The 114th Congress convened January 3 with energy at the top of its agenda. Both the House and the Senate kicked off the new session with approval of the Keystone XL Pipeline. That was just the start. Senator Lisa Murkowski (R-AK), the new Chairwoman of the Senate Energy Committee, has promised comprehensive energy legislation based on her Energy 2020 agenda. The House has begun moving other energy legislation as well, and House Energy and Commerce Committee Chairman Fred Upton (R-MI) plans to move forward with his “Architecture of Abundance.” But what about lifting the ban on crude oil exports?
The ban on the export of crude oil was enacted in 1975 in response to the Arab oil crisis. It was intended to shield US consumers from the impact of future oil embargoes by foreign oil-producing nations. The act sought to increase domestic energy supplies and availability, to restrain energy demand, and, in part, banned the export of most domestic crude exports so that crude would be available at home. So why the clamor now to export domestic crude? What has changed?
In fact, many things. Fracking, horizontal drilling and the shale oil revolution have the US on track to overtake Russia and Saudi Arabia as the leading crude oil producer in the world. The US Energy Information Administration (EIA) recently reported that it expects US crude production in 2016 to be close to the record level of 9.6 million barrels per day set in 1970. As a result, the policy battles have begun in the Congress and the groundwork is being laid by both proponents and opponents.
Proponents and Opponents
The industry itself is divided into two camps and specific regional and environmental interests are fully engaged in the debate.
The American Petroleum Institute (API) has led the charge for lifting the ban on crude exports. API has engaged energy consulting firms and think tanks to produce studies on the positive impacts of crude exports on expanded US 0production, jobs, fuel prices, trade and strategic support for allies, and have engaged influential public figures and former officials. Joining API is a single issue coalition of 14 of the nation’s largest independent oil producers. On the other side are independent refiners and another single issue coalition of small refiners, which has issued its own studies on the capacity of U.S. refiners to process domestic crude and published a University of New Hampshire poll demonstrating that voters overwhelmingly support keeping US crude oil in America.
A brief summary of the pros and cons presented by the two industry camps to Congress are:
1. Refinery Capacity:
Pro: US refiners are configured to process heavy or sour crude resulting in a mismatch between the refining industry and the light crude now produced in the US. European and Asian refiners are better equipped to process light crude, providing producers additional markets for their crude.
Con: The US refining industry has the capacity to process all the light crude produced through 2020 based on a study examining increased utilization of existing refinery capacity, planned capacity expansion, and displacement of imports, so there is no “mismatch.”
2. Free Trade:
Pro: The US must repeal an outdated barrier to free trade in crude and take advantage of the country’s abundance of crude to lead the world in opening markets abroad.
Con: The global market in crude is not free given the ability of OPEC to manipulate the price and production of crude in the world. The current drop in global crude oil prices is case in point as Saudi Arabia maintains production levels to retain market share and to test the resolve of U.S. producers. Moreover, U.S. laws and regulations, such as the Renewable Fuel Standard and the Jones Act, further erode a level playing field and disadvantage US refiners with their foreign competitors.
3. Taking Advantage of the Energy Renaissance
Pro: The US is producing record amounts of domestic crude and will overtake Russia and Saudi Arabia to become the world’s leading producer of crude. The US has achieved energy independence and can capitalize on its energy abundance.
Con: The US still imports nearly 40% of its crude supplies, approximately 7 million barrels per day, more than the amount imported when the ban was first enacted. For every barrel of crude that would be exported, a barrel of crude would have to be imported, increasing US dependence on foreign crude.
4. Lower Fuel Prices
Pro: Exporting US crude will increase the global supply, bring down the global price, and result in lower gasoline and fuel prices for U.S. consumers.
Con: Studies indicating exports will lower prices are qualified, depending on numerous factors, and any lower prices would be temporary at best. Consumers are enjoying the lowest fuel prices in years.
5. The Economy Prospers with Crude Exports
Pro: Crude exports will fuel the US energy boom, expand production and production jobs.
Con: The economy prospers from energy independence, a stable fuel supply shielded from foreign threats, and a robust refinery sector processing U.S. crude.
6. Equal Treatment
Pro: Refined gasoline, diesel and other products are exported, and crude should have equal treatment.
Con: Crude is a strategic commodity critical to national security and defense. The export of refined products instead means that the value-added manufacturing and the manufacturing jobs stay in the U.S.
7. Public Opinion
Pro: The American people support the export of crude – nearly two-thirds of voters in one recent poll support allowing domestic companies to export crude to countries who are trading partners.
Con: Multiple recent polls indicate that voters overwhelmingly support (7 in 10) keeping domestic crude in America, especially if exporting crude could raise gasoline prices.
Congress and the Administration
So what is happening in Washington on the issue of crude exports?
On February 4, Congressman Joe Barton (R-TX) introduced his legislation to lift the ban on crude exports. The House Energy and Commerce Committee, which has jurisdiction over the issue, held its first hearing on the issue in mid-December. Congressman Barton has since added 12 cosponsors and is seeking to build more support for his bill, and other similar bills having been introduced. But just recently, Energy and Commerce Chair Upton stated that proponents still “need to build the case” for exports.
In the Senate, Senator Murkowski has taken a different approach. She and her staff spent last year reviewing the issue and laying the foundation for consideration with a series of white papers on export policy. She has advocated that the President has existing authority to act based on the national interest and urged the Administration to permit an expansion of exports. She plans to hold hearings before introducing legislation and will continue to press the Administration to ease restrictions.
For its part, the Obama Administration’s Department of Commerce has taken the limited but significant step of issuing private letter rulings to a few producers permitting the export of minimally processed condensates. Dozens of additional applications are said to be pending, along with petitions requesting crude swaps with Mexico, though the Obama Energy Secretary has previously noted that the case has not been made to lift the ban.
In sum, what are the prospects for lifting the ban on crude exports? As with anything in Washington, it depends. What is certain is that the issue will be the subject of additional Congressional hearings and debate, and the campaign for the hearts and minds of the American consumer (and voter) is well underway.
June DeHart is a partner in the Washington, D.C. office of Manatt, Phelps & Phillips. She advises clients on a broad range of legislative and regulatory matters, including energy and energy tax; transportation and other public infrastructure policy and funding; appropriations; international trade; and gaming, and often advises CEOs and Boards of Directors on policy issues. Ms. DeHart previously served as Chief Counsel for the U.S. Senate Subcommittee on Energy, Nuclear Proliferation and Government Processes. She can be reached at 202.585.6510 or firstname.lastname@example.org.
This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. The first column in the fifth edition of this series discussed the California Governor’s Energy and Climate Plan.