U.S. again overlooks top CO2 impact of expanding oil supply, but that might change

The U.S. Department of the Interior (DOI) is developing a plan to lease new areas in the Gulf of Mexico and Arctic for offshore oil and gas drilling. As part of its required environmental review, the DOI has looked at how much expanding offshore oil and gas supply would affect CO₂ emissions.

But there’s a problem. Much as the State Department overlooked the biggest CO₂ impact of the oil carried by the Keystone XL pipeline, now the DOI appears to miss the greatest impact of expanding offshore oil. Both agencies take self-contradictory positions when they posit that expanding fuel supplies will not impact fuel consumption or, with it, global CO₂ emissions. It is as if they believe that consumers aren’t influenced at all by the availability or price of oil and gas.

At issue here is a draft analysis by the DOI’s Bureau of Ocean Energy Management (BOEM) of the economic and environmental implications of the proposed program of leases for offshore oil and gas exploration and development for 2017–2022.  BOEM estimates that the leases would, over the projects’ 50-year lifetimes, yield more than 8 billion barrels of oil. The agency uses its own model of global oil markets to estimate how expanding oil supply might affect oil consumption, at least domestically. (I focus on oil here because BOEM expects more oil than gas, and because oil is more carbon-intensive.)

The BOEM’s bottom line? Emissions from oil consumption “are assumed to be roughly equivalent under both the Program and No Sale options”. In other words, adding 8 billion barrels of oil to the world would make no difference for oil consumption and CO₂ emissions.

So is that what BOEM’s own analysis found? Not at all.

Let’s first look at the domestic oil market, which BOEM examined in the most detail. The analysis finds that, were U.S. offshore production to expand by the estimated 8.3 billion barrels of oil, production declines elsewhere would make up almost the entire difference – about 330 million barrels from decreased domestic production, and the vast majority, 7.5 billion barrels, from decreased oil imports. That would leave a net increase in U.S. oil consumption of about 450 million barrels of oil. That is equivalent to almost a year’s worth of all U.S. offshore oil production, and would release 190 million metric tons of CO₂ when combusted.

But what about the 7.5 billion barrels of oil from other countries that the U.S. would no longer import? The oil market is global, and an addition of these barrels in those markets would have ripple effects elsewhere, and corresponding impacts on CO₂ emissions.

BOEM omits these international impacts from its analysis, but the model and assumptions clearly recognize this effect. Indeed, in its model documentation, BOEM describes how its oil market model, MarketSim, “models oil as a global market”, and how the global oil market responds to increased production by decreasing prices, and how lower prices lead to increased global consumption.

So how much of an increase in consumption and CO₂ emissions does BOEM leave out? I did a very simple calculation – using the economic parameters called elasticities provided in BOEM’s reports, to estimate the increase in global consumption and CO₂ emissions from oil consumption.

Economic theory indicates that for every barrel of added supply, consumption will increase a fraction of a barrel: prices drop, and consumers use a bit more oil.  Economists use elasticities to estimate just what that fraction might be (for the technically inclined, it is the ratio of the elasticity of demand to the difference between the elasticities of demand and supply). For oil markets outside the U.S. – which would now have an extra 7.5 billion barrels of oil no longer bought by the U.S., BOEM uses an elasticity of supply of 0.45 and an elasticity of demand of -0.4. These parameters translate into an increase in oil consumption outside the U.S. of 4 billion barrels (7.5 * -0.4/(-0.4-0.45)). That is equivalent to 1.7 billion metric tons of CO₂.

The chart below puts all these changes in oil production and consumption in perspective. Notably, BOEM’s analysis says the 450-million-barrel increase in U.S. would make “no significant difference in the greenhouse gas emissions from consumption”, even though it would be about 190 million tons CO₂ from change in oil consumption. The global impacts on oil consumption are 10 times greater, more than 1.7 billion tons CO₂. (The overall effects could be smaller to the extent that fuels other than oil were to substitute.)

BOEM’s oversight is particularly troubling, because the agency finds the only CO₂ emissions impact worth counting – a potential decrease in emissions from producing and transporting the fuels that no longer need to be imported – to be just 350 million tons CO₂. (And that includes both oil and gas. Ironically, most of these emission decreases would occur outside U.S. borders, and BOEM justifies including them because “greenhouse gases are global pollutants”, even as the agency ignores the global market impacts).

Thus BOEM gets both the sign and magnitude of the CO₂ emissions wrong. Where it reports a relatively modest decrease in CO₂ from issuing the leases, its own modeling assumptions suggests that a much bigger emissions increase is much likelier.

At a time when President Obama has called for “changing the way we manage our oil and coal resources, so that they better reflect the costs they impose on taxpayers and our planet”, the DOI should start by doing a more complete accounting of those global CO₂ impacts. Thankfully, BOEM officials have recently expressed interest in considering these “downstream” emissions. The approach outlined above – which uses BOEM’s existing modeling assumptions – is one clear path they could take.

On May 3, SEI will release a new analysis of the CO₂ emissions impact of not issuing any more leases for oil, gas, and coal from U.S. federal lands and waters.