Congressional Study Questions Embargo-Era Oil Policies

Lifting restrictions on U.S. crude oil exports could actually lower fuel prices for U.S. motorists and other consumers by contributing to a drop in world oil prices, according to a report from an influential congressional watchdog released on Monday.

The Government Accountability Office (GAO) also recommended that the U.S. Department of Energy review the size of the Strategic Petroleum Reserve (SPR) to ensure it remains appropriate as net oil imports fall.

Without a comprehensive re-examination, the Department cannot be sure the SPR is holding the right amount of crude and giving taxpayers good value for money, according to GAO ("Changing crude oil markets: allowing exports could reduce consumer fuel prices, and the size of the strategic reserves should be re-examined" September 2014).

By focusing on the effectiveness of the export ban and the strategic reserves, congressional investigators have called into question the relevance of two major programmes introduced in response to the 1973 Arab oil embargo.

GAO's report will help strengthen an emerging consensus among policymakers in Congress and the Administration about the need to adjust embargo-era policies in an era of fast-rising domestic oil output.

Influential and Impartial
GAO is one of three specialist non-partisan agencies which report to Congress and carry great weight with lawmakers and their staff as a source of impartial technical advice (the others are the Congressional Research Service and the Congressional Budget Office).

GAO's enormous influence and professional prestige is most likely the reason it was asked to do the study by Senator Lisa Murkowski, the top-ranked Republican on the Senate's Energy and Natural Resources Committee.

Murkowski, who represents the energy-producing state of Alaska, has been a strong supporter of lifting the export restrictions. She is already an influential leader on oil export policy and is in line to become the next committee chair if the Republican Party secures a Senate majority following mid-term elections next month.

Opposition to relaxing the ban has been led by some domestic refineries (which benefit from privileged access to cheap U.S. crude) and environmental groups (which worry about increasing emissions from U.S. oil and gas production).

But many lawmakers, both Republicans and Democrats, have expressed unease in case lifting the ban results in an unpopular increase in gasoline and diesel prices for U.S. motorists.

In requesting the study, Murkowski has tried to give other legislators political cover to take a potentially controversial decision once the current election cycle is completed.

GAO's study is part of an emerging consensus that lifting the ban would not increase fuel bills and might actually reduce them if it results in a worldwide drop in crude oil prices.

None of the technical studies reviewed by GAO showed an end to the export ban raising fuel prices for U.S. motorists. Instead, each of the studies showed that ending the ban would reduce pump prices, though the projected fall was marginal and ranged from just 1.5 to 13 cents per gallon.

If control of the Senate passes to the Republicans in January, which seems likely, Murkowski will use GAO's findings to intensify the pressure on her congressional colleagues and the White House for a change in policy.

Exports, Output and Prices
In producing its report, GAO evaluated four technical studies on the impact of allowing crude oil exports that have already been published and interviewed 17 experts and organisations from across the oil production and refining industries. The report summarises the current state of knowledge rather than presenting new findings, but lends them GAO's imprimatur.

GAO explains that domestic oil production has already jumped by almost 70 percent from around 5 million barrels per day in 2008 to 8.3 million in April 2014.

Even without an end to export restrictions, domestic production is forecast to rise further to 9.6 million barrels per day, according to the U.S. Energy Information Administration.

But export restrictions have kept domestic crude prices below international levels since 2011, mostly as a result of transport problems and constraints on refineries' ability to process the rising amount of light crude.

If export restrictions were lifted, the price of U.S. crude oil would rise closer to international levels, and higher prices would encourage more drilling.

The four studies GAO reviewed put the increase in domestic crude prices at between $2 and $8 per barrel in current prices.

The result would be an increase in domestic crude production of between 130,000 barrels per day and 3.3 million on average between 2015 and 2035.

But higher prices for domestic crude would probably lower, not raise, the cost of the refined fuels bought by consumers and businesses.

According to GAO: "The studies we reviewed and most of the stakeholders we interviewed suggest that consumer fuel prices, such as gasoline, diesel, and jet fuel, could decrease as a result of removing crude oil export restrictions."

"A decrease in consumer fuel prices could occur because they tend to follow international crude oil prices rather than domestic crude oil prices, according to the studies and most of the stakeholders. If domestic oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well," the congressional investigators wrote.

The impact of more U.S. oil production and exports on world crude prices would obviously depend on the reaction of OPEC and other oil producers, and whether they cut their own production to protect prices or cut prices to maintain market share.

On balance the studies all concluded the impact on international crude markers would be small but negative, which is why they predicted an average nationwide reduction of 1.5 to 13 cents per gallon in U.S. gasoline prices.

Lifting the ban would have benefits for investment, tax revenues, the trade balance and the size of the economy, but could impact on water resources, air quality and transport congestion.

GAO noted concerns from "two stakeholders" including "one refiner" that ending export restrictions could raise fuel prices in the U.S. Northeast and Midwest if it led regional refineries to close.

But that risk remains contested. Other stakeholders told GAO "they did not anticipate refinery closures as a result of removing export restrictions."

Reassessing the Size of the SPR
GAO also recommended the Department of Energy "undertake a comprehensive re-examination of the appropriate size of the SPR."

The Strategic Petroleum Reserve was established by the 1975 Energy Policy and Conservation Act (EPCA) to protect the United States against future supply interruptions.

It is part of an emergency stockpiling network maintained by members of the International Energy Agency (IEA) which requires them to maintain government and private stocks equal to at least 90 days worth of net imports. (Fuel switching and stand-by production capacity can also contribute to satisfying the 90-day requirement.)

The SPR is authorised to hold up to 1 billion barrels, though it currently stores 690 million, in a system of salt caverns along the U.S. Gulf Coast in Texas and Louisiana.

In the past, GAO has expressed concerns about whether the type of crude being stored in the SPR and the system for delivering it out remain appropriate. Now the agency is urging the Department of Energy to re-examine whether its size remains appropriate as part of a comprehensive review.

The Department has not issued a strategic plan for the SPR since 2004 and the last comprehensive re-examination of the SPR's size was back in 2005, according to GAO.

But net oil and product imports have already shrunk by 60 percent from 12.7 million barrels per day in July 2005 to 5.0 million in July 2014, and are expected to shrink further in future as shale output grows.

In May 2014, as a result of shrinking net imports, the SPR held enough oil to meet 106 days worth of net imports and industry stockpiles held an additional 141 days, putting total stocks at 247 days -- far above the 90-day stockholding obligation.

Some of the experts GAO interviewed questioned whether such a large SPR would be needed in future.

The agency was careful not to endorse that view. But it did insist that the SPR, like all government programmes, should be re-evaluated when circumstances change.

"The SPR may ... be at risk of holding excess crude oil. In addition, Department of Energy officials told us that SPR infrastructure is aging and will need to be replaced soon."

"If the Department of Energy were to assess the appropriate size of the SPR and find that it held excess crude oil, the excess oil could be sold to fund other national priorities."

(By John Kemp, Editing by David Evans)