End of crude export ban rockets from inconceivable to possible

First in an occasional series

Whether or not the senior Republican on the Senate Energy and Natural Resources Committee today embraces a relaxation of 39-year-old limits on exporting domestic crude, Alaska Sen. Lisa Murkowski's head-on engagement with the incendiary question opens a new chapter in the unpredictable drama of the U.S. oil and gas surge.

When Murkowski unveils her report on "renovating the architecture of U.S. energy exports," the sense of economic urgency that last year propelled three natural gas export facilities in three months to Energy Department approval will begin seeping into the once-untouchable crude export ban. Election-year politics and the potent legacy of 1970s price shocks are formidable obstacles to the industry's push to ease the ban, but what might appear a heavy lift for even the lobbying power of Big Oil could yet prove a savvy move that emphasizes the power of fossil fuels to ease the massive U.S. trade deficit and boost the national economy.

"The underlying question here is much bigger than the specific export of hydrocarbons: What, strategically, is the U.S. going to do with the petrochemical boom?" Paul Bledsoe, a senior fellow on energy at the German Marshall Fund and former Clinton White House aide, said in an interview.

"One theory is that the U.S. should use it as a competitive advantage, to revive our manufacturing sector," Bledsoe added. "For a while, that seemed ascendant -- and now, the more global market-oriented school seems predominant, led in part by the willingness of the Obama administration to entertain export licenses" for liquefied natural gas, or LNG.

The American Petroleum Institute teed up Murkowski's exploration of energy exports days before Christmas, warning that the ban risks "trapping light domestic crude within our borders" if shale oil production continues to reach anticipated highs while refiners on the Gulf Coast are configured to process heavier, sour grades of fuel that were historically imported (Greenwire, Dec. 20, 2013).

But API did not outline specific legislative or regulatory routes to ease export constraints that Congress first passed in 1975 -- and some analysts say such paths may not be necessary. Existing law allows overseas sales of crude oil should they meet "the national interest," a standard that theoretically empowers President Obama to clear the way for light oil exports.


"As the lawyers start to dig into this, they're going to find lot of places where there is flexibility in the statute," Trevor Houser, a partner at the Rhodium Group consulting firm and visiting fellow at the Peterson Institute for International Economics, said in an interview.

Yet other oil market observers echo API chief economist John Felmy, who last month urged lawmakers to explore the free trade upside to lifting the ban rather than focus on "ad hoc" methods of skirting it "that can be reversed."

Stronger avenues to easing the ban, however, need not necessarily involve Congress, as former deputy Commerce Secretary Theodore Kassinger observed in a November presentation at the Center for Strategic and International Studies.

An administration could set up licensing rules for the Commerce Department to approve exports so long as the recipients of domestic crude held free trade agreements with the United States, similar to the standard currently in place for DOE approval of LNG export applications, explained Kassinger, now a partner at the law firm O'Melveny & Myers.

A legislative end to the ban, according to Kassinger, could involve enshrining the same free trade agreement rule of thumb or changing EPCA to allow but not require limits on crude exports deemed to violate the national interest.

Convincing the famously fractured Congress to change such a deeply entrenched energy policy is no easy task. But even before Murkowski begins her speech on the subject this morning at the Brookings Institution, oil-state colleagues in both parties already are indicating openness to taking on the export ban.

Sen. Mary Landrieu (D-La.), poised to take the reins at the Energy and Natural Resources Committee assuming Sen. Max Baucus (D-Mont.) is confirmed as ambassador to China, said yesterday that the Obama administration should look at easing the ban and did not rule out eventual congressional involvement. Sen. John Hoeven (R-N.D.), whose state is taking a harder look at light crude safety after the derailment of a Bakken oil train, endorsed looking at a change in the ban so long as price and supply can be juggled to maintain public buy-in.

"Five years from now," GOP energy lobbyist and strategist Mike McKenna said in an interview, "exporting crude is going to be fairly noncontroversial. But when in the next five years it becomes noncontroversial, I can't predict."

An oil lobby divided?

API's support for easing the crude export ban comes amid a long-running tussle over new infrastructure that could help bring shale oil and gas to markets more quickly, focusing on new pipelines. The industry opted to join a fresh battle over exports in response to recent economic signals that suggest refining capacity -- not "transportation bottlenecks" -- is now driving the lower price of domestic light oil relative to counterparts priced on the world market, Houser of the Peterson Institute said.

Refiners could idle some equipment designed to process heavier oils in a bid to use more of the light oil being pumped out of North Dakota and Texas, but "refiners benefit far more than consumers from this trend" of oil pricing imbalance, added Houser, who served as a U.S. negotiator during the 2009 U.N. climate talks in Copenhagen, Denmark, and this week will release a book on the economics of the energy boom.

"This is not an issue that the oil and gas industry as a whole has a clear position on," he said. "Upstream producers have a clear interest [in easing the ban], but refiners don't."

The CEO of refiner Tesoro Corp. continued to point to infrastructure hurdles last month when asked about the viability of lifting the export ban. "[Y]ou do have to remember that those crudes have to get to the water to clear to then be exported," Greg Goff told investors and reporters, adding that "we don't have, really, any idea of where the government is going to come down on that."

Any simmering tensions between refiners and upstream oil producers over crude exports would not be without precedent. Divisions erupted within the petrochemical industry last year over LNG exports, as Dow Chemical Co. left the National Association of Manufacturers in protest of what the company said was the lobbying group's lack of a "neutral" stance on unrestricted overseas sales of a commodity that provides a valuable feedstock for chemical producers (Greenwire, Jan. 22, 2013).

Jobs, KXL and the pump

At the heart of the oil industry's case for foreign crude sales are employment and growth, the same push made by proponents of more terminals to feed foreign demand for LNG as well as domestic coal on track for export from the West Coast. Hydrocarbons and petrochemicals constitute 16 percent of gross U.S. exports, according to the Center for Strategic and International Studies, with oil and gas enshrined as the nation's No. 1 export.

Ultimately, then, the export clash may come down to the same dueling messages that have dominated another energy debate focused on "the national interest": Keystone XL.

Just as KXL proponents tout the economic value of more heavy oil processing and pipeline construction jobs, boosters of looser export limits contend that every $1 billion drop in the U.S. trade imbalance thanks to stronger energy sales could create as many as 5,000 jobs. Just as KXL opponents argue that the environmental hazards of that project would be compounded by an increase in Midwestern gasoline prices thanks to the end of regional crude pricing gaps, opponents of allowing overseas crude sales warn that more exports would drive up costs for consumers at the pump.

"Because lifting the ban would cause U.S. benchmark oil prices to rise, companies likely would have a greater incentive to increase production," Tyson Slocum, director of the energy program at the watchdog group Public Citizen, said in a statement yesterday. "With all of the increased production coming from controversial fracking techniques, lifting the ban not only would raise gasoline prices for U.S. families, but would create bigger environmental headaches."

Backing an end to the ban is "a little risky," the GOP lobbyist McKenna acknowledged, "because every time gas prices go up, you're going to wind up getting dinged."

Still, he added, Republicans have a poll-tested response to gas price spikes in calls for more production, while Democrats have made less headway in public surveys with their corresponding calls for energy efficiency.

"When most people think about energy independence, they don't think about a great big wall around the country," McKenna said. "They think about, 'Could the U.S., if we needed to, supply all of our own energy?'"

Reporter Nick Juliano contributed.

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