In October of 1973, the Arab members of the Organization of the Petroleum Exporting Countries declared an oil embargo against the United States in retaliation for U.S. support of Israel during the Yom Kippur war. The resulting oil price spike led to the Energy Policy and Conservation Act of 1975, which banned most oil and natural gas exports. The hope was that keeping most American crude oil at home would prevent price shocks and keep the nation from becoming dependent on foreign oil.
After years of debate, this December Congress passed and the president approved a measure to repeal the export ban. Domestic oil producers, battered by recent price drops, would love to sell their light, sweet crude at the higher prices that it commands outside of North America.
While the export ban may have served U.S. national security interests in 1975, it actually was counterproductive to those interests today, the oil industry argues. Others say lifting the ban is premature when the nation still imports millions of barrels of foreign oil every day, and could lead to higher gas prices for consumers.
Gregory Upton, an economist and assistant professor with the LSU Center for Energy Studies, says many of the arguments on both sides of the issue have been overstated. At the center’s annual Energy Summit in October, he argued that the move carries serious risks for Louisiana’s refining industry, but might also offer rewards that few people are talking about.
Louisiana isn’t really a big crude producer compared to Texas and North Dakota, says Ragan Dickens of the Louisiana Oil and Gas Association. But our pipeline and highway infrastructure support the industry, and men and women from Louisiana work in many of those shale plays that are responsible for so much production.
“The way it affects Louisiana is that rock thrown into the lake,” Dickens says. “It’s that ripple effect.”
Economist Loren Scott says Louisiana refineries primarily are built to process heavy crude. The West Texas Intermediate crude produced at shale plays in Texas and North Dakota is light and sweet. That misalignment leads to a bottleneck, which means WTI oil sells for less here than it does overseas. So the shale producers want to sell their product where it will draw the higher price.
“The major beneficiaries of lifting the export ban would be the people who are drilling for oil and harvesting oil in the Bakken play in North Dakota and the Eagle Ford in Texas,” Scott says. “I wouldn’t think it would have a whole bunch of impact on us [in Louisiana].”
Upton says several studies have predicted massive economic impacts from lifting the oil ban. According to some proponents, lifting the ban could create almost 1 million new jobs or boost GDP by as much as $1.8 trillion.
Upton says such studies are premised on the idea that removing the export ban would lead to higher prices for domestic producers, which causes an increase in production that leads to the economic benefits. But he argues that much of the price differential between WTI and the Brent crude produced in Europe, the Middle East and Africa can be attributed to shipping constraints within the U.S., not the export ban. If that’s right, that could mean that lifting the ban would have little to no impact on domestic prices.
“So Louisiana and other Gulf Coast producers are unlikely to have been impacted by the crude export ban, as the price differential between Brent and these Gulf Coast crudes is just simply not large enough to move these things overseas,” he says.
But Upton says the change still could have a dramatic impact on Louisiana’s economy. U.S. refineries, many of which are based in Louisiana, are thought to benefit from the export ban because it suppresses the price of domestic crude below the global price. If domestic producers could sell their crude worldwide, the thinking goes, U.S. refiners could lose the cost advantage they currently enjoy over their foreign competitors.
“For Louisiana, the removal of the export ban will remove a long-running federal protectionist policy for an industry that has served as an important component of our economy,” Upton says. “But in return, we’ll have the opportunity for the state to be at the center of an emerging global trading hub.”
The domestic shale boom has caused crude imports through the Louisiana Offshore Oil Port to decline. But if crude exports are allowed, LOOP becomes a two-way import and export terminal, possibly allowing Louisiana to become the epicenter of the international crude market, Upton suggests. Gasoline prices likely won’t be affected much by the change, he says.
SECURITY AND FAIRNESS
“Repealing or weakening the crude oil export ban could harm our national security,” a group of senators said in a letter to President Barack Obama last summer, noting that the United States still imports about 5 million barrels of oil a day. The argument is that it’s premature to lift the ban now, especially when the impact of lifting sanctions on Iran has yet to be determined.
But industry representatives argue that the ban actually harms America’s security interests. LOGA President Don Briggs says it “places Saudi Arabia in the driver’s seat to control the world crude market,” while restricting the United States’ “ability to be the oil-producing competitor that we should be globally.”
Ultimately, Upton didn’t take a position on whether the ban should be lifted or not. But during his Energy Summit presentation, he noted that major oil companies could export refined products with no limitations, yet crude producers couldn’t do the same. As one CEO put it, that’s like stopping farmers from exporting wheat but allowing Pillsbury to export all the processed flour it wants.
The U.S. also has approved some exports of liquefied natural gas, though it has yet to be determined how large that industry will be. Perhaps it’s time, Upton suggests, to treat all hydrocarbons the same and let the market sort it out.
ENERGY SUMMIT NOTES
The LSU Center for Energy Studies held its annual Energy Summit on Oct. 21, where CES economist Gregory Upton presented a fresh perspective on the debate over lifting the crude oil ban.
Among the other news from the summit:
• Frank Macchiarola, executive vice president for government affairs with America’s Natural Gas Alliance, said gas producers can meet new demand as the EPA tries to nudge the nation away from coal. But more pipelines are needed, he said, particularly in the northeast. Despite the low price of oil, he said, liquefied natural gas exports still have a future, as Eastern European countries in particular look for alternatives to buying Russian gas.
• Jennifer Vosburg, senior vice president with NRG Energy and president with Louisiana Generating, said the technology associated with microgrids, which can be used to distribute electricity when the main grid goes down, is improving. However, only about 124 are in operation nationwide. Such grids could serve industrial corridors and large residential neighborhoods. A hospital-based system could also power nearby schools, gas stations, supermarkets and public water facilities, helping the entire community recover from a disaster.
• Mike McGough, chief commercial officer with NuScale Power, said his company is making progress developing modular nuclear reactors that are safer, cheaper and more scalable than traditional nuclear power plants. He said a NuScale plant can be built for less than $3 billion, compared to about $8 billion for a traditional plant, and has the ability to shut itself down and cool itself off without power or human actions. The design might be certified by 2020, and other companies would be able to copy that design.
• R. Neal Elliott, associate director of research for the American Council for an Energy-Efficient Economy, said advances in sensors, communications and computation are enabling new advances in utility planning and management. Better data collection, and high-performance computing and analytic capability being applied to that data, can lead to lower costs and less spending on new infrastructure.
Originally published in the first quarter 2016 edition of 10/12 Industry Report. Read more from this issue at 1012industryreport.com.