude oil produced in the United States. As recently as half a decade ago, oil companies had no interest in exporting U.S. crude oil, but that has changed. Oil production has grown more in the United States over the past five years than anywhere else in the world, even as domestic oil consumption has declined. With these changes has come a widening gap among the types of oil that U.S. fields produce, the types that U.S. refiners need, the products that U.S. consumers want, and the infrastructure in place to transport the oil. Allowing companies to export U.S. crude oil as the market dictates would help solve this mismatch. Under federal law, however, it is illegal for companies to export crude oil in all but a few circumstances. Over the past year, the Department of Commerce granted licenses to several oil companies to export a small amount of U.S. crude oil. But these opaque, ad hoc exceptions are insufficient. Removing all proscriptions on crude oil exports, except in extraordinary circumstances, will strengthen the U.S. economy and promote the efficient development of the country's energy sector. The Issue When Congress in the 1970s made it illegal to export domestically produced crude oil without a license, the goal of the legislation was to conserve domestic oil reserves and discourage foreign imports. In reality, the export ban did not help accomplish either of these objectives. It has now become more of a hindrance than a help. The opaqueness of the export approval process discourages would-be exporters from applying for licenses. Companies see a lack of legal clarity and fear inconsistent regulation. They are hesitant to incur negative publicity on Capitol Hill when they doubt they will be granted approval. Two important elements of the U.S. oil export equation have changed in the past few years. First, exporting U.S. crude oil has become economically attractive to the energy industry. Crude oil exports have grown from next to nothing in 2007 to around one hundred thousand barrels per day in March 2013, all of which went to Canada. Second, the United States has become one of the world's largest gross exporters of refined oil products, such as gasoline and diesel. Unlike crude oil, which is unprocessed, oil that has been refined can be exported freely under U.S. law. Roughly three million barrels per day of refined oil products were exported in December 2012, a major increase from prior decades. Until 2011, the United States had not been a consistent net exporter of oil products since 1949. Restrictions on crude oil exports are already beginning to undermine the efficiency of the U.S. oil economy. Much of the country's rapidly growing production of light crude oil, including lease condensates (i.e., ultra-light oil), comes from either areas where refiners are not interested in or able to process it, given that many U.S. refineries are configured to run lower-quality crude oil, or in parts of the country with inadequate transportation infrastructure. With few viable domestic buyers, producers are forced to choose between leaving oil in the ground and pumping it at depressed prices. These artificially low prices slow additional U.S. crude oil production. New refineries and pipelines currently under construction will help remedy some of these market distortions over time, but a simpler, more cost-effective solution would include allowing U.S. crude to be exported. Doing so will not raise gasoline prices. Prices at the pump will continue to be determined by the global market, regardless of whether the United States exports crude oil. Were the ban overturned today, crude exports would immediately rise by several billion dollars a year, according to industry executives, likely surpassing five hundred thousand barrels per day by 2017. U.S. Law Governing Crude Oil Exports The primary laws prohibiting crude exports are the Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979. The so-called short supply controls in the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS), an agency of the Department of Commerce, spell out these restrictions. A few obscure types of crude oil automatically qualify for export licenses under EAR. These types include crude oil produced in Alaska's Cook Inlet or exported to Canada, as long as it is consumed there; and small amounts of heavy (or viscous) crude oil produced in California. Other niche cases do not require licenses. Crude oil transported via the Trans-Alaska Pipeline System or produced overseas and stored in the U.S. Strategic Petroleum Reserve may be exported. Some U.S. crude oil can be exported with a presidential finding. This includes crude oil of U.S. origin transported on federal right-of-way pipelines, crude oil produced from the outer continental shelf, and crude oil produced from naval petroleum reserves that were once set apart for use by the military but that are now almost entirely commercialized. In nearly all other cases, U.S. crude oil can only be exported if the BIS finds that proposed exports are "consistent with the national interest and the purposes of the Energy Policy and Conservation Act." The agency has the right to accept or reject applications for an export license according to its own unarticulated definition of the "national interest." The only specific case the EAR mentions as meeting these strict criteria is when the exported crude is exchanged for more or better refined oil imports, under a contract that can be terminated if U.S. oil supplies are "interrupted or seriously threatened," and could not have "reasonably [been] marketed" in the United States. A Better Approach A better approach would be to allow companies to freely export oil as the market dictates, eliminating the requirement that companies obtain a license for each crude oil export transaction. The only exception to this policy should be when the president determines there is a national emergency. To make this change, Congress should repeal EAR's short-supply controls that apply to crude oil exports. Benefits Versus Costs Exporting energy is good for the economy. Crude oil exports could generate upward of $15 billion a year in revenue by 2017 at today's prices, according to industry estimates. Those gains would be partially offset by displacing some refined product exports, however. Today's export restrictions run the risk of dampening U.S. crude oil production over time by forcing down prices at the wellhead in some parts of the country. Letting drillers reap extra profits from selling crude oil overseas, if the market dictates, would provide greater incentives for drilling, stimulating new supply. It would also encourage investment in oil and gas production in the United States rather than abroad. In oil-producing regions, more workers would be hired for oil exploration and production, as well as for local service industries. Greater policy certainty regarding exports would also catalyze the expansion of U.S. energy infrastructure. As it stands, the primary beneficiaries of the export ban are a few fortunate oil refineries in the central United States—not U.S. consumers—that are able to buy crude oil at depressed prices before selling it at prevailing market rates. Current law arbitrarily works to the benefit of these companies. In several years, a wider range of refineries will benefit from the ban as pipeline capacity constraints are alleviated and more light oil flows to the U.S. Gulf Coast. These pipelines will help reduce the discount that some producers face in the domestic market, but they would be more effective at bringing domestic oil prices in line with global ones if U.S. crude oil could be freely exported and other restraints on shipping were removed. Allowing crude oil exports will not affect U.S. energy security. Proponents of the export ban might argue that it increases national security by slowing the depletion of U.S. oil fields. Yet the ban also slows production growth, increasing the country's reliance on imported energy. Insofar as oil self-sufficiency would be economically and militarily useful in a time of crisis, removing the ban would increase U.S. security by catalyzing oil production. Were an international emergency to arise, exports could be temporarily suspended, providing extra oil for domestic needs, though such extreme measures would likely hurt U.S. trade relationships. Liberalizing the crude oil export regime would advance U.S. foreign policy. It would demonstrate Washington's commitment to free and fair trade, even in a politically sensitive sector, bolstering its negotiating position on other trade issues. It would also avoid putting Washington at odds with allies that would like to source their oil from the United States. If the United States were to become a major crude exporter, its leverage as an oil trade partner would grow significantly. To the extent that exports mean greater domestic production of tight oil from hydraulic fracturing, or "fracking," allowing exports could bring environmental risks such as water contamination and local pollution. These risks, however, are manageable through prudent regulation. Continuing to ban crude oil exports is not an effective means of preventing harm to the environment. Environmental regulators will need to manage the risks of oil production regardless of whether the United States exports more crude oil. Conclusion Without compelling reasons for continuing to restrict crude exports, and given the potential benefits, Congress should liberalize the crude oil export regime. Republicans and Democrats alike, including President Obama, express support for boosting U.S. exports in general. Crude oil should be no exception. Some observers might object to exports on the grounds that U.S. oil production could fall short of today's optimistic forecasts or that exports will cause gasoline prices to rise. These should not be major concerns. U.S. crude exports are self-limiting: if the supply gains expected do not materialize, the market will induce producers to keep the oil at home rather than to send it abroad. Though the companies that benefit from today's export restrictions might oppose any change in the status quo, the broader gains available to the United States from allowing crude exports make it the far better choice.

Introduction Nuclear power has been an important, if understated, aspect of South Korea's National Strategy for Green Growth, a set of policies reflecting the idea that economic growth and environmental protection can be compatible activities rather than conflicting. Former president Lee Myung-bak did not mention nuclear power when he announced his administration's national vision for green growth in a 2008 speech, although nuclear power later made an appearance as one of ten major green growth policy objectives.[1] Arguing that nuclear energy use improves energy independence while mitigating carbon emissions, Lee championed a green growth framework that provided a new justification for South Korea to expand nuclear power at home and promote it abroad.[2] Plans are under way to increase nuclear power's share of the country's electricity generation from 33 percent to 59 percent by 2030.[3] In addition to the twenty-three reactors currently operating, five new reactors are under construction and eight more are planned.[4] However, recent reports of safety and quality-control problems at nuclear power plants in South Korea have undermined public trust in the safety and reliability of the country's cheapest source of electricity.[5] Although South Korea has experienced no major nuclear accidents since its first reactor began commercial operations in 1978, the nuclear power rethink in many countries resulting from the March 2011 nuclear accident in Fukushima, Japan, has created an atmosphere that only heightens these concerns.[6] At the same time, the government must also secure public acceptance of new storage sites for radioactive waste from spent nuclear fuel—an issue that highlights how doubts about nuclear power's green credentials can clash with the desire to meet rising electricity demand with low-carbon sources. Complicating this situation is the new South Korean president Park Geun-hye, who must decide how to put her stamp on green growth. Linking Nuclear Power and Green Growth South Korea's 1970s-era decision to adopt and expand nuclear power long predates the green growth initiative, although the two efforts share a common motivator: the quest for energy security in a country that is poor in energy resources and relies on imports to meet almost all its high energy demand. Currently, South Korea consumes more energy than all but ten other countries.[7] Added to the country's long struggle with energy security are the global economic slowdown of 2008–2009, a growing consensus about the need to tackle climate change, and the concomitant inability of global climate talks to achieve meaningful action on emissions reduction. These dynamics have recently given rise to the concept of green growth, which, under Lee's rubric, aims to curb carbon emissions while improving energy independence, create new engines of economic growth, and enhance South Korea's international standing. Although nuclear power—already firmly entrenched in South Korea's energy mix—seems tailor-made for achieving all three of these overarching goals, its broader impact on South Korea's energy landscape renders its use much more complex. In an era of widespread concern about climate change, the emissions mitigation potential of nuclear power generation, which emits no carbon, provides a new leg on which South Korea's nuclear expansion ambitions can stand. According to a recent report by the International Energy Agency (IEA), South Korea's per capita CO2 emissions increased 115.4 percent between 1990 and 2010.[8] The same report noted that electricity demand from all sectors "has grown significantly since 2000," while "production of nuclear electricity increased by almost 50 percent over the same period.[9] In 2009, the government of South Korea announced a voluntary target to reduce greenhouse gas emissions by 30 percent below the expected level by 2020.[10] The challenge of following through on this commitment while meeting increasing electricity demand provides double justification for South Korea's plans to expand nuclear power. Expanding nuclear power is not the only way South Korea is attempting to reign in its carbon emissions. There is already a program in place that requires the country's top emitters to meet designated emissions reduction targets or face a financial penalty. An emissions trading scheme (ETS) is expected to take effect in 2015 and the government is aggressively pursuing a smart-grid strategy aimed at reducing demand by providing real-time consumption and pricing information to consumers. But these efforts remain works in progress, whereas nuclear power is longstanding and proven. Determining the relationship between improved energy independence and nuclear power in South Korea requires an assessment of the country's electricity sources. Together, coal and natural gas account for two-thirds of electricity production in South Korea and nuclear energy accounts for most of the remaining third.[11] Coal—the majority of which is imported—is the largest single source of electricity, making up 45 percent of total electricity production.[12] Nuclear power expansion can offset the need for additional imports of coal and natural gas, diversifying the energy mix and improving energy independence. Moreover, indigenous technology is now used in critical systems in new reactors; at a groundbreaking ceremony for two new reactors last year, President Lee noted that South Korea had "achieved the dream of independent nuclear technology."[13] However, South Korea is wholly reliant on imported uranium and uranium conversion services to fuel its reactors.[14] This means nuclear energy is not entirely an autonomous power source for the country. There is evidence that nuclear power expansion can create new engines of economic growth. A 2009 paper published by the Korea Atomic Energy Research Institute found that "the total net contribution of nuclear technologies as a percentage share of GDP amounted to 2.38 percent in 2005."[15] This amount includes economic activity generated from the construction and operation of nuclear power plants as well as industrial output stimulated by the electricity produced from nuclear power. Furthermore, South Korea's aggressive pursuit of new export opportunities for its nuclear expertise has already boosted economic growth. In 2009, a South Korean consortium won a bid to build four nuclear reactors in the United Arab Emirates (UAE), prevailing over competitors from Japan and France. According to projections by the International Atomic Energy Agency (IAEA), global demand growth for nuclear power is expected to continue, although at rates lower than predicted prior to the Fukushima accident.[16] Strategic marketing of nuclear power as a zero-carbon alternative to fossil fuels may enhance the country's efforts to capture more of this market. In 2010, President Lee wrote in the journal Global Asia, "Nuclear is one of the most efficient power generation methods that will lead us to a low-carbon society, and I intend to make sure that [South] Korea keeps up with its role as one of the major suppliers of these zero-carbon power plants."[17] He went on to say the nuclear reactors South Korea is building in the UAE would equal "40 million tons of carbon mitigation."[18] This UAE deal was a critical initial win in the country's quest to export eighty nuclear reactors by 2030, which could reportedly total $300 billion in sales for South Korea.[19] However, experts question the feasibility of this goal, noting it would require a significant uptick in production of nuclear reactors at a time of diminishing human resource capacity in South Korea's nuclear industry.[20] Therefore, nuclear power's future contribution as a green growth export engine is questionable. Finally, nuclear power can serve the third pillar of the green growth strategy—enhancing international standing—in three ways. First, South Korea's contract to build four nuclear reactors in the UAE is a major opportunity for South Korea to show it can deliver a nuclear power plant export on time and on budget while building safety credentials. One executive who was involved in the UAE contract decision cited "world-class safety performance" of South Korean plants as one reason for the win.[21] Other sources have emphasized the South Korean project's smaller budget relative to those of other proposals.[22] Second, whereas some countries, such as Germany, responded to the Fukushima accident by retreating from nuclear power production, South Korea is taking the opportunity to promote nuclear safety, beginning at home. Following Fukushima, President Lee emphasized, "We must learn from the Fukushima accident and redouble our efforts to enhance nuclear safety in keeping up with new technology and demands of the times, and to restore public confidence."[23] South Korea already houses the world's first International Nuclear Safety School to train safety experts from other countries. This can be a basis for bolstering international collaborative efforts on nuclear safety. Finally, nuclear power could also strengthen South Korea's international standing in an indirect fashion by serving as an important means for the country to deliver on its voluntary emissions reduction target. A report released by South Korea's Ministry of Knowledge Economy projecting electricity supply and demand indicates the country may overshoot the target by 10 percent in 2020.[24] In any case, if South Korea can meet its target, or make significant emissions reductions in later years, nuclear power will surely have played a role. Nuclear power has an important role to play in South Korean green growth, especially as a near-term tactic for meeting rising electricity demand without increasing emissions. Its future as a green growth engine is buttressed by the cost advantage it enjoys over other forms of electricity generation. However, this potential is complicated by the task of regaining public trust in the safety of nuclear power and the debate over nuclear power's green credentials at a time when the government must secure public acquiescence to new storage sites for nuclear waste. Bolstering Public Trust in Nuclear Safety Public confidence in the safety of nuclear power plummeted in South Korea after the March 2011 nuclear accident at Fukushima, Japan.[25] The monumental accident ultimately resulted in the idling of almost all of Japan's nuclear power plants. Promoting the expansion of nuclear power in South Korea might have been difficult enough in such an environment, but domestic safety problems and a quality control scandal that unfolded during the closing months of 2012 have further hampered these efforts. In February 2012, a power loss at a South Korean nuclear plant went unreported until authorities discovered it.[26] The revelation that falsified quality-control documents had been used to certify more than seven-thousand reactor parts led to the temporary closure of two reactors in November of that year, sparking fears of power shortages at a time of unusually cold temperature forecasts and record-high levels of electricity consumption.[27] One month later, hundreds of falsely certified parts were discovered in two other reactors, as well as in their water-cooling systems.[28] These reactors have remained online during replacement work. Discerning the implications of these events on public opinion was made more difficult after Fukushima, when the Korean Nuclear Energy Promotion Agency (KONEPA) declined to publish its regular polls on the public opinion of nuclear safety in South Korea.[29] According to a report by Reuters, South Korean opposition lawmaker Woo Yoon-guen has called on KONEPA to resume publishing the polls and has also revealed some of the agency's data himself.[30] A September 2012 KONEPA poll indicated that public confidence may have begun to regain its footing, showing that 53.3 percent of respondents viewed nuclear power plants as safe compared with 41.5 percent who did not.[31] However, public confidence dipped to 34.8 percent by the end of 2012 as the quality control scandal was unfolding.[32] The Fukushima accident galvanized existing antinuclear movements and gave rise to new ones in South Korea, but these do not appear to have gained widespread traction. The situation in the east-coast town of Samcheok, where there are plans to build a nuclear power plant, may illustrate a measure of ambivalence about nuclear power among some citizens in South Korea. According to a March 2011 survey of residents taken before the Fukushima accident, 75 percent of respondents favored locating the new plant in their town.[33] Seven months later, following the accident, support dropped to 50 percent.[34] A local group tried to recall the pronuclear mayor, though the effort failed.[35] By contrast, some residents seemed to value the need for economic resurgence over safety concerns. According to a report by Reuters, even after the Fukushima accident, local pronuclear activists based their support for building a nuclear plant in their town on the estimation that the construction and operation of the plant would pump 6.2 trillion won ($5.7 billion) into Samcheok's economy.[36] Public opinion of nuclear power expansion seems to result in part from a complicated mix of safety perceptions and self-interest; the citizens were conflicted between concerns about the government response to the recent scandals and the recognition that nuclear power is, for now at least, a low-cost electricity source that can bestow economic benefits on the communities where plants are located. Nuclear power may be the one piece of the green growth strategy most vulnerable to changes in public perception, especially because its expansion requires some level of public acceptance to manage the tangible problem of storing spent nuclear fuel. There was no broad public debate over the ETS, which passed the National Assembly with little fanfare. Investments in smart-grid technology and new forms of renewable energy, including wind and solar power, do not attract as much opposition due to safety concerns as nuclear power does. In January, the government announced new measures responding to the quality control scandal and safety problems. These include new procedures for procuring reactor parts and dealing with mechanical problems.[37] However, any indication that the government is suppressing data that reflects negatively on nuclear power—such as the refusal to publish KONEPA polls—could undermine public trust and ultimately backfire. Cost Advantages of Nuclear Power Nuclear power has one advantage that would make it difficult to dislodge from South Korea's energy mix: it is the cheapest source of electricity in the country.[38] The IEA report notes that "while the Korean consumer price index increased by 254 percent from 1982 to 2011, electricity prices increased by 29.9 percent in the same period."[39] Although the initial investments and operations and maintenance costs are higher for nuclear power plants than coal or gas plants, the cost advantage of generating electricity with nuclear power instead of using imported fossil fuels outweighs the start-up costs of a nuclear power plant in South Korea.[40] When a carbon price is added to the cost of fossil fuel electricity generation, nuclear power's cost advantage becomes even starker.[41] South Korea's ETS may eventually result in a carbon price, making nuclear power even more affordable relative to fossil fuels than it already is. The country also seems to be well positioned to build new nuclear power plants at a lower cost than many other developed countries, due to its recent experience and lower construction costs.[42] Nuclear power's cost advantage is even clearer when compared with renewable forms of energy such as wind, solar, and tidal power. According to one researcher at the Korea Energy Economics Institute, the wholesale cost of power from alternative sources in South Korea is six times higher than that of nuclear power.[43] The green growth strategy sets out a goal of increasing the share of renewables to 11 percent of total primary energy supply by 2030 (though it is unclear how much of that share is intended for the electricity sector versus other sectors, such as transportation).[44] South Korea has a long way to go on this score. Renewable energy sources currently make up a meager 1.5 percent of the country's electricity generation, with the bulk of that supply coming from biofuels and renewable waste.[45] Although solar and wind power are growing in South Korea, they still account for only a tiny share of renewable energy.[46] Moreover, as is widely noted, "their intermittent and variable supply make them poorly suited for large-scale use in the absence of an affordable way to store electricity.[47] In addition, as the IEA has noted, South Korea's climate and geography present a steeper challenge for the development of renewable energy compared with other IEA countries.[48] Nuclear power is the only major energy source that South Korea can rely on for wide-scale, zero-carbon electricity in the near term as more costly renewable energy sources struggle to gain a foothold. Han Seung-soo, former prime minister of South Korea and then chairman of the Seoul-based Global Green Growth Institute, acknowledged this in 2011 when he said, "If we pursue clean energy, we need to accept nuclear power as a reality until we have better options readily available."[49] Is Nuclear Power Really "Green"? Although nuclear power can help meet energy needs without emitting carbon, there is disagreement over whether it truly serves the purpose of green growth. The Lee administration emphasized nuclear power as a "clean" source of energy, focusing on its zero-carbon characteristics, but some environmental groups, such as Green Korea United, reject its no-carbon credentials, arguing that emissions from the mining and refining of the uranium fuel source must be taken into account.[50] In addition, the problem of finding new storage sites for high-level radioactive waste from spent nuclear fuel further tarnishes nuclear power's "green" image and is likely to be a pressing challenge for the government in the coming years as it runs up against storage limits at current sites amid "not in my backyard" opposition to new sites. The three reactor sites where spent nuclear fuel is currently stored in South Korea are projected to reach capacity in 2016.[51] Reprocessing spent fuel is a strategy for managing nuclear waste, but South Korea does not have this option. A longstanding agreement with the United States that was recently extended for two more years prohibits this practice over concerns about nuclear weapons proliferation. Although the South Korean government is pressing for the right to reprocess spent nuclear fuel, in part to help manage the storage problem, the United States remains reluctant to agree to this. Nuclear power expansion will create more nuclear waste that must be handled without reprocessing spent fuel. The real challenge for the near term may be overcoming public opposition to new storage sites for spent nuclear fuel. The government already spent 300 million won ($247 million) in cash and other benefits to tamp down local opposition to a low- and intermediate-level radioactive waste storage site at Gyeongju.[52] Construction of this repository was twice prolonged due to "weak bedrock and groundwater problems," a situation that does not bode well for public acceptance of new storage spaces for high-level radioactive waste.[53] Government-sponsored public discussions to help determine new locations for storing high-level waste from spent nuclear fuel are expected to begin in the coming weeks. If these talks are a true give-and-take between citizens and government, they could help build the "culture of transparency" in the nuclear power industry that President Lee called for.[54] Regardless, the challenge of managing nuclear waste that remains radioactive for centuries is a powerful argument against labeling nuclear power as "green." However, the need for a zero-carbon electricity source to meet rising demand is likely to win out, as long as the government can gain enough public acceptance to new storage sites. Conclusion When it comes to nuclear power in South Korea, green growth is a new banner for an old strategy. South Korea's long experience with nuclear power, its reliance on this form of energy to meet rising demand, and its recognition of nuclear power's carbon mitigation potential together render a natural and convenient relationship between nuclear power and South Korea's green growth strategy. Public trust in nuclear safety has faltered but can recover, as polls have shown. Going forward, President Park is likely to continue the aggressive nuclear agenda she inherited from President Lee. She has indicated that she does not support closing all of the country's aging nuclear plants.[55] However, working with the public to find new storage sites for nuclear waste from spent fuel will be an important task during her tenure—one that complicates the challenge of selling nuclear power as "green." In an early signal that she may decouple nuclear power from green growth, her newly appointed environment minister, Yoon Seong-kyu, publicly questioned nuclear power's relevance to green growth in a recent hearing.[56] In any case, Fukushima did not stop South Korea from breaking ground for two new reactors a little more than one year after the accident, a signal of how important nuclear power is to meeting the country's electricity demand. Nuclear power expansion is likely to continue in South Korea. It is less certain whether President Park is as eager as her predecessor to embrace green growth as a justification for it. Endnotes ^ Yonhap News Agency, Text of South Korean president's liberation anniversary address, August 15, 2008. ^ According to Korea's Future in Green Growth, a 2009 report of the Presidential Committee on Green Growth, nuclear power expansion is mentioned as one of ten major policy directions for the purpose of reducing the use of fossil fuels and improving energy independence, p. 10. ^ International Energy Agency, Energy Polices of IEA Countries: The Republic of Korea 2012 Review (Paris: International Energy Agency, 2012), pp. 102–3. ^ Ibid. ^ International Energy Agency, Energy Polices of IEA Countries: The Republic of Korea 2012 Review, OECD/IEA, 2012, p. 109. ^ A report by the UAE Ministry of Culture, Sports and Tourism noted South Korea's nuclear safety record, as cited in Xinhua News, "Will S. Korea's nuclear power ambition make sense?" February 16, 2010. ^ International Energy Agency, Energy Polices of IEA Countries: The Republic of Korea 2012 Review (Paris: International Energy Agency, 2012), p. 9. ^ Ibid, p. 35. ^ Ibid, p. 77–78. ^ Kim Young-won, "S. Korea likely to fall short of emissions reduction target," Korea Herald, February 12, 2013. ^ International Energy Agency, Energy Policies of IEA Countries, p. 77. Oil, hydro, and other sources together make up a small share of electricity production, about 4.4 percent. ^ Ibid. ^ Yonhap, "South Korea starts work on two nuclear reactors," May 4, 2012. ^ International Energy Agency, Energy Policies of IEA Countries, p. 105. ^ Manki Lee, Kee-yung Nam, Kiho Jeong, Byungjoo Min, and Young-eek Jung, "Contribution of Nuclear Power to the National Economic Development in Korea," Nuclear Engineering and Technology, vol. 41, no. 4, May 2009, p. 549. ^ International Atomic Energy Agency, "IAEA Updates Its Projections for Nuclear Power in 2030," September 25, 2012. ^ Lee Myung-bak, "Shifting Paradigms: The Road to Global Green Growth," Global Asia, vol. 4, no. 4, January 2010, p. 11–12. ^ Ibid. ^ Meeyoung Cho, "South Korea urged to restore trust in nuclear power," Reuters, Nov. 22, 2012. ^ Center for Strategic and International Studies and Asan Institute for Policy Studies, Report from a Workshop on South Korea as a Responsible Nuclear Supplier, February 18, 2013. ^ Andrew England, Peggy Hollinger, and Song Jung-a, "S. Koreans win $20bn UAE nuclear power contract," Financial Times, December 28, 2009. ^ Ann McLachlan, "Lauvergeon: French lost UAE bid because of expensive EPR safety features," Nucleonics Week, January 14, 2010. ^ Ministry of Foreign Affairs and Trade, "Address by President Lee Myung-bak at High-Level Meeting on Nuclear Safety and Security," September 22, 2011. ^ Kim Young-won, "S. Korea likely to fall short." ^ Yonhap News Agency, "Seoul to overhaul operator of scandals-hit nuclear power plant," Yonhap, January 8, 2013. ^ Sangim Han and Yuriy Humber, "Nuclear Halt in South Korea Seen Boosting Coal: Energy Markets," Bloomberg Businessweek, April 13, 2012. ^ See "Looming blackout threat," Korea Herald, December 6, 2012, and "Electricity consumption shoots up to record high," Korea Herald, January 3, 2013. ^ Park Si-soo, "More fake certificates for nuclear reactor parts found," Korea Times, December 6, 2012. ^ Jack Kim and David Chance, "Secrecy cloaks South Korea's civil nuclear program," Reuters, Nov. 13, 2012. ^ Ibid. ^ According to an unpublished poll revealed by Woo Yoon-geun, as cited in Kim and Chance, "Secrecy cloaks." ^ According to the Ministry of Knowledge Economy, as reported by Yonhap, "Seoul to overhaul operator." ^ Survey data cited in article by Yoon Ja-young, "Yeongdeok, Samcheok tapped as candidates for nuclear power plants," Korea Times, Dec. 23, 2011. ^ Ibid. ^ Kim and Chance, "Secrecy cloaks." ^ Ibid. ^ Yonhap, "Seoul to overhaul operator." ^ International Energy Agency, Energy Polices of IEA Countries, p. 109. ^ Ibid, p. 99. ^ International Energy Agency and OECD Nuclear Energy Agency, Projected Costs of Generating Electricity: 2010 Edition (Paris: Organization for Economic Cooperation and Development, 2010), p. 75. ^ Ibid. ^ Ibid, p. 50. ^ States News Service, "Reactor Shutdown in South Korea Raises Blackout Fears," July 31, 2012. ^ International Energy Agency, Energy Polices of IEA Countries, p. 98. ^ Ibid, p. 93. ^ Ibid, p. 93. ^ Ernest Moniz, "Why We Still Need Nuclear Power," Foreign Affairs, November/December 2011, p. 84. ^ International Energy Agency, Energy Policies of IEA Countries, p. 98. ^ Cho Jin-seo, "Green growth is second industrial revolution," Korea Times, June 26, 2011. ^ Green Korea United, "Green Growth Policy of the Korean Government and its Critics," http://green-korea.tistory.com/101. ^ Seongho Sheen, "Nuclear Sovereignty versus Nuclear Security: Renewing the ROK-U.S. Atomic Energy Agreement," The Korean Journal of Defense Analysis, Vol. 23, No. 2, June 2011, p. 276. ^ "Nuclear waste a growing headache for S. Korea," Associated Press, March 26, 2013. ^ International Energy Agency, Energy Polices of IEA Countries, p. 106. ^ Ministry of Foreign Affairs, "Address by President." at High-Level Meeting on Nuclear Safety and Security, Sept. 22, 2011. ^ Lee Sun-young, "Major environmental policy change unlikely under Park," Korea Herald, Dec. 27, 2012. ^ Shin Hyon-hee, "Park ditches 'green growth' in environmental policy shift," Korea Herald, March 28, 2013.

Overview In this Energy Brief, Blake Clayton and Adam Segal argue that cyber threats to oil and gas suppliers pose an increasingly challenging problem for U.S. national security and economic competitiveness. Attacks can take many forms, ranging from cyber espionage by foreign intelligence services to attempts to interrupt a company's physical operations. These threats have grown more sophisticated over time, making them more difficult to detect and defend against. So too have the actors behind them, which have evolved from lone hackers with few resources to state-sponsored teams of programming experts. Several of the world's major oil and gas producers, including Saudi Aramco (officially the Saudi Arabian Oil Company) and Qatar's RasGas, have fallen victim to cyberattacks since 2009. Others, such as Chevron, have also had their networks infected. Clayton and Segal contend some damage was done in each of these cases, but the costs of future breaches could be much higher, whether to corporate assets, public infrastructure and safety, or the broader economy through energy prices. Successful cyberattacks threaten the competitiveness of the U.S. oil and gas industry, one of the nation's most technically advanced and economically important sectors. While intrusions previously focused on the theft of intellectual property and business strategies, the malware attack on Saudi Aramco reflects a worrying qualitative change toward attacks with the potential for causing physical disruptions to the oil and gas supply chain.