Source: House Foreign Affairs Subcommittee on Terrorism, Nonproliferation and Trade
Managing the economic, security, and climate impacts of its new bounty of oils is the central energy challenge facing the United States. In testimony to the House Foreign Affairs Subcommittee on Terrorism, Nonproliferation, and Trade, Deborah Gordon says Congress needs to carefully evaluate the impacts of lifting the ban on crude oil exports.
Policy Recommendations
- Adopt a go-slow policy to maintain market stability. It’s difficult to predict what effect dropping the oil export ban will have because it will change market dynamics and redirect flows of refined products in ways that are not fully understood. Going slowly will minimize market disruptions and price volatility.
- Recognize the varying impacts on different groups. Oil producers stand to gain, consumers could see price increases at the pump, and refiners and manufacturers have different objectives—this all needs to be considered.
- Don’t forget about climate risks. As new oil resources surface, climate change is slipping down the policy agenda. But carbon emissions must be taken into account to protect existing assets and future investment decisions.
“As one of the world’s fastest-growing oil producers, the United States has the opportunity and responsibility to be a global leader in the energy sector,” concludes Gordon. “A strong, balanced energy policy is needed to guide decisionmaking in ways that satisfy the energy needs of American consumers, strengthen the U.S. economy, protect the climate, and enhance energy security.”
Full Testimony
Chairman Poe, Ranking Member Sherman, distinguished members of the Subcommittee, thank you for the opportunity to testify today to examine U.S. export policy on crude oil.
I am a senior associate at the Carnegie Endowment for International Peace, a non-partisan policy think tank. I began my career with Chevron as a chemical engineer and then spent over two decades researching transportation policy at Yale University, at the Union of Concerned Scientists, and for a wide array of non-profit and private sector clients. I have authored books and many reports on transportation and oil policymaking.In my remarks I will discuss three key points: the changing conditions influencing today’s crude oil market; the divide among stakeholders on whether the export ban on crude oil should be lifted; and the need to deal with the environmental consequences of an unconditional lifting of the ban.
The bottom line is that managing the U.S.’s newfound oil abundance will require careful analysis and strategy. Many opportunities and challenges lay ahead. Determining how U.S. light tight oils (LTO) fit in the oil value chain is not straightforward. Lifting the export ban on U.S. oil would affect the U.S. energy industry, consumers, and society as a whole. It is critical for Congress to examine economic, security, and environmental effects of policy decisions over both the short and longer terms.
By way of background, today, the U.S. is the major energy nation that is closest to being equal parts oil producer and oil consumer. (See figure 1). Our energy situation stands in stark contrast to other nations. For example, China and Japan are majority consumers and Saudi Arabia and Russia are majority producers. America is in an enviable energy and economic position. We won’t want to either hoard or hand over all of our resources without first establishing policy goals and strategies. The challenge will be to determine what policy frameworks will balance the nation’s long-term oil trade objectives, national security, and global climate concerns.
As U.S. oil production ramps up to peaks not seen since 1970, a key policy question is whether the forty-year old decision to ban U.S. crude oil exports should be reversed. In my judgment, the right answer is not a simple “yes” or “no”. The situation is far more complex than those in favor of or against lifting the U.S. crude oil ban suggest. As policymakers debate whether the ban should be lifted, it will be important to address three key questions.
Question #1: Given that the U.S. can already export unlimited volumes of petroleum products, under what conditions should it also be allowed to export crude?
American crude generally cannot be exported, but there is no legal limit on exporting certain raw ultra-light oil components (natural gas liquids and condensates) and refined oil products. As of January 2014, product exports have increased four-fold over the past eight years to 3.6 million barrels per day. Today’s oil trade is increasingly driven by valuable diesel, gasoline, jet fuel, and petrochemical feedstocks rather than crude oil. In 2013, the U.S. exported at least $150 billion in petroleum products, scoring the largest gain for any commodity in the U.S. economy.
As the U.S. ramps up its petroleum product exports and seeks to also export crude oil beyond Canada, the U.S. could flood the market. Balancing global liquid fuel trade with an increasing number of players will be an ongoing challenge. But this will be critical in order to minimize short-term market disruption and future price volatility. (See figure 2).
A go-slow policy will allow other nations to adjust to North America’s increased oil capacity. Those oil-rich nations that have built their economies around oil revenue are increasingly vulnerable to disruption. While reversing the export ban could increase global energy competition, it is also likely to change market dynamics and redirect refined product trade flows. It is unclear how the oil value chain will adjust in response to changes in upstream production and downstream refining factors. U.S. oil export policies must take these dynamics into consideration. Fostering market stability should be a primary consideration in deciding what conditions should apply to the U.S. in terms of future crude and petroleum product exports.
Question #2: Who would benefit most from reversing the U.S. oil export ban?
Answering this question is not straightforward. It is unclear where exactly American LTO fits into today’s oil value chain. Fracking in the U.S. is producing a different type of oil than Canada and increasingly OPEC are producing. And not all LTOs are alike. Despite their generally high quality (light and sweet), U.S. LTO gravity ranges widely from 30 to over 70 degrees API—a huge spread. The lightest of these oils are more like natural gas than conventional oil. Many U.S. and overseas refineries have been retrofitted to handle heavy, sour oils, and cannot be fed a steady diet of LTO. In order to process Eagle Ford and Bakken oils, significant volumes of heavy oil must be imported and blended into LTO feedstocks. Depending on their quality, some LTOs may be better suited to petrochemical manufacturing.
As such, determining who benefits from exporting LTO is not simple. Oil producers (International Oil Companies and independents), refiners, manufacturers, and the public each have different objectives that relate back to price spreads and uncertainty (see figure 3), and may not align with U.S. policymakers’ goals.
- Oil producers and LTO leaseholders strongly advocate lifting the export ban. These stakeholders are responding to the potential for domestic LTO saturation along the Gulf Coast, widening price differentials between WTI/LLS and Brent benchmarks, and an overly simplistic view that easing the export ban would facilitate selling off more of the crude at a higher price from the Bakken, Eagle Ford, and other LTO oilfields.
- Industry analysts like Woodmac argue, however, that crude markets are complicated with different prices for various transportation mode and oil qualities. As such, relaxing the oil export ban may not necessarily eliminate the LTO discount to Brent. Instead it could invite cost-cutting arbitrage of U.S. and international crudes with unpredictable outcomes.
- Refiners are split on whether to lift the ban depending on numerous operational and geographic factors that determine their bottom lines. To the extent the ban discounts U.S. crude to Brent, large U.S. refiners enjoy higher petroleum produce profits. Other U.S. refiners that can preferentially handle LTO also favor the export ban. Those refiners who cannot handle U.S. LTO feedstock because their infrastructure is designed for low-quality oil imports from Canada, Mexico, and Venezuela are in favor of free trade and do not oppose ending export restrictions. European refiners who can better handle LTO and desire greater competition to moderate Brent pricing are in favor of loosening the U.S. oil export ban.
- Manufacturers may not yet have a unified position. Chemical companies took a strong position on liquefied natural gas (LNG) exports. But major manufacturers have yet to do so with oil exports. Petrochemical companies worry that lifting the ban could increase the price of domestic crude, which now trades for less than its international counterpart. Still others believe that more oil in the global market will drive down energy prices and create jobs in the United States.
- American consumers are concerned about what exporting U.S. oil will mean for gasoline prices. Simple assumptions—more oil at home means energy independence that will lower gasoline prices—lead to misperceptions. Prices are greatly influenced by global factors. Market volatility could be a real challenge in the future. And, in order for LTOs to be produced, global oil prices must remain high. The era of cheap oil and gasoline is over despite the U.S.’s new oil bounty.
Question #3: Could unconditional exporting of U.S. crude have unintended environmental consequences?
Answering this question is critical yet complex. How U.S. and global oils are managed through imperfect markets or policy directives creates significant uncertainties. As the U.S. debates lifting its crude export ban, carbon emissions are already flowing throughout the marketplace in a highly fluid fashion. The U.S. is exporting an increasing volume of petroleum products—from less climate-intensive petrochemical feedstock to extremely climate-intensive petcoke with its emissions that rival coal. There are several ways the crude oil export ban can be skirted. New mini-refinery splitter configurations are being built to process crude just enough to escape the restrictions. A move is afoot to re-export unrefined Canadian oil sands brought through the United States. Abruptly changing the U.S. policy to ban its crude oil will impact the oil value chain in complex ways.
This raises concerns for climate change. The world is still moving in the wrong direction. (See figure 4). As new oil resources surface, climate change is slipping down the policy agenda map even as evidence continues to mount, according to the International Energy Agency (IEA).
National efforts in this decade need to buy time for an international agreement, which the IEA expects to come into force in 2020. The energy sector must adapt to climate change, both in the resilience of its existing assets and in future durable investment decisions.
The situation the U.S. is confronting on how to manage the North American oil boom raises serious climate questions that must be answered.
- As an emerging oil production leader, what responsibility does the U.S. have in terms of exporting carbon around the world?
- How do emissions differ by oil?
- How can the U.S. most effectively cut carbon out of the oil value chain?
- Which oils should be taken out of the ground and which should remain buried as nature’s carbon capture and storage devices?
In sum, the right question is not whether or not to eliminate the U.S. crude oil ban. Exporting U.S. oil is part of a much larger and more important picture. The burning question is whether America can manage the economic, security, and climate impacts of its new bounty of oils.
As one of the world’s fastest-growing oil producers, the United States has the opportunity and responsibility to be a global leader in the energy sector. A strong, balanced energy policy is needed to guide energy decisionmaking in ways that satisfy the energy needs of U.S. consumers, strengthen the American economy, protect the climate, and enhance national and global energy security. Guided by Congressional leadership, this policy framework can deliver on the promise of new energy abundance.
