EIA Responds to ASPO-USA’s Letter to Energy Secretary

In October 2011, ASPO-USA conducted a news conferencein front of the U.S. Department of Energy (DOE) headquarters in Washington D.C. to express deep concerns about the reliability of projections for future oil and gas supplies by DOE and the Energy Information Administration. Representatives of ASPO-USA presented a letter to DOE Secretary Steven Chu which outlines these concerns and asks for answers to seven specific questions. The letter also urges DOE to initiate and lead the development of a National Oil Emergency Response Plan. A staff member from the Office of the Secretary was on hand to receive the letter. This month DOE sent their response – printed below. ASPO-USA will continue to follow up with DOE to pursue further meetings and additional dialogue on these critical issues.

[Read the ASPO-USA Letter to Steven Chu and other related materials here]

Text of the letter from Howard K. Gruenspecht, Acting Administrator of the U.S. Energy Information Administration [PDF version includes EIA footnotes]:

James S. Baldauf
President & Co-Founder
Association for the Study of Peak Oil & Gas USA
300 New Jersey Ave NW
Suite 900
Washington, DC 20001

Dear Mr. Baldauf:

This is in response to your letter of October 26, 2011, to Secretary of Energy Steven Chu regarding world oil supply and U.S. natural gas supply. The U.S. Energy Information Administration (EIA) is the statistical and analytical agency within the U.S. Department of Energy that collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.

EIA is acutely aware of the importance of the supply and prices of all forms of energy, including crude oil, for U.S. consumers, the economy, and national security. EIA makes available to the public a wide range of data, analysis, and projections to further understanding and discussion on these topics.

Energy markets are complex, while energy models are simplified representations of energy production and consumption, regulations, and producer and consumer behavior. Energy projections by EIA are not statements of what will happen but of what might happen, given the assumptions and methodologies used for any particular scenario. Energy market projections, however, are subject to much uncertainty. Many of the events that shape energy markets cannot be anticipated. In addition, future developments regarding economic growth, technologies, demographics, and resources cannot be foreseen with certainty.

Many key uncertainties in EIA’s projections are addressed through alternate cases that assume different future outcomes regarding important, but exogenous model parameters, such as macroeconomic growth rates, world oil prices, and rates of technological progress. The Annual Energy Outlook (AEO 2011) provided 56 such cases besides the reference case. For example, the AEO2011 discussed the potential impact of the shale gas resource base being significantly larger or smaller than the shale gas resource assumed in the AEO2011 reference. Similarly, the Annual Energy Outlook 2012 report to be released in May 2012 will discuss the potential impact of significantly larger or smaller shale gas and tight oil resources on U.S. oil and gas supply, consumption, and prices.

World oil production is a result of many factors, including the world’s oil resource in place, wellhead productive capacity, the level of investment in new productive capacity, oil prices, the level of economic activity which is a critical driver of the stock and utilization rate for vehicles and other oil-using equipment, the development of oil substitutes, and governmental policies affecting both production and equipment efficiency. The impact of governmental policy, for example, is manifest in the stated intentions of some key oil exporting countries to restrict oil production and wellhead productive capacity in order to affect world oil prices. Consequently, the existence of world oil prices greater than historical highs is not necessarily the result of limited oil resources.

EIA’s analyses and projections are based on the economic principle that long-term energy supply and consumption are equilibrated through market prices. High oil prices (compared to historical prices), for example, both reduce oil consumption and encourage the development of new oil supplies and their substitutes. The world consumes oil largely to satisfy specific energy services. When oil prices rise, consumers have the incentive to reduce their demand for those oil-intensive energy services, upgrade to more efficient technology, and/or substitute other energy forms to satisfy the same energy services. For example, biofuels can be substituted for gasoline and diesel; and natural gas can be substituted for diesel and residual oil to generate heat and electricity. As noted above oil consumption growth is also greatly influenced by economic growth.

Recognizing that the role of EIA does not encompass all of the issues raised in your letter, I hope that the information provided will be helpful to your understanding of EIA’s approach to many of the topics of concern to you.

Sincerely,

Howard K. Gruenspecht
Acting Administrator
U. S. Energy Information Administration

ASPO-USA