Boom to Bust? How Export Restrictions Imperil America’s Oil and Gas Bonanza Cato Institute February 10, 2014

Scott Lincicome

Introduction  Practical/economic problems  Policy problems  Common myths about lifting restrictions  Possible reforms

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Practical and Economic Concerns  Market uncertainty deters investment, production and employment  Producers unwilling to invest if they can’t guarantee long-term returns  Business decisions based on political whims rather than market forces  Economic loss  Producers lose billions on lost export sales  “Mini-refineries” built to circumvent export ban, resulting in further losses  Prices collapse when captive supply outstrips demand  Led to gas/NGL glut in 2011-13  Prices hit record lows, causing divestment and switch to crude  But crude faces the same, and in some ways worse, problems  Limited refinery capacity (current and future)  Some imports won’t ever be replaced  Industry analysts warn of serious problems ahead  Result: less stable, predictable and efficient global energy markets

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US NatGas Prices Collapse (Jan 2008 – Dec 2013) 20.00 18.00 16.00

US ($/mmbtu)

14.00 12.00 10.00 8.00

EU ($/mmbtu) Japan (LNG) ($/mmbtu)

6.00 4.00 2.00 0.00

Source: World Bank

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Crude Oil Prices Decouple (Jan 2008- Dec 2013) 160.00

140.00

120.00

100.00

80.00

Brent ($/bbl) WTI ($/bbl)

60.00

40.00

20.00

0.00

Source: World Bank White & Case

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Policy Concerns  Legal  Contradicts longstanding US positions- at WTO on export restrictions and licensing  domestically on subsidies and CVDs  Potentially exposes downstream US exporters to CVDs or higher anti-dumping duties (re: exporter costs) in foreign markets  Process also raises concerns under US law  Political  Undermines the National Export Initiative  Contradicts support for other energy exports (renewables, nuclear, etc)  Contradicts longstanding US policy re: CVDs and “unfair” export restraints and subsidies  Undermines multilateral efforts to rein in export restrictions  Raises specter of cronyism, pitting some consuming industries against producers  Undermines environmental policies (natural gas, renewables) White & Case

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Myths About Lifting the Restrictions  Harm caused by higher oil & gas prices  Natural gas prices would rise, but nowhere near harmful levels  Condensing, shipping costs are significant (up to $7/mmbtu)  US manufacturers would remain globally competitive  Domestic crude oil prices (e.g. WTI) would equalize with international (Brent) prices  But this would likely lower gasoline prices, not raise them (per Citigroup, others)  Total global supply is what matters most  Gas prices more closely linked to Brent, not WTI  No limits on refined product exports  Currently, certain U.S. refiners – not consumers – are benefiting via cheap oil and unlimited exports  Rhodium group analysis of 2010-2013:  Rocky Mountain/Midwest refiners paid 21%/16% less per barrel for crude oil than East Coast refiners, BUT  Wholesale gas prices in Rockies/Midwest only 1% lower than East Coast

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Jan-2000 Jun-2000 Nov-2000 Apr-2001 Sep-2001 Feb-2002 Jul-2002 Dec-2002 May-2003 Oct-2003 Mar-2004 Aug-2004 Jan-2005 Jun-2005 Nov-2005 Apr-2006 Sep-2006 Feb-2007 Jul-2007 Dec-2007 May-2008 Oct-2008 Mar-2009 Aug-2009 Jan-2010 Jun-2010 Nov-2010 Apr-2011 Sep-2011 Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013

U.S. Crude Oil and Refined Products Exports 2000 – 2013 3500

3000

2500

Crude Oil (Mbbl/day)

2000

1500

Finished Petroleum Products (Mbbl/day)

1000

500

0

Source: EIA

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Myths About Lifting the Restrictions, ctd  Sacrificing “energy independence”  Total energy independence is unnecessary and impossible  Regardless of restrictions, US will continue to import fossil fuels due to refineries and multinational investment  Energy stability should be the real goal: domestic production, imports and exports  National security  Far more stable, diversified energy market than in 1970s, when dependent on crude  Undermines domestic investment/production over the longer term  Exports could help US allies and overall global energy stability  US still could restrict exports in an emergency (clearly not the case right now)

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Emerging Policy Consensus  IEA: US export restrictions threaten production and growth  Institutions whose experts favor increased exports or reform:     

AEI Brookings Institution Cato Institute Center for a New American Security Columbia University Center on Global Energy Policy  Competitive Enterprise Institute  Council on Foreign Relations

     

Heritage Foundation Heartland Foundation Manhattan Institute Marshall Institute MIT Energy Initiative Rice University James A. Baker III Institute  University of Houston

 Institutions whose experts oppose increased exports or reform:  Center for American Progress  Third Way

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So How Can We Export More?  No systemic changes  Options  Natural gas  Increased applications to FTA countries  Expedited DOE “public interest” determinations for non-FTA countries  Crude Oil  Increased exports to Canada (assuming refinery capacity exists)  BIS determination related to a stated exception  Presidential “national interest” determination  Problems  Might increase exports, but would not resolve systemic problems  Exceptions/determinations are difficult  Will this administration actually do it?

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So How Can We Export More?  Systemic changes  Options  New regulations for Crude Oil – administration has authority to update the EAR  Legislative action  Best approach: Complete overhaul, with all energy exports subject to transparent, automatic licensing (w/ clear national security exception)  Some recent movement, but limited and piecemeal  Legal challenges  US law: exporter challenges (i) delay/denial of export license (or order of approval); or (ii) regulations themselves  WTO dispute settlement challenge by another Member  FTA negotiations (TPP/TTIP) amend US law via implementing legislation  Problems  Highly controversial  Political will appears lacking, even among supporters

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Conclusions  Reform is needed  Emerging consensus in support of reform  Some political momentum, but  Piecemeal proposals  Administration reluctance  Little momentum for real reform, unless driven by legal challenge

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