Washington Needs to Embrace the New American Century: More Thoughts on US Exports

I don’t always agree with New York Times columnist Thomas Friedman but his column today is a must read. In a nutshell, he is arguing that innovation in the United States is driving us to greatness again (shale, the internet of things, 3-D printing, etc.) and potentially fantastic job creation but he notes correctly that our political leaders in Congress are failing to join in the success. In fact, they are sapping us of the strength of our success. Notes Friedman, Washington is the place where good ideas “go to die.”

What Friedman fails to explain in his essay is the reason why this is so. Hence, this blog which is intended to lay it bare: Washington D.C. is the place where incumbent industries that are failing to innovate go to protect themselves from competition.

The US refining and petrochemical industry is a great case in point. Shrouding itself in the banner of protecting US consumers, certain refiners, airlines and petrochemical firms are trying to get Congress to back them for an exclusive right to export energy. They argue that relying on markets to decide how much US crude oil and natural gas leaves American shores is dangerous to consumers. But what they fail to explain to the American public is that every step of the way, for a decade or more, the US downstream refining and petrochemical industry has been lobbying state legislators and Congress to block any constructive policy that would increase availability of alternative fuels or require them to provide the kind of normal operational inventory stockpile coverage that protects markets from unexpected price volatility and price gauging.  

In 2001, I participated in a 52 member panel on US Strategic Energy Policy where we recommended that states review minimum inventory for fuel switching where feasible and also fiscal incentives or regulations to industry to build inventories in advance of seasonal demand increases.

During the 1990s and 2000s, gasoline inventories stopped accumulating on a seasonal basis in line with demand trends. As “just-in-time” refinery production practices and rising export business orientation has progressed as the key means for US refiners to reap profits, larger swings in local gasoline and other refined product prices have become the norm.

In 2008, I revisited the issue of inventory policy again in light of the fact that Hurricanes Katrina and Rita exposed the difficulties of allowing the US refining industry to operate like Dell Computer with just in time inventories.

I advocated for regulators to mandate a minimum level of mandatory refined product inventories in the United States. Such a system exists in Europe and Japan and allowed Europe the flexibility to provide gasoline to the United States during the production shortfalls that occurred following Katrina and Rita, preventing worse dislocations. The system helped Japan in the aftermath of the Fukushima crisis.

A US government program reserving the right to use for strategic national emergency releases a portion of this mandated minimum supplementary industry refined product stocks of 5% or 10% of each refining company’s average customer demand would ensure that needed supplies of gasoline or heating oil in inventory to ease the impact of sudden weather related demand surges or accidental disruption of consumer supplies.

The US Federal Government and/or forward position states should also consider strategic stockpiles of motor fuel to be used to supplement supplies during evacuations from severe storms to prevent fuel outages along key evacuation routes and to allow emergency vehicles access to fuel. Regional gasoline demand in the US Southwest was at least twice normal levels in during the evacuations during Rita and Katrina. For the days leading up to Hurricane Rita’s Sept. 24 landfall, the evacuation of some 3 million people pushed gasoline demand to an estimated 45 million gallons per day – about two times higher than normal. Distribution systems in storm affected areas need to be shut down for safety reasons, meaning that alternative supplies must come by truck from unaffected areas that are contiguous with affected zones.

If we had the correct inventory policy, then consumers could rest assured that they could gain from all the benefits from US crude oil exports without fear that gasoline prices would be determined to their disadvantage in a temporary supply crunch. The New York Times recently reported that the industry is conflicted on the topic of oil exports. In my testimony to the US Senate Energy and Natural Resources Committee, I pointed out that given that US gasoline and diesel fuel exports are not banned, debate about crude oil exports focuses in reality solely on who gets the profits from exports, as the “oil” will be exported one way or the other, either in the form of refined products like gasoline (giving refiners the profits) or as crude oil (giving drillers the profits).

Refiners claimed that exporting value added products creates jobs but this is not actually correct. Whether a refinery operates at 75% of capacity or 90% of capacity, it is probably going to employ roughly the same number of workers. And, refining and petrochemicals are capital intensive industries, not labor intensive industries, as we know from Saudi Arabia which is having trouble establishing quality jobs for its citizens. Moreover, one has to ask the question whether refiners would actually plunge their profits back into building new facilities given the long term direction of US gasoline demand is down. In California, refiners are arguing vociferously against alternative fuels saying that lower gasoline demand means that they will close their facilities in the state, not improve their efficiency.

On the other hand, investment patterns in the US unconventional oil and gas space show that upstream investors are reinvesting cash flows into new oil production. Allowing exports of field condensate might be critical to preventing shut-in of valuable domestic oil and gas production if condensate output overruns US and Canadian domestic use capabilities, as expected by 2017.      

US refiners and petrochemical companies like Dow Chemical are among a long list of large incumbent industries who are having trouble innovating in the New American Century. Instead of thinking about how to profitably tap new innovations and big data analytics to be safer, more efficient and less carbon producing, they run to Capital Hill or state regulators for protection against other US innovators capturing profits that they used to have. The same pattern is true in other industries as well.

When mid-term elections gear up for 2014, voters should consider whether their representatives are embracing the New American Century or whether their current representative has been voting to curb the growth of American global power and economic promise by catering to the beck and call of big industry incumbency.

A vote for innovation and open trade is a vote for our future. We don’t need to line the pockets of big legacy industry to ensure jobs from going abroad. We need to back innovation and entrepreneurship in energy, in transportation, in tech and in manufacturing to lock in a promising future that can address new challenges from cyber threats, severe weather and global competition.