Oil and gas exports—one policy change, many benefits

Will allowing oil and gas exports spark a new round of economic growth?

Pritzker“Businesses that sell to foreign markets put more people to work in high-quality jobs, offering more Americans the chance to earn a decent wage,” claimed the Obama Administration’s Secretary of Commerce Penny Pritzker in a March 18 Wall Street Journal (WSJ) opinion piece.

She makes a strong case for U.S. exports: “jobs in export-intensive industries pay up to 18% more than jobs not related to exports.” Her premise is: “The U.S. economy ended 2014 on the uptick, and exports added to the momentum.” Noticeably absent is any mention of the potential for “high-quality jobs” and economic “uptick” that would come from the export of America’s abundant oil-and-natural gas resources—something an executive order could expedite; something her office could champion.

Pritzker states: “From large enterprises and multinational corporations to small startups and local manufacturers, an increasing number of businesses are realizing that their customer base is no longer around the corner, but around the world. They understand that 95% of the world’s customers live outside the U.S., and to succeed in the 21st century, they must find a way to reach consumers in ever-expanding markets.” Penny, this is especially true for American energy!

Due to the modern technologies of horizontal drilling and hydraulic fracturing—developed and refined within our borders—the U.S. is producing more oil and natural gas than in decades. So much that we are nearly out of places to store it. We know how to produce it safely and cheaply. But, unlike the airplanes Pritkzer’s co-author Jim McNerney, CEO of Boeing Co., builds, the oil and gas industry is prevented from sending its abundance to “foreign markets”—including our allies in Europe who are dependent on energy from a source that uses it as a weapon against them.

The same day the WSJ published Pritzker’s piece, it featured a news story announcing: “(S)ome of the world’s biggest oil companies are starting to give up” on “hydraulic fracturing wildcatting in Europe, Russia, and China.” This, despite the fact: “Eastern European officials who were eager to wean their nations off of Russian gas welcomed the explorers.” It explains: “Wells in Poland and China can cost up to $25 million each, while American wells on average cost about $5 million”—resulting in overseas costs to produce a barrel of shale oil that are higher than what it can be sold for with the current worldwide low prices.

In trade negotiations, the U.S., according to the New York Times (NYT), “typically argues that countries with excess supplies should export them.” We have excess CheniereSabinesupplies of both crude oil and natural gas that has driven down prices—resulting in “trouble for an industry that has done much to keep the national economy afloat in recent years.” We “should export them”—but we aren’t.

“Why can’t we export crude oil and natural gas?” you might ask—especially when the U.S. can export refined petroleum products such as gasoline, diesel, and jet fuel. The NYT explains: “In 2011, the country pivoted from being the world’s largest importer of petroleum products to becoming one of the leading exporters.” At that point, for the first time in 21 years, refined petroleum became our number one export product—though Pritzker never mentioned that.

The “energy world changed.” But, as the NYT points out, exports could soak up the excess production, “but there are still political hurdles.”

For crude oil, the problem is energy policy enacted before the “energy world changed.” Signed into law in 1975, after the 1973 Arab oil embargo shook the U.S. with high oil prices, the goal of the Energy Policy and Conservation Act, according to the International Business Times, was “to stifle the impact of future oil embargos by foreign oil producing countries.” The result was a ban on most U.S. oil exports—though some exceptions can be made and the Commerce Department has recently given export licenses to two companies for particular types of oil. The WSJ reports: “Ten companies have applied for similar ruling to export oil.”

For natural gas exports, the problem is two-fold. Exporting natural gas is not prohibited, but it is not encouraged or made easy. In order to export natural gas, it must be converted into Liquefied Natural Gas (LNG)—which is done at multibillion-dollar facilities with long lead times for permitting and construction that require purchase contracts to back up financing. Many potential customers for U.S. LNG are non-Free Trade Agreement (FTA) countries. Currently, Breaking Energy (BE) reports, “the Department of Energy (DOE) has issued five final and four conditional approvals for LNG export to non-FTA countries.”

The Financial Times says about two dozen U.S. LNG export facilities have been proposed with four “already under construction, which have contracts to back up their financing.” Last month, according to Reuters, looking to reduce dependence on supplies from Russia, Lithuania signed an agreement to purchase LNG from the U.S.’s first export terminal: Cheniere Energy Inc.’s Sabine Pass, which is expected to send its first cargoes by the end of this year.

Fortunately, as I predicted in November, there are fixes in the works that, as energy historian Daniel Yergin said, symbolize “a new era in U.S. energy and U.S. energy relations with the rest of the world.”

BarrassoIn January, Senators John Barrasso (R-WY) and Martin Heinrich (D-NM) introduced the LNG Permitting Certainty and Transparency Act to expedite DOE decisions on LNG export applications. It specifically requires a decision on any LNG export application within 45 days after the environmental review document for the project is published. Currently, applications to export natural gas to non-FTA countries require the Secretary of Energy to make a public interest determination which includes a public comment period. Not surprisingly, “environmental groups are lobbying the Obama Administration to veto the bill.” BE states: “The bipartisan bill could garner enough votes to gain a filibuster-proof majority in the Senate.”

A month later, Representative Joe Barton (R-TX), along with 14 co-sponsors, introduced a bill to end the crude oil export ban: HR 702. On March 25, the House Foreign Affairs Committee will meet to debate and vote on the bill—though its passage is not as optimistic as the LNG bill. Bloomberg sees that lawmakers on both sides of the aisle are weary, fearing “that they’d be blamed if gasoline prices climb after the ban is lifted.” Oil producers support lifting the ban, while refiners oppose it.

In October, David Goldwyn, the State Department’s coordinator for international energy affairs in the first Obama Administration, said: “The politics are hard.” He added: “When the economics become overwhelming the politics will shift.” The NYT stated: The telltale sign of a glut will be a collapse in the West Texas Intermediate (WTI) price, the principal American oil benchmark, which is currently [October 2014] about $3 below the world Brent price.” It continues, “If the spread cracks open, the economic arguments for free export of domestic crude will probably win the day.”

That day may have come. On March 13, the WSJ editorial board announced: “WTI now trades 20% below the world market price.” Holman Jenkins, who writes the Business World column for the WSJ, says: “Oil producers are already being denied a premium of $12 a barrel by not being allowed to export this oil.” Thomas Tunstall, research director at the University of Texas at San Antonio’s Institute for Economic Development, reported: “Before the rapid increase in U.S. oil and gas production, WTI historically sold at a slight premium to Brent, typically about $1-$3 per barrel.”

“U.S. pump prices are mainly tied to the price of Brent crude, which is freely traded on the world market and is higher than it might otherwise be because of the ban on U.S. exports,” explains the WSJ. “If U.S. producers were allowed to compete globally, prices of Brent and WTI would converge over time, and U.S. gasoline prices would come down, all things being equal.”

Now, the “industry that has done much to keep the national economy afloat” is in trouble. There have been some 74,000 layoffs in the U.S. oil patch since November.

If Congress could muster up the political will to lift the arcane oil export ban, the U.S. could emerge as a major world exporter, which according to the NYT, would result in the “return to a status that helped make the country a great power in the first half of the 20th century.” Yergin adds: “Economically, it means that money that was flowing out of the United States into sovereign wealth funds and treasuries around the world will now stay in the U.S. and be invested in the U.S., creating jobs. It doesn’t change everything, but it certainly provides a new dimension to U.S. influence in the world.”

Pritzker brags that the Commerce Department has “worked with the private sector to help businesses reach customers overseas; … to open new markets for U.S. goods and services; to reform the export-control process; and to overcome barriers to entry.” For U.S. oil-and-gas producers the biggest barrier to reaching customers overseas and opening up new markets is our own energy policy—something the administration and Congress have taken steps to fix. According to Bloomberg, if they knew the public was with them, lawmakers could easily save American jobs and investment, lower gasoline prices, help balance our trade deficit, aid our allies, and increase U.S. influence in the world.

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About the Author: Marita Noon

Marita Noon

CFACT policy analyst Marita Noon is the author of Energy Freedom.,