A recent entry discussed whether the Federal Reserve would start raising short-term interest rates, which have been held at near zero levels since 2007, and concluded that a rate increase that had been foreseen in September would probably be postponed. “Moral: It’s far easier to block questionable policies initially than it is to reverse them after they have been in effect for a while.” Fed mulls shift in monetary policy, 9/7/15.
This week we’ll discuss another example of the staying power of government policies, namely the crude oil export ban that has been in effect since 1975. This policy never did make much sense, but the US was producing far less oil than it consumed and the oil industry learned to live with it.
The push to repeal the ban is a recent development, which reflects rising US oil production and a global oil glut that has domestic producers scrambling for markets wherever they can find them. In some cases, lifting the ban might make the difference between keeping US production operations going and being forced to close them down.
There are no obvious drawbacks of lifting the export ban and politicians on both sides of the aisle are always talking about their commitment to boosting the US economy, so one might think the change would be easily made. Guess again, because straightforward answers to simple questions are not the norm in Washington, DC!
A. Background - Our story begins with Arab oil production cutbacks in 1973 et seq., which led to sharply higher oil prices around the globe and, in short order, a raft of new laws and regulations in this country that would supposedly fix the problem (or at least make a show of “doing something” about it). Some of these measures would prove relatively short-lived, such as price controls on gasoline that led to long lines at service stations, a 55-mile per hour national speed limit that was more honored in the breach than the observance, and a windfall profits tax on oil companies.
Among the measures that endured was a ban on the export of crude oil, which was seen as a way to minimize crude oil imports and thereby minimize the exposure of US consumers to global market price volatility. Net US imports of oil were not reduced, however, and national oil markets are interlinked so spikes in global prices continued to be felt in this country just as they are felt everywhere else.
The Commerce Department has exercised its statutory authority to grant exceptions, for example permitting export of oil shipped through the Trans-Alaskan Pipeline, US oil shipped to Canada for consumption there, and certain heavy oil from California. In total, the exceptions added up to a relatively minor 67,000 barrels of oil a day in 2011.
There is no export ban for gasoline or diesel fuel, so the thrust of the policy is that domestically produced oil must be refined in the US – not that it must be consumed here. US oil exports have been banned for 40 years, Brad Plumer, Washington Post, 1/8/14.
B. Recent developments – For years, big government fans insisted that growing reliance on imported oil was inevitable because US recoverable oil reserves had been heavily exploited already and were dwindling. The fact that vast areas remained off limits for petroleum exploration and production was conveniently overlooked, and the “drill, baby, drill” slogan of Sarah Palin et al. was mocked.
SAFE believed more oil and gas would be found if the oil companies were allowed to seek it on reasonable terms, and we made this point repeatedly. To drill or not; that is the question, 7/7/08.
Drilling for oil and gas in currently banned areas would take five to ten years to result in major increases in U.S. production. Commercial development of alternative fuels, plug-in vehicles recharging over night, and the like, may come in time, but they will take even longer. The best answer is probably a combination of approaches, albeit with as little government intervention as possible. Let the market decide how future energy needs will be met. The last thing we need is to equate drilling with human selfishness and sin, but this may be what the opponents of drilling are really saying.
Federal restrictions on drilling in unexplored areas under federal government control have not been relaxed significantly since 2008. However, the fracking boom has resulted in growing oil production from shale formations, etc. and reduced the need for US oil imports. Crude oil production surpasses net imports, Department of Energy, 2015.
Although the administration had little to do with this achievement, the president has not hesitated to claim credit for it. Remarks on the economy, Northwestern University, 10/2/14.
. . . as soon as I came into office, we upped our investments in American energy to reduce our dependence on foreign oil and strengthen our own energy security. And today, the number-one oil and gas producer in the world is no longer Russia or Saudi Arabia. It’s America. For the first time in nearly two decades, we now produce more oil than we buy from other countries. We’re advancing so fast in this area that two years ago I set a goal to cut our oil imports by half by – in half by 2020, and we’ve actually -- we will meet that goal this year, six years ahead of schedule.
Given rising US oil production, no reduction in production by Saudi Arabia et al., and a relatively slack global economy, the inevitable happened – global oil prices began dropping in the summer of 2014 and at this point are down by over 50%. 5-year crude oil prices and price charts, Infomine.com, 10/2/15.
Some analysts likened this situation to a Saudi Arabia vs. US fracking showdown. Gloves off over oil: Saudi Arabia versus shale, Holly Ellyatt, cnbc.com, 10/17/14.
Whilst markets try to divine Saudi Arabia's reasons for refusing to cut supply, [one analyst] said it was plausible that it was trying to pressure its rival oil producer Iran or was trying "to have a price war with the U.S. shale producers -- because they know they can win it."
Various estimates have been made as to how low oil prices could fall before US and Canadian firms were forced to start shutting down their current production operations (exploration budgets have already been slashed). The answer depends on the nature of the operation (fracking has lower upfront costs but higher operating costs than conventional wells), the kind of oil (light oil commands a price premium over heavy oil due to lower refining costs), shipping costs (to the refinery from point of extraction), and the level of debt being carried by the firm.
Speaking generally, many producers are apparently under pressure at current price levels (West Texas Intermediate is about $45 per barrel). US oil [slump] nears; Defaults are on the rise, investors.com, 9/18/15.
•Continental Resources (CLR) CEO Harold Hamm has said that if U.S. crude prices are at $60 a barrel, cash flow would be neutral. But below $50, the bellwether shale producer would be outspending its cash inflow.
•The Energy Information Administration said Friday that 83% of the operating cash at U.S. companies with onshore activity was devoted to debt repayments from July 1, 2014 to June 30, 2015, marking the highest rate since at least 2012.
Some US producers are being prevented from shipping their oil to the most logical destination (refineries built to process the kind of oil involved). In the current environment, the revenue foregone may represent the difference between being able to keep pumping oil or shutting down. How the oil export ban chokes the fracking ban, Holman Jenkins Jr., Wall Street Journal, 3/6/15.
Thanks to the fracking boom in Texas and North Dakota, America is producing more light sweet crude than domestic refineries can handle. Oil producers were already being denied a premium of $12 a barrel by not being allowed to export this oil. Soon the only option may be to shut down production altogether.
Note the irony! An oil export ban that was supposed to reduce oil imports may result in increasing net oil imports if US producers are artificially forced to shut down production operations. Higher than necessary gasoline prices for the motoring public are a likely result, even after factoring in an associated setback for US refiners. Refiners would lose big if oil export ban is loosened, EIA report says, fuelfix.com, 9/3/15.
Buried in the latest government analysis on lifting the crude-oil export ban is a piece of data that shows why ending the limits will be a heavy lift: It would cut refiners’ profits by $22 billion a year. The report shows that dropping the ban, which dates to the 1970s Arab oil embargo, could lower gasoline prices for drivers and boost domestic oil drillers. But refiners — one of the nation’s most powerful industries — would be the losers. “The refiners will definitely be hurt, there is no question about that,” said Charles Ebinger, a senior fellow at the Brookings Institution who supports lifting the ban. “But the studies have shown that lifting the ban is good public policy.”
Other observers have offered more guarded conclusions about lower gas prices for US motorists, but no one seems to expect that higher gas prices would result. US oil producers seek end to export ban, businessdayonline.com, 9/24/15.
A study by the US Energy Information Administration reportedly found “no plausible scenarios in which liberalization of crude exports would push up fuel prices for American motorists.” An EIA executive (Lynn Westfall) was quoted that such a policy change “won’t do any harm, and could even do a little bit of good.”
We agree with Mr. Ebinger and others who have called for an end to the oil export ban. This appears to be an easy call, and in that respect reminds us of another decision that has taken longer than it should. An update on the Keystone pipeline, 2/25/13.
What’s not to like about the Keystone pipeline? This project would create jobs for the workers to construct and operate the pipeline, contribute to restraining motor fuel prices, and facilitate heavy oil imports from Canada versus the present imports from Venezuela (a far less friendly trading partner). No government mandates or subsidies would be required; instead, federal and state tax revenues would be augmented. C. Legislative outlook – A bill (HR 702) to end the oil export ban was introduced in February, has been reported by the Committee on Energy and Commerce, and is scheduled for a House vote this week. House sets oil export bill for next week, John Siciliano, Washington Examiner, 9/30/15.
Sounds like HR 702 will be passed by the House, but there hasn’t been much Democratic support thus far – either in the House or elsewhere – and without such support the legislation is very likely to get blocked in the Senate.
•All Democrats at a House subcommittee meeting spoke in opposition to HR 702, reportedly saying “it could increase gasoline prices, reduce jobs at oil refineries and harm the environment, among other objections.” However, most of them were open to further discussions. House panel votes to life oil export ban, Timothy Cama, The Hill, 9/10/15.
•The Senate Banking Committee has endorsed a bill to end the oil export ban, but Senator Heidi Heitkamp of North Dakota was the only Democrat who supported the measure. Senate panel votes to lift 40-year-old US ban on oil exports, Matthew Daly, yahoo.com, 10/1/15.
Subsequently, the Committee added an amendment to the bill that Democrats would obviously never accept. (We understand that Senator Pat Toomey proposed the amendment.) Oil export bill gets an Iran-shaped “poison pill,” John Siciliano, Washington Examiner, 10/1/15.
•The White House opposes lifting the export ban, arguing among other things that (a) the Department of Commerce has authority to grant exceptions so no legislative change is needed, and (b) oil companies support this action so it must be the wrong thing to do. Josh Earnest, press briefing, 9/15/15.
We wouldn’t support legislation like the one that’s been put forward by Republicans *** for an update on our position, if one is necessary, you can consult with the Commerce Department *** this policy announcement is being made by Leader McCarthy in front of an organization in Houston that is largely funded by four or five of the biggest oil companies in the United States *** he could go and stand before that organization and actually offer up something bold but also common-sense, which is to end the billions in subsidies that oil and gas companies in the United States already enjoy, and actually use that money to ensure the long-term success of our economy and the energy sector in this country by making important investments in things like wind energy and solar energy -- investments that even some of those oil companies themselves have bragged about making.
Presidential candidate Hillary Clinton has staked out a similar position. Clinton would support end to oil export ban only with concessions, Amanda Becker & Timothy Gardner, reuters.com, 9/18/15.
Clinton said she had not yet seen any legislation on lifting the ban that included concessions from the fossil fuel industry, In the absence of that, "I don't think the ban should be lifted," Clinton told reporters.
What's going on? The president et al. don’t want to support HR 702 – which could be seen as a favor for the unpopular oil industry – without a quid pro quo such as more handouts for wind and solar energy programs. This “what will you give us” attitude is wrong in principle and destructive in practice. Why Democrats are wrong to use the crude oil export ban as a bargaining tactic, Nicolas Loris, dailysignal.com, 9/17/15. Americans shouldn’t have to take two steps backward in extending bad policies that reward special interests and political preferences in order to move a step forward in making America’s energy economy freer and more prosperous. Summing up, a repeal of the oil export ban looks like a long shot. Too bad, because how can the government bureaucracy ever be shrunk if the nation’s political leaders can’t be persuaded to roll back any of the rules it has been put in charge of enforcing?