Environmental advocates weighing in against US oil and gas exports and Keystone XL Pipeline need to be wary. The belief that creating barriers to exports and infrastructure will lock oil and gas under the ground is a misplaced one. Markets will clear, as long as the demand for fossil energy remains.
The United States as a superpower and leading global economy has a vital interest in free trade and open markets in energy. The United States, by virtue of both its superpower role and its position as the largest oil consuming country, has a direct interest in preventing energy supply from being used as a strategic weapon.
Barriers to foreign investment in energy resources in key producing countries generally contribute to supply constraints, leading to sharp rises global prices and potentially harming economic growth in major oil consuming countries such as the United States and its key industrialized trading partners. For three decades, the United States has recognized this and has actively supported open markets and free trade in energy. To continue to do so, the United States cannot restrict its own energy exports. By leading the charge on new energy technologies and exports, the United States now has the ability to fashion a global energy world more to its liking where petro-powers can no longer hold American drivers hostage or turn off the heat and lights to millions of consumers in the United States or allied countries to further geopolitical ends.
As Senators Ronald Wyden and Lisa Murkowski so aptly pointed out at historic recent Senate Energy and Natural Resources committee hearing on the subject of US crude oil exports (the first of its kind in 25 years), now is an important time for the United States to begin a thoughtful debate and re-evaluation of current export policy. I presented at the hearing and raised the importance that US policies avoid creating market distortions that, while temporarily benefiting some consumers in particular U.S. regions, may create more questionable medium to longer-term trends that could turn out to be more damaging than helpful. Our history of energy policy is replete with such negative examples, such as President Nixon’s inflation-targeted price controls on natural gas which ultimately caused a long lasting shortage of natural gas supply in the United States and a two-tiered system of oil pricing that ultimately, in practice, incentivized imports of foreign oil.
We are already exporting our new rising unconventional supplies of oil and gas in other forms: our tight oil in the form of refined products exports to Europe and Latin America; our natural gas in the form of displaced coal now being shipped to Europe replacing other fuels.
Since the United States participates in international trade, blocking exports of one or more particular commodities or manufactured products cannot “protect” U.S. consumers from international prices.
Ultimately, the discussion of banning some energy commodity exports and not others is a question of who in the United States economy gets the profits from exports. U.S. gasoline and diesel exports will link prices for U.S. consumers to international markets in the exact same way as crude oil exports. And, any net exports from the US will hurt OPEC eventually, whether it is refined products or crude. That is because rising exports of U.S. refined products to international markets will eventually erode profit margins for European, Asian and Latin American refiners, causing them to reduce their own refinery throughputs, lowering demand for crude oil generally and thereby weakening international crude oil price levels. In this way, rising U.S. crude oil production impacts global crude oil markets through displacement via U.S. refined product exports and it is not correct to say that OPEC has been shielded from the impact of rising US production even if it seems to be trapped in the US midcontinent. Rising US tight oil production is impacting OPEC. Global oil prices would be even higher, but for ongoing disruptions in supplies from Libya, Nigeria, and Sudan, among others.
Lobbying against exports or export infrastructure is not proving to be a successful way to lower North American oil production and thereby lower greenhouse gas emissions. Canadian oil sands exports are moving by rail. US natural gas is being shipped to Europe in the form of displaced coal moving on ships across the Atlantic. The result is rising greenhouse gas emissions and other unintended environmental and safety consequences.
The only way to keep oil under the ground is to lower demand more permanently through energy efficiency, lifestyle changes or externality taxes or pollution markets.
Keystone demonstrations have proven successful only in one regard: convincing producing companies of the potential benefits of carbon capture and sequestration technology. With America’s oil and gas potential on the rise, returning to the strategy of calling for mechanisms for a realistic carbon price and other kinds of green finance is a better path to the task at hand, as some world leaders pointed out in Davos earlier this month. Environmental groups might do well to take stock of their tactical achievements from advocacy against exports/pipelines and regroup to more effective ways to bring about change. In the meantime, as long as demand for oil remains strong, exports should be part of the arsenal of policies that the United States can tap to ensure that resource nationalism does not deprive the global economy of needed energy supply.