WASHINGTON — As a new year dawns in the nation’s capital, the Obama administration and Congress find themselves grappling with a scenario that was unthinkable just a short time ago: What to do with the domestic oil flowing out of West Texas, North Dakota and other states?
The climb in domestic crude production has created a dilemma for both lawmakers and the White House, who are facing new pressure from oil companies to relax the nation’s 38-year-old ban on exports of the unprocessed product.
The current restrictions — born in the aftermath of the oil embargo of the 1970s — benefit some domestic refiners, who are selling record amounts of gasoline and other refined products to foreign customers. But their gains are coming at the expense of oil producers who face the prospect of dropping domestic prices for the commodity, as the U.S. produces more light sweet crude than it can handle.
“If we wouldn’t have had this massive, huge increase in the development of oil and natural gas, we wouldn’t be having this discussion; we’d still be living in the shadows of the 1970s,” said Charles Drevna, head of the American Fuel and Petrochemical Manufacturers. “This is a good problem to have.”
Consider that the U.S. exported some 2.6 million barrels of finished petroleum products each day in 2012, according to the government’s Energy Information Administration, more than double the 1.2 million barrels logged daily in 2007.
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Meanwhile, there is a growing glut of light, sweet crude that is unearthed in the U.S., and barred from export. Many U.S. refineries, particularly along the Gulf Coast, were designed to process heavier supplies from Venezuela, Saudi Arabia and Canada, and while some have adapted to handle more of the light, sweet domestic product, bigger changes are unlikely soon.
“It’s all about getting the oil to market,” said Ed Hirs, an energy economist at the University of Houston. Where crude exports may be constrained, “a refinery manager in Beaumont has a choice: He can sell to a gas station here at the corner of 610 and Westheimer, or he can sell it to a gasoline station in Tokyo or Dubai.”
Republican Sen. Lisa Murkowski of Alaska is set to officially launch the Capitol Hill debate over crude exports on Tuesday, with a white paper and speech touting the economic benefits of selling U.S. energy abroad.
But Obama administration officials, major oil company executives and newspaper editorial boards all have been addressing the issue recently. ConocoPhillips and ExxonMobil did it first, with executives telling a Houston audience and the Wall Street Journal that it was time to end the export ban. Then, last month, Energy Secretary Ernest Moniz suggested that the crude export ban deserves re-examination “in the context of … an energy world that is no longer like the 1970s.”
Changes soon unlikely
Changes could come from Congress, which could rewrite the underlying ban imposed in 1975, or the Obama administration’s Commerce Department, which could opt to more liberally interpret an existing national interest exception in the governing statute. Existing exceptions include exports to Canada as well as foreign sales of oil produced in Alaska’s Cook Inlet, some heavy crude produced in California and oil transported through the Trans-Alaska Pipeline System.
But any major upheaval in U.S. oil export policy is unlikely anytime soon, especially in an election year, when voters’ concerns about spiking gasoline prices - and lawmakers’ fear of being held accountable for them at the ballot box – are likely to hold sway on Capitol Hill.
The issue is a political hot potato for the White House, which may be worried as much about straining relations with Saudi Arabia as populist backlash from motorists here at home. Saudi Arabia is both a major U.S. ally and a leading crude oil exporter.
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“There’s a lot of opportunity, but it’s going to involve having a full discussion and a full debate about what laws are on the books from the ’70s that no longer make sense,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. “We need to be thoughtful in how we reform those rules because there is a greater chance of upheaval in Saudi Arabia today than there has been in a long time.”
As it is, U.S. lawmakers and policymakers still are working to come to grips with wider exports of natural gas, which have much higher physical and economic barriers, in the form of the multibillion-dollar facilities that are required to super chill the fossil fuel until it is transformed into a liquid capable of being tanked around the world.
The Energy Department has issued five licenses to broadly export liquefied natural gas, but only one planned liquefaction facility has received other necessary approvals from the Federal Energy Regulatory Commission. More than 20 other broad gas export applications are pending at the Energy Department.
Concern for consumers
Critics say that allowing unchecked oil exports would be bad for U.S. consumers.
For instance, Sen. Robert Menendez, D-N.J., says exports could boost domestic crude prices, narrowing the gap between U.S. and global oil. Where the price of the global benchmark, Brent crude, averaged $108 per barrel last year, the cost of a barrel of U.S. benchmark West Texas Intermediate was $10 less.
“Big Oil clearly wants to pad their record profits and fetch a higher price for their oil,” Menendez said. “I believe we should be more worried about the bottom line for American families.”
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But export backers say more foreign sales of high-quality, coveted light sweet crude from the U.S. could help lower global oil prices, even as imported heavy crudes – including heavily discounted Canadian supplies – keep running through Gulf Coast refineries.
In the meantime, some oil companies are adapting by stepping up their minimal processing of both crude oil and the condensate flowing out of U.S. fields, so they qualify for export under existing laws.
Jaffe predicts that the first step in easing the export ban would be a change in the classification of field condensate so that it can easily be sold overseas without additional processing or possibly even waivers from the Commerce Department.
The oil industry casts the issue as a logistical challenge, as refiners have already pared imports of light sweet crude and now may be using as much as they can handle of the domestic supply.
Hirs noted the dynamic comes against declining oil consumption domestically, which has dropped some 3 million barrels per day since a peak in 2008.
“We still have the refining capacity of 20 million barrels a day and we are exporting 3 million barrels a day of refined product,” the UH economist said.
“Really, it’s in the national interest of the United States to effectively and economically advantage its processing capabilities,” Hirs said. “With an influx of light sweet crude beyond what we can process – without retooling and rebuilding refining (facilities) – it’s in our economic interest to go ahead and export that.”