Neelesh Nerurkar
Specialist in Energy Policy
Mark Jickling
Specialist in Financial Economics
Oil prices generally increased from 2002 until mid-2008, collapsing with the economic downturn and then rebounding with global economic recovery in 2009 and 2010. In 2011 to date, the price of West Texas Intermediate crude oil has ranged from less than $80 to more than $110. These price levels and fluctuations stand in contrast to the relatively low and stable oil prices of the 1990s, when the level of WTI averaged about $20 per barrel. Periods of price increases raise economic and energy security concerns. This report provides an overview of factors that contributed to these oil price movements and may continue to drive prices in the future.
The United States imports about half of the oil and related liquid fuels needed to meet domestic demand. The volume of imports is down in recent years due to higher domestic production and lower consumption. Nonetheless, oil import costs have climbed due to higher oil prices. Rising oil prices can strain household budgets, widen the trade deficit, and create economic dislocations that reduce economic growth and lower employment.
The oil market is globally integrated and affected by a range of international supply and demand developments (market fundamental factors). Rapid, energy-intensive economic growth in developing countries raised global oil demand since 2002. Global oil supply was unable to keep up at previously prevailing prices. Depletion of some easy-to-produce resources, the oil industry’s difficult shift to more complex resources, geopolitical and weather-related supply disruptions, resource nationalism in oil rich countries, and the actions of the Organization of the Petroleum Exporting Countries all hampered supply growth. Oil prices rose to balance the market, pricing out some consumers and incentivizing additional supply. Supply and demand are inelastic to price changes, so it took large changes in prices to affect consumers and producers. However, demand is responsive to economic conditions. The recession, which caused a sharp decrease in global oil demand, proved to be a brief respite from high prices. Prices recovered as economic growth returned, particularly in developing countries, and new geopolitical supply disruptions again raised concerns about global supply. How these long- and short- term supply and demand trends develop will shape future price movements.
The rising price of oil has also raised concerns that non-fundamental factors increased prices even higher than justified by supply and demand. The inelasticity of supply and demand may have enabled other factors to further raise prices. Of particular concern has been the impact of rising financial investment in energy derivatives, as well as concerns about impacts of exchange rate fluctuations and price manipulation. These factors may impact the price of oil and oil products to some degree for limited periods of time, but it is unclear how large or enduring their impacts are.
A number of policy measures have been introduced by Congress and the administration to address both fundamental factors and non-fundamental factors. Fundamentals policy is complicated by the high upfront costs and long lead times that energy sector investments need to bear fruit. Much of the fundamentals focused legislation advanced in the 112th Congress focuses on the supply side of the equation. Non-fundamental factors have also been addressed, most notably as part of the Dodd-Frank Wall Street Reform Act of 2010. However, delays in implementation mean it is still unclear what impact these measures will have. Given the scale and complexity of the challenge posed by various drivers of the oil price, it may require a suite of options to best address oil price risks. Given the long lead times for investment and technology development and deployment to provide benefits, commitments to such measures may need to persist through continued upward and downward oil price fluctuations.
Date of Report: August 26, 2011
Number of Pages: 38
Order Number: R42024
Price: $29.95
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Michaela D. Platzer
Specialist in Industrial Organization and Business
Increasing U.S. energy supply diversity has been the goal of many Presidents and Congresses. This commitment has been prompted by concerns about national security, the environment, and the U.S. balance of payments. More recently, investments in new energy sources have been seen as a way to expand domestic manufacturing. For all of these reasons, the federal government has a variety of policies to promote wind power.
Expanding the use of wind energy requires installation of wind turbines. These are complex machines composed of some 8,000 components, created from basic industrial materials such as steel, aluminum, concrete, and fiberglass. Major components in a wind turbine include the rotor blades, a nacelle and controls (the heart and brain of a wind turbine), a tower, and other parts such as large bearings, transformers, gearboxes, and generators. Turbine manufacturing involves an extensive supply chain. Until recently, Europe has been the hub for turbine production, supported by national renewable energy deployment policies in countries such as Denmark, Germany, and Spain. Competitive wind turbine manufacturing sectors are also located in India and Japan and are emerging in China and South Korea.
U.S. and foreign manufacturers have expanded their capacity in the United States to assemble and produce wind turbines and components. Nearly 400 U.S. manufacturing facilities produced wind turbines and components in 2010, up from as few as 30 in 2004. An estimated 20,000 U.S. workers were employed in the manufacturing of wind turbines in 2010. Because turbine blades, towers, and certain other components are large and difficult to transport, manufacturing clusters have developed in certain states, notably Colorado, Iowa, and Texas, which offer proximity to the best locations for wind energy production. The U.S. wind turbine manufacturing industry also depends on imports, with the majority coming from European countries, where the technical ability to produce large wind turbines was developed. Although turbine manufacturers’ supply chains are global, recent investments are estimated to have raised the share of parts manufactured in the United States to 50-60%, up from 25% in 2005.
The outlook for wind turbine manufacturing in the United States is partially dependent upon federal and state policies. A variety of federal laws and policies have encouraged both wind energy production and the use of U.S.-made equipment to generate that energy. Some of these policies are subject to change at the end of 2011, and others are scheduled to expire in 2012. Future decisions about these policies will affect the extent to which wind turbine manufacturing becomes an important industrial sector in the United States.
Date of Report: September 23, 2011
Number of Pages: 40
Order Number: R42023
Price: $29.95
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Marc Humphries
Specialist in Energy Policy
The concentration of production of rare earth elements (REEs) outside the United States raises the important issue of supply vulnerability. REEs are used for new energy technologies and national security applications. Is the United States vulnerable to supply disruptions of REEs? Are these elements essential to U.S. national security and economic well-being?
There are 17 rare earth elements (REEs), 15 within the chemical group called lanthanides, plus yttrium and scandium. The lanthanides consist of the following: lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium. Rare earths are moderately abundant in the earth’s crust, some even more abundant than copper, lead, gold, and platinum. While more abundant than many other minerals, REEs are not concentrated enough to make them easily exploitable economically. The United States was once self-reliant in domestically produced REEs, but over the past 15 years has become 100% reliant on imports, primarily from China, because of lower-cost operations.
There is no rare earth mine production in the United States. U.S.-based Molycorp operates a separation plant at Mountain Pass, CA, and sells the rare earth concentrates and refined products from previously mined above-ground stocks. Neodymium, praseodymium, and lanthanum oxides are produced for further processing but these materials are not turned into rare earth metal in the United States. Molycorp anticipates reopening its Mountain Pass mine (as a low-cost producer) in 2012.
Some of the major end uses for rare earth elements include use in automotive catalytic converters, fluid cracking catalysts in petroleum refining, phosphors in color television and flat panel displays (cell phones, portable DVDs, and laptops), permanent magnets and rechargeable batteries for hybrid and electric vehicles, and generators for wind turbines, and numerous medical devices. There are important defense applications, such as jet fighter engines, missile guidance systems, antimissile defense, and space-based satellites and communication systems.
World demand for rare earth elements is estimated at 136,000 tons per year, with global production around 133,600 tons in 2010. The difference is covered by previously mined aboveground stocks. World demand is projected to rise to at least 185,000 tons annually by 2015. Additional mine capacity at Mt. Weld Australia is expected to come onstream later in 2011, to help close the raw materials gap in the short term. Other new mining projects could easily take 10 years to reach production. In the long run, however, the USGS expects that global reserves and undiscovered resources are large enough to meet demand.
Several legislative proposals have been introduced in the 112th Congress in the House and Senate to address the potential of U.S. supply vulnerability and to support domestic production and supply chain development of REEs because of their applications for national security/defense systems and clean energy technologies. The House Committee on Natural Resources approved H.R. 2011, the National Strategic and Critical Minerals Policy Act of 2011, on July 20, 2011.
Date of Report: September 6, 2011
Number of Pages: 30
Order Number: R41347
Price: $29.95
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Richard J. Campbell
Specialist in Energy Policy
Adam Vann
Legislative Attorney
Perhaps the most contentious electricity transmission financing issue is cost allocation for new interstate transmission lines—that is, deciding which electricity customers pay how much of the cost of building and operating a new transmission line that crosses several states. This report provides background and analysis of current transmission cost allocation policy and issues.
For many years, the Federal Energy Regulatory Commission (FERC) declined to go beyond establishing general principles as set forth in its Order No. 890, which addressed “undue discrimination and preference” in the providing of transmission services. Transmission cost allocation proposals made by transmission service providers were therefore reviewed by FERC to ensure compliance with the general principles outlined in Order No. 890 and the Federal Power Act (FPA). However, there were calls for FERC to provide a clearer framework for cost allocation. The decision of the Seventh Circuit in Illinois Commerce Commission v. FERC, to reject a cost allocation plan approved by FERC which would have permitted “socialization” of the costs for some new transmission projects (i.e., allowing the costs to be spread widely among ratepayers in the PJM Interconnection, even those who do not substantially or clearly benefit from a project) encouraged FERC to seek more clarity with respect to cost allocation. Congress also entered the fray in the form of legislative proposals that would amend the Federal Power Act to include new transmission cost allocation guidelines that FERC would be required to follow.
In 2009 FERC decided to take an in-depth look at cost allocation and other transmission planning issues as part of a new docket. FERC observed that its “best remaining opportunity to eliminate barriers to new transmission construction may therefore be to provide greater certainty in its policies for allocating the cost of new transmission facilities, particularly for facilities that cross multiple transmission systems.” FERC requested comments from stakeholders on transmission planning issues.
After receiving and reviewing comments from stakeholders and offering a proposed rule in 2010, FERC published Order No. 1000, a final rule reforming FERC’s transmission planning and cost allocation requirements for transmission service providers, on July 21, 2011. The final rule required transmission service providers to (1) participate in a regional transmission planning process; (2) amend their transmission tariffs to provide for consideration of public policy; (3) remove from their tariffs a federal right of first refusal for certain new transmission facilities; and (4) improve coordination between neighboring transmission planning regions.
The Final Order comes as state renewable portfolio standards and the upcoming U.S. Environmental Protection Agency (EPA) regulations for coal power plants may drive demand for new transmission lines. The uncertainty regarding the implications for generation resources of upcoming EPA regulations has caused some utilities to delay decisions on building new generation, with plans to satisfy (at least interim) power needs from power markets until the regulatory clarity they seek is provided.
This report analyzes recent developments concerning transmission cost allocation leading up to Order No. 1000, as well as the contents of the Order and their potential impact on the transmission planning process in the future. FERC acknowledges that some key questions may only be answered in the compliance filing process.
Date of Report: September 7, 2011
Number of Pages: 25
Order Number: R41193
Price: $29.95
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Mary Beth Nikitin, Coordinator
Specialist in Nonproliferation
Anthony Andrews
Specialist in Energy and Defense Policy
Mark Holt
Specialist in Energy Policy
After several decades of widespread stagnation, nuclear power has attracted renewed interest in recent years. New license applications for 30 reactors have been announced in the United States, and another 541 are under construction, planned, or proposed around the world. In the United States, interest appears driven, in part, by tax credits, loan guarantees, and other incentives in the 2005 Energy Policy Act, as well as by concerns about carbon emissions from competing fossil fuel technologies.
A major concern about the global expansion of nuclear power is the potential spread of nuclear fuel cycle technology—particularly uranium enrichment and spent fuel reprocessing—that could be used for nuclear weapons. Despite 30 years of effort to limit access to uranium enrichment, several undeterred states pursued clandestine nuclear programs, the A.Q. Khan black market network’s sales to Iran and North Korea representing the most egregious examples. However, concern over the spread of enrichment and reprocessing technologies may be offset by support for nuclear power as a cleaner and more secure alternative to fossil fuels. Both the Bush and Obama Administrations have expressed optimism that advanced nuclear technologies being developed by the Department of Energy may offer proliferation resistance. Both Administrations have also pursued international incentives and agreements intended to minimize the spread of fuel cycle facilities.
Proposals offering countries access to nuclear power and thus the fuel cycle have ranged from requesting formal commitments by these countries to forswear sensitive enrichment and reprocessing technology, to a de facto approach in which states would not operate fuel cycle facilities but make no explicit commitments, to no restrictions at all. Countries joining the U.S.- led Global Nuclear Energy Partnership (GNEP), now the International Framework for Nuclear Energy Cooperation (IFNEC), signed a statement of principles that represented a shift in U.S. policy by not requiring participants to forgo domestic fuel cycle programs. Whether developing states will find existing proposals attractive enough to forgo what they see as their “inalienable” right to develop nuclear technology for peaceful purposes remains to be seen.
GNEP was transformed into IFNEC under the Obama Administration and has continued as an international fuel cycle forum, but the Bush Administration’s plans for constructing nuclear fuel reprocessing and recycling facilities in the United States have been halted. Instead, the Obama Administration is supporting fundamental research on a variety of potential waste management technologies. Other ideas addressing the potential global expansion of nuclear fuel cycle facilities include placing all enrichment and reprocessing facilities under multinational control, developing new nuclear technologies that would not produce weapons-usable fissile material, and developing a multinational waste management system. Various systems of international fuel supply guarantees, multilateral uranium enrichment centers, and nuclear fuel reserves have also been proposed.
Congress will have a considerable role in at least four areas of oversight related to fuel cycle proposals. The first is providing funding and oversight of U.S. domestic programs related to expanding nuclear energy in the United States. The second area is policy direction and/or funding for international measures to assure supply. A third set of policy issues may arise in the context of U.S. participation in IFNEC or related initiatives. A fourth area in which Congress plays a key role is in the approval of nuclear cooperation agreements. Significant interest in these issues is expected to continue in the 112th Congress.
Date of Report: September 12, 2011
Number of Pages: 45
Order Number: RL34234
Price: $29.95
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