Kemp: U.S. Crude Export Controls Crumbling

In the three months ending in August, the United States and Canada swapped a record amount of crude oil with each other, one of the more bizarre consequences of outdated U.S. export controls.

Because U.S. oil producers cannot export crude oil to any other country, crude is sent north to refineries in Canada, even if it would make more sense to ship it to refineries in Europe, Latin America or Asia.

In some instances, crude is even shipped past U.S. refineries on the East Coast that want to take it and on up north because of the antiquated restrictions on coastwise trade within the United States imposed by the Jones Act ("Canada's far east refinery swaps Iraqi crude for U.S. shale", Nov. 4).

U.S. oil producers have been permitted to export unrefined petroleum to Canada since the 1980s, when the Reagan administration exempted Canadian refiners from the general ban on crude exports.

In June 1985, President Ronald Reagan issued a formal determination that "domestic crude oil may be exported to Canada for consumption or use therein."

As required by law, the president made formal findings that crude exports were in the national interest; would not diminish the total quantity or quality of crude available in the United States; would not increase reliance on imported oil; and were consistent with the Export Administration Act of 1979 and the Energy Policy and Conservation Act of 1975.

In December 1988, shortly before leaving office, Reagan made additional findings to permit exports of up to 50,000 barrels per day (b/d) of more severely restricted Alaskan crude for consumption or use in Canada as part of the U.S.-Canada Free Trade Agreement.

But in an era when U.S. oil production was declining and the country was increasingly relying on imports to supply its refineries, domestic oil producers made little use of this flexibility to market unrefined oil north of the border. Between 1985 and 2011, U.S. exports to Canada generally averaged well under 50,000 b/d, according to the U.S. Energy Information Administration (EIA).

Thanks to the shale revolution, however, U.S. output has jumped by more than 3.7 million b/d (75 percent) since 2007. Increasing amounts of U.S. crude are now being exported north as producers and traders try to find alternatives to saturated markets at home. Between June and August 2014, a record 378,000 b/d of U.S. crude was exported for refining in Canada.

But at the same time as more and more U.S. crude is heading north, a record amount of Canadian is heading south. In the same three months, Canada exported a record 2.8 million b/d of crude to the United States -- up from 2.5 million in the same period in 2013 and 2012, 2.2 million in 2011 and just 1.5 million b/d back in 2003. (http://link.reuters.com/zyc43w)

SINGLE REFINING AREA

Two-way trade in crude allows both countries to optimise their refining assets. Light U.S. crude is being exchanged for heavier Canadian production to enable refineries on both sides of the border to use their distillation facilities more efficiently.

In effect, North America is fast becoming a single refining area with free trade in both crude and refined products between the United States and Canada. But it also makes a complete mockery of the remaining restrictions on crude oil exports to the rest of the world.

In theory, U.S. crude can be exported to Canada for "consumption or use therein" but once the oil has left the United States there are no records and no controls on where the products refined from it end up.

Refiners in both the United States and Canada can export gasoline, diesel, home heating fuel and jet fuel almost anywhere in the world without any restrictions.

CRUMBLING CONTROLS

In the words of the 1979 Export Administration Act, "it is the policy of the United States to use export controls ... to restrict the export of goods where necessary to protect the domestic economy form the excessive drain of scarce materials and to reduce the serious inflationary impact of foreign demand" (Section 3(2)(C)).

But if that is the purpose of the crude export controls, they are both failing and unnecessary. The ban has become a sort of leaky dam. In August 2014, the United States produced 8.6 million b/d of crude (including condensates). But it exported 390,000 b/d of crude, as well as 1.3 million b/d of diesel, 400,000 b/d of gasoline, 200,000 b/d of jet fuel, 330,000 b/d of heavy fuel oil and 550,000 b/d of petroleum coke.

All told, crude and product exports from the United States amounted to more than half of total domestic crude production. Given the law of one price, U.S. consumers and businesses cannot be protected from international price fluctuations when so much crude and products is already being sent abroad.

Even the remaining restrictions are beginning to crumble. Two companies have received permission from the U.S. government to export minimally processed condensates, in a controversial ruling earlier this year by the Commerce Department.

Now a third company, BHP Billiton (BHPLF) , relying on those earlier rulings as a precedent, is moving to export condensates without securing prior clearance, in effect daring the government to commence enforcement proceedings ("New oil shipment shows cracks in U.S. export ban," WSJ, Nov. 4).

Consumers and businesses in North America already pay international prices for refined fuels (adjusted by the cost of transport) -- as shown in a recent series of studies by the U.S. Energy Information Administration and private consultants.

So the idea that the U.S. crude export ban is reserving scarce petroleum supplies for consumers and businesses in the United States (and Canada) or protecting them from price increases is simply wrong.

TRANSATLANTIC PARTNERS?

The main effect of the remaining crude export controls is to distort trade in crude oil and refined products (as well as creating an enormous amount of lucrative work for lawyers).

The United States and Canada have now created in practice what they have long had in theory: a free trade area in crude oil. But like other regional free trade agreements, this one discriminates against trading partners outside the area.

In effect, the export controls divert U.S. crude towards Canada when it might be more profitable and more efficient to sell it to refiners elsewhere.

The European Union, where refineries are particularly disadvantaged by the export ban, has begun to press the United States for it to be lifted as part of an eventual Transatlantic Trade and Investment Partnership agreement.

"I think unquestionably there will be pressure internally in the U.S. as well as externally from others like Europe, who should be putting much more pressure on the U.S. than they are quite frankly" to ease the ban, Ian Taylor, the head of Vitol, the world's largest independent oil trader, told Reuters in an interview earlier this week.

"There's no doubt there's going to be more and more lobbying for the free flow of crude oil," he added ("U.S. oil patch still Klondike for world's biggest traders", Nov. 5).

TIME FOR CONGRESS TO ACT

In the meantime, the remaining export controls resemble a bizarre relic. They don't protect U.S. consumers and businesses from fuel shortages. They don't limit price rises. They don't even really stop the export of oil any more. They just create numerous distortions, legal uncertainty, and provide a full employment act for lobbyists, lawyers and government staff.

In January 2014, Lisa Murkowski, the top-ranked Republican on the Senate Energy and Natural Resources Committee, called the patchwork of controls on export controls "antiquated" and insisted "it is time to renovate this regulatory edifice, modernizing it for a 21st century in which the United States is a forward-leaning, outward-facing leader on energy, the environment and trade."

Then she was merely a member of the relatively powerless minority. From January 2015, when the 114th Congress assembles, she will likely be the committee chair, and one of the most influential policymakers on energy matters for a Republican Party that will control both chambers of Congress.

It is time to act.

By John Kemp