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2014: Export of American Oil Is Contentious Industry Goal After 4-Decade Federal Ban

Lure of greater profits from global markets on collision course with national security goal of keeping supplies at home and protecting domestic gas prices.

Jan 6, 2014

Emboldened by the recent boom in U.S. crude production, oil company executives and others closed the year by launching a highly public push for the right to freely export U.S. crude oil. The move is a 180-degree change from 40 years of telling Americans that the country needs all the oil it can get to achieve energy independence and to protect consumers and the economy from oil and gasoline price shocks.

It's a particularly dicey appeal to make right now because the call for oil exports—and the industry's rationale for it—run counter to the arguments that oil companies and politicians are still using to justify a host of industry-backed initiatives, including the controversial Keystone XL pipeline project that would import oil from Canada.

What's more, for the American public, every discussion about oil policy ultimately boils down to one question: What would it do to gasoline prices? On that front, unrestricted oil exports would be a difficult sell. So far, the domestic oil boom has lowered the cost of U.S. crude and enriched the industry and nearby communities, but it's provided little relief to consumers at the pump. In the wake of that disappointment, export proponents would have to convince Americans that fuel costs won't be driven higher once homegrown oil starts flowing to the likes of Europe, Latin America and China—and that's an assurance no one can make.

Recent events make it clear, however, that the oil industry is undaunted.

Last month, Exxon Mobil Corp. joined Royal Dutch Shell and ConocoPhillips in publicly urging a repeal of the 1970s era federal law that strictly limits exports of domestic oil. "We are not dealing with an era of scarcity, we are dealing with an era of abundance," Exxon spokesman Ken Cohen told the Wall Street Journal, in arguing that the nation needs to "rethink" its restrictions on American oil shipments. 

Then, in a sign that the issue is gaining traction in Washington, Energy Secretary Ernest Moniz said at a conference that "there are lots of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that is no longer like the 1970s." One of those issues, according to Moniz: The prohibition of most U.S. oil exports.

The nation's oil export restrictions are rooted primarily in legislation approved in the wake of the 1973 Arab oil embargo that halted Middle East imports and triggered long lines at gas stations nationwide. The repercussions were felt throughout the economy and galvanized Congress to create a federal oil reserve and to protect the U.S. oil supply by prohibiting almost all exports.

CLICK on image to enlarge

Other effects of the embargo were just as enduring. A whole generation of consumers and politicians came away with a deep-seated fear of oil shortages, gas price spikes and an overreliance on Middle East and other foreign oil—a combination that has stoked the country's quest for energy independence ever since.

Daniel Yergin, author of the acclaimed oil book "The Prize," described the embargo-induced transformation this way: "The shortfall struck at fundamental beliefs in the endless abundance of resources, convictions so deeply rooted in the American character and experience that a large part of the public did not even know, up until October 1973, that the United States imported any oil at all."

Soon after, then-President Nixon declared: "Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy source."

It was an impossible task, and Nixon knew it. But for the next four decades, the goal would be repeatedly resurrected to steer the nation's oil policies. Nixon's bold pronouncement created a new reality, Yergin wrote, "Energy was now both a crisis and high politics."

The resulting export restrictions and regulations are not absolute, however. The Commerce Department's Bureau of Industry and Security (BIS) can grant export licenses for certain types of domestic oil on a case-by-case basis. Among those exportable crudes: oil from Alaska's Cook Inlet and North Slope, conventional heavy oil from California, and oil being sent to Canada for consumption there.

In addition, the BIS can approve other applications for export licenses if the shipments are deemed to be in the "national interest."

Oil exports to Canada have occurred with some regularity over the years, though they have spiked recently in the wake of America's new oil boom. Shipments to other countries have been rare.

The Obama administration has the latitude to clear the way for more U.S. oil exports. He could, for example, exercise discretion on the definition of "national interest" so that the Commerce Department would be obliged to grant all export license requests. But that's unlikely given the risk of a public backlash. So the industry's wish for unfettered oil exports will have to be granted by Congress.

Getting politicians to propose and back oil export legislation could be tricky, though. Lawmakers who have traditionally aligned themselves with the industry, especially, could be accused of sending consumers mixed messages about the reasons for boosting domestic oil supplies.

For years, the oil industry and its Congressional supporters have tapped the public's ingrained oil-supply and gas-price fears—at times, even reinforced them—to win support for industry-friendly legislation and to beat back regulations that might discourage domestic drilling. Many politicians are still emphasizing the notion that robust U.S. oil production and imported Canadian oil are the keys to insulating the nation from the influence of oil-rich members of OPEC, the Organization of the Petroleum Exporting Countries.   

Michigan Rep. Fred Upton, a Republican and strong oil industry advocate, is among those who would have to reconcile apparently contradictory messages if he were to take up the oil export issue. Last month, he touted the ongoing U.S. oil boom, declaring in a press release that because of the production surge, "we now have the opportunity to take back control of our energy future and liberate ourselves from OPEC's influence."

Upton, who chairs the House Energy and Commerce Committee, uses similar language to push for approval of the Keystone XL oil import pipeline. Because of its cross-border characteristics, the Canada-to-Texas project needs a State Department determination that the pipeline is in the national interest.

"Canada's dramatic energy growth, combined with our shale energy boom here in the United States, has finally put the goal of North American energy independence within reach," Upton said in an editorial earlier this year. The pipeline, he said, represents "an opportunity for America to increase its access to affordable and secure North American energy supplies."

The energy security argument has played a critical role in bolstering American public support for the Keystone XL pipeline, according to a string of public opinion polls. The most recent survey found that 56 percent of U.S. respondents viewed the project favorably because it represents "a chance to reduce dependence on oil imports from less reliable trading partners," according to Bloomberg News, which commissioned the poll taken in early December.

With the United States still importing almost half of the crude oil it consumes, could Upton and others now argue that it's in the country's interest to export our own crude to China and other potentially unfriendly bidders?

Tom Kloza, longtime oil market analyst for the Oil Price Information Service and gasbuddy.com, thinks that would be treacherous territory for any politician.

"That is a toxic, toxic issue," he said of the move to eliminate the oil export ban. "Any Congress person who would suggest that in 2014 would be [politically] dead. It would be like suggesting that on every third Friday of the month, men should wear hoop skirts."

Why 2014?

While the industry and its backers never liked the restrictions on domestic crude exports, the limits were mostly moot in a market where oil supplies could not keep pace with demand and the thirst for imports seemed in permanent ascent. For U.S. oil producers, it was a lucrative state of affairs.

But conditions have changed radically in the American oil market, and now those longstanding export controls are an economic liability.

In recent years, U.S. fuel demand has been on the decline, undercut by a lengthy recession, more fuel-efficient vehicles and the rising proportion of ethanol in every gallon of gasoline.  While fuel use has increased some as the economy has regained its footing, experts believe cutbacks in driving and higher fuel efficiency standards will continue to erode American gasoline demand.

At about the same time, U.S. crude production soared. High world oil prices and a new combination of technologies provided drillers with the motivation and wherewithal to tap previously irretrievable pockets of oil trapped in tight geologic formations such as shale. An oil boom ensued.

New supplies from those formations, particularly in North Dakota and Texas, have boosted domestic oil production to a 24-year high, causing the nation's oil imports to recently fall to their lowest levels since 1996. A host of prognosticators have said the trend puts the United States on a path to become the world's largest oil producer, possibly as soon as 2015.

As a result, the U.S. Gulf Coast—the world's largest oil refining center—is now awash in crude oil for the first time in decades. The glut is primarily made up of the new flood of light sweet crude from the Bakken fields in North Dakota and Texas' Permian Basin and Eagle Ford formations. Imported varieties and an influx of heavy crudes that travel from Canada by rail and through pipelines are in the mix, too.

The situation is a boon for oil refiners, because the overflow has depressed oil prices throughout the United States. That allows refiners to buy crude at a discount, process it, and then bank extra profit by selling the resulting gasoline and diesel at market prices that are benchmarked to costlier overseas crudes.

Domestic oil producers, meanwhile, are decidedly unhappy. Because of the export restrictions, they are stuck selling most of their output into a flooded U.S. market where refiners have the upper hand. As of Dec. 13, the price of light sweet oil from North Dakota's Bakken formation was $78.19 per barrel, more than $14 per barrel cheaper than the U.S. benchmark West Texas Intermediate oil, and more than $30 below what oil of similar quality was selling for on the world oil market, according to figures from the Oil & Gas Journal.  

Another problem for oil boom producers: Many of the nation's largest refiners make more money when they process cheaper heavier oil instead of the once-prized light crudes now gushing out of North Dakota and Texas.

That's true for two reasons. First, with American fuel demand lagging, Gulf Coast refiners are increasingly focused on selling their gasoline and diesel overseas, where they can charge higher prices. Exporting diesel is especially lucrative, and that gives refiners extra incentive to buy and process heavy crude. Light crudes typically yield more gasoline; heavier oil yields more diesel.

Second, refiners spent billions readying their Midwest and Gulf Coast plants to process cheap, heavy crude oil from Canada. For those reconfigured refineries, it's generally more profitable to use large volumes of heavy crude and less of the light variety.

Industry officials and others characterize the situation as a "mismatch" between the newly available domestic crude and the type of oil now sought by many refiners. While they applaud the new streams of domestic oil because of the jobs and economic benefits they are creating, export proponents say the refiners' preference for heavy oil means the U.S. light must be sold elsewhere to boost production and profits.

Opponents say the American market has several more years before it's saturated with light oil, and that refiners and producers are nimble enough to adjust during that time without eliminating the export ban. Others worry that unrestrained exports will accelerate the already-frenetic pace of oil production using hydraulic fracturing, a controversial extraction method also known as fracking.

Time Has To Be Now

The timing could be critical for swaying lawmakers on the export question because today's profitable opportunities for overseas sales may not last. The world of oil continues to shift dramatically, defying predictions and upending long-held market assumptions.

Competing supplies of light crude could emerge—from a resurgent, sanction-free Iran, for example—and cut into demand for the U.S. supply. Demand shifts or carbon restrictions could stifle export prospects by pushing world oil prices below break-even levels for U.S. producers. The recent historic move by Mexico to allow foreign investment to bolster its sputtering oil production represents yet another wild card that could have ramifications for both U.S. and Canadian oil producers.

In addition, the domestic oil boom itself may prove unsustainable. Current production is accelerating rapidly, but there are worries that the wells are being depleted faster than conventional oil wells. Concerns about negative environmental impacts from fracking could grow, strengthening public opposition and triggering government regulations.

And, the industry could find ways to profit from the status quo or simply win more export licenses. To some extent, that's already happening. The Bureau of Industry and Security has granted 103 licenses in the last fiscal year, up from 66 in 2012, according to the Financial Times. Much of that oil went to Canada, but not all of it.

Those approved exports are helping ease the glut of domestic crude, and so is the fact that U.S. refiners can, with some relatively inexpensive adjustments, process a good deal more light crude than they had planned to.

Still, exporting that oil would be substantially more profitable for domestic drillers ranging from industry giants like Exxon and Shell to fast-growing lesser-known players such as Continental Resources Inc.

So far, there's no formal industry campaign to get the export restrictions removed. But a June 2013 planning document from the industry's principle lobbying arm, the American Petroleum Institute, showed that the group had begun "the necessary legal analysis" to bolster the industry's push for exports, according to Bloomberg News, which obtained a copy of the document.

The API document indicated that it could frame the current U.S. oil export limits as a violation of World Trade Organization rules against restrictions on free trade, according to Bloomberg. The API didn't comment on its specific strategies, but spokesman Reid Porter told Bloomberg that "supporting the free market and supporting open trade is a key priority for our industry."

It's unclear how effective a free market argument could be in the world of oil, where most of the global supply is controlled by OPEC—a cartel-like organization whose members openly collude to influence the price of oil.

Given those and other factors, getting free rein for domestic oil exports won't be easy. But help might already be on the way. A shift in Washington could put industry ally Sen. Mary Landrieu (D-La.) at the helm of the Senate's influential energy committee, an ideal position for pressing the export case.

It's also worth noting that the fossil fuel industry often achieves the improbable. The industry has, for example:

► secured approval for natural gas exports despite widespread objections that domestic prices for the fuel will rise as a result, pushing up costs for consumers, power plants and manufacturers. The move also guaranteed that U.S. natural gas prices will be more volatile and unpredictable because they are now linked to global supplies and events—like crude oil— instead of being strictly a reflection of regional market forces.

suffered no public backlash for exporting record amounts of diesel into the more profitable international market, a trend that has helped increase costs for American farmers, airlines and freight carriers—indirectly adding to the price of every item produced with diesel-fueled heavy equipment or that travels to market by truck or train. 

continues to hold onto government subsidies and tax breaks despite being one of the most profitable industries in the world.

is winning support in its drive to eliminate the federal renewable fuel mandate—a controversial and problematic policy that has nevertheless succeeded in quickly cutting the amount of gasoline and diesel needed to run U.S. cars and trucks. As the mandate unfolded, ethanol grew to make up as much as 10 percent of each gallon of gasoline, for example. For a refiner, that represents a 10 percent cut in demand for pure gasoline.

Democratic Sen. Edward J. Markey of Massachusetts, a longtime critic of the oil industry, will be among those fighting to retain the country's existing oil export limits. He said domestically produced oil "should be kept here in America, to benefit our consumers and to reduce our dependence on imports from the Middle East."

Markey described the recent calls from the oil executives to remove the existing export ban as "a disturbing trend," and pointed to an apparent conflict in the industry's messages on energy security. "Clearly Big Oil's push for increased domestic drilling has nothing to do with increasing our nation's security, or else the industry wouldn't be seeking to export U.S. crude oil abroad," he said.

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