The Renewable Fuel Standard’s Contribution to National Security is Misconstrued by its Advocates

September 30, 2016


Advocates of the Renewable Fuel Standard (RFS) often cite its contribution to national security in their list of reasons for either maintaining or expanding the program. Providing security is a first-order priority of government, but the contribution of the RFS to national security is widely misrepresented. Understanding this component of the program is necessary in order to conduct a fair assessment of whether its benefits outweigh its costs.

The Renewable Fuel Standard

The 2007 Energy Independence and Security Act mandates several programs related to energy efficiency and renewable fuels “to move the United States toward greater energy independence and security.” The RFS is one of the key provisions of this legislation; the law requires EPA to increase U.S. biofuel use annually with the target of consuming 36 billion gallons per year by 2022 (compared to the requirement of approximately 18 billion gallons as of 2016). This expansion of the RFS followed President George W. Bush’s 2007 State of the Union address, where he called for increasing domestic oil production and urged Congress to increase the use of renewable fuels. The President stated that the nation’s dependence on foreign oil left us “more vulnerable to hostile regimes and to terrorists who could cause huge disruptions of oil shipments and raise the price of oil and do great harm to our economy.”

In addition to addressing a national security concern, the RFS was initially described as a program that provided numerous other benefits including healthier rural economies and improved environmental quality. However, a growing literature on the environmental effects of biofuel production, including our public comment submitted to EPA on its proposed standards for 2017 and 2018, indicates that these regulations likely result in either paltry environmental benefits or actual harm to the environment, on net, by increasing levels of greenhouse gases (GHG), including carbon dioxide.

Still, those who oppose revisiting the assumptions and goals of the RFS (including politicians, industry advocates, and others) often make the case that the program’s contribution to national security is so crucial that it tips the scales in favor of maintaining, or even expanding, the RFS. This line of reasoning advances the idea that if the U.S. did not import foreign oil, it would not concern itself with the supply of oil from hostile regions. Advocates of this argument also point out the billions of dollars and countless lives lost in U.S. military actions abroad and tie these costs to our dependence on foreign oil. When EPA has exercised its statutory authority to decrease its annually mandated biofuel volumes, critics decry the revision as “disastrous for our country’s energy independence and security.” These claims concerning the value of pursuing U.S. energy independence and the extent to which the use of biofuels would reduce U.S. efforts in protecting global oil supplies merit serious scrutiny.

Without a clear understanding of how the global market for oil works and how it relates to the national security interests of the United States, it is difficult to understand the relationship between broad policies under the heading of “energy security” and those that also overlap with national security. Additionally, understanding the important limits of “energy independence” is crucial to understanding why the RFS does not have the effect of reducing U.S. involvement in safeguarding global oil supplies.

The World Market for Oil

The price of oil is based on global supply and demand. Companies operating within the oil industry employ sophisticated methods to hedge against uncertainty and invest in maintaining their operations. While these models can be difficult to understand, the world oil market as a whole can be understood fairly easily using an economist’s metaphor of the oil market as a giant bathtub.

Imagine that all the countries producing oil are different faucets pouring oil into a giant bathtub and that all the countries consuming oil are drains. At any given moment, the price of oil is determined by the total amount going into, and being drained from, the tub—regardless of which faucet is pouring in oil or which drain is removing it. In short, the price of oil* is determined by the aggregate world supply and demand; the price is not contingent upon where the oil comes from or who uses it. This framework allows a clearer understanding of the intersection between energy policy and national security.

Energy Independence vs. Energy Security

Politicians, analysts, and the public consistently misconstrue the supposed benefit of achieving “U.S. energy independence.” The idea of energy independence has been a recurring theme in U.S. politics since at least Nixon’s energy policies in response to the Arab oil embargo in 1973. President Nixon advanced the reasoning that if Americans were able to supply all of their own oil they would not be dependent on the often-unstable Middle East for energy and the American economy wouldn’t be hurt by such supply disruptions. This reasoning continues to this day, with numerous people wondering why the U.S. concerns itself with oil supplies from “unstable” regions instead of relying on “friendly” sources. The bathtub of oil analogy is the answer.

Even if the U.S. imported all of its oil from a political ally—say Canada—or met all of it needs with domestic production, the U.S. economy would still be exposed to price spikes caused by oil supply disruptions in the Middle East. If several of the faucets in the bathtub turn off (supply rapidly contracts) then there is less oil in the tub and prices will spike globally. This is an often-misunderstood characteristic of the global energy market.

William Nordhaus, the economist responsible for the bathtub metaphor, correctly points out that “a crisis anywhere is a crisis everywhere.” Energy independence does nothing to increase our energy security.

From a national security perspective, energy security involves taking actions that protect the country from acute spikes in oil prices caused by foreign powers’ political-military manipulation of the market. In short, energy security is about ensuring global supply within the world oil market and creating resilience against price spikes.

It is worth noting that although some of these activities involve U.S. government policies (such as maintaining the Strategic Petroleum Reserve or certain U.S. military postures), a significant amount of energy security is also provided via market mechanisms—mostly through the actions of private oil companies. Oil companies are intimately acquainted with political risk—this causes them to diversify their holdings, maintain petroleum reserves and use sophisticated financial instruments to hedge against market fluctuations.

Energy Security within the RFS

EPA calculates an “energy security” benefit in its Regulatory Impact Analysis (RIA) of the RFS. It is an estimate of the harm avoided to the U.S. economy in the event of a price spike in the oil market—the result of having a smaller portion of the economy reliant on oil. Note that this has nothing to do with changing where the U.S. gets its oil, but simply that a smaller percentage of the economy is reliant on oil in general and, therefore, the economy as a whole is less vulnerable in the event of a sudden change in prices.

The effect is not the result of protecting global supply. Rather, it is a result of diversifying the energy profile of the economy and is related to resilience which can fairly be attributed to addressing national security concerns. However, there are currently technological and economic limits that constrain how far the U.S. economy can diversify away from oil. Even if we reach the 2022 RFS mandate for biofuel consumption, a significant part of the U.S. economy will still rely on oil.

In short, it would be incorrect to assume that the RFS reduces U.S. concerns about global supplies of oil such that it would reduce military expenditures as a result. The RFS simply doesn’t have a large enough effect on domestic oil demand. Anything short of the elimination of oil as a significant part of the U.S. economy leaves U.S. foreign policy aimed at protecting global oil supplies unchanged.

The RFS Can and Should be Revisited

The RFS makes a contribution to national security by diversifying a portion of the economy away from oil, which adds a measure of resilience to the U.S. economy in the event of a price spike within the oil market. However, it does little to decrease U.S. foreign policy interests in protecting global supplies. This means that the national security benefits of the RFS do not extend above and beyond what EPA has already accounted for within its RIA, contrary to the claims of several of its advocates.

Recent data suggest that the RFS actually harms rather than benefit the environment. Other studies indicate that the entire program may result in a net cost. Furthermore, the program began in 2005, and several changes occurred within global energy markets since that time that dramatically altered the energy security landscape for the U.S. including: a consistently declining share of oil production from states within OPEC and technological advancements that allow countries to increase their supply to the world oil market—including hydraulic fracturing (or “fracking”).

Congress should review and modify its biofuel mandate based on updated information. In doing so, it shouldn’t allow incorrect assumptions about the program’s impact on national security tip the scales in favor of maintaining a costly program that harms the environment.

* There are variations in oil prices based on characteristics of different types of crudes and the cost of refining them, but this does not change the utility of viewing oil as a single market. The key property of oil that makes it a global commodity, with a single price, is that it is so inexpensive to transport, by ship and by pipeline.