Energy Security:

Evaluating U.S. Vulnerability to Oil Supply Disruptions and Options for Mitigating Their Effects

RCED-97-6: Published: Dec 12, 1996. Publicly Released: Dec 12, 1996.

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Pursuant to a congressional request, GAO reviewed the effectiveness of the Administration's 1995 National Energy Policy Plan (NEPP) in reducing the vulnerability of the U.S. economy to oil supply disruptions and price shocks, focusing on: (1) the economic benefits of importing oil compared with the potential economic costs of vulnerability to oil shocks; (2) the extent to which the U.S. economy's vulnerability to oil shocks will likely change over time given the programs and policies contained in the Administration's 1995 NEPP and other relevant factors; and (3) options for reducing the economy's vulnerability to oil shocks.

GAO found that: (1) the U.S. economy realizes hundreds of billions of dollars in benefits annually by using relatively low cost imported oil rather than relying on more expensive domestic sources of energy; (2) by comparison, oil shocks impose large but infrequent economic costs that, when annualized, are estimated to cost the U.S. economy tens of billions of dollars per year; (3) the economic costs of oil price shocks depend largely upon the rise in the price of oil coupled with the nation's level of oil consumption, rather than the level of imports; (4) as long as market forces prevail, world and domestic oil prices will be the same and will rise and fall with changes in world oil market conditions; (5) under these conditions, an incremental decrease in oil imports would reduce the benefits of such imports without substantially lowering the costs of oil price shocks; (6) oil supply disruptions impose significant economic costs, and reliance on imported oil imposes military and other costs that are not easily measured; (7) while adopting the NEPP's initiatives may keep the economy's vulnerability to oil supply disruptions below what it otherwise would be, the Energy Information Administration's forecasts indicate that by most measures the economy will not likely be significantly less vulnerable through 2015, primarily because the demand for oil is projected to increase; (8) only over a longer period do energy analysts anticipate significant improvement, and that depends on technological advances in such areas as energy efficiency and alternative fuels; (9) while their views varied, almost all of the experts GAO consulted about options for reducing the economy's vulnerability to oil supply disruptions said that, in the short run, the United States should rely on rapid and large releases of oil from the Strategic Petroleum Reserve to blunt price increases at the onset of an oil supply disruption; and (10) in the long run, the experts generally favored research to develop cost-competitive alternatives to petroleum.

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