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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