A Choice America Needs to Make: Reform Fossil Fuel Export Regulations
The production of oil and natural gas in the United States is booming. Next week, the American Security Project, where I am the Senior Fellow for Energy and Climate Policy, is releasing the 2014 edition of our “America’s Energy Choices” report (if you’re in DC, come to our event on Tuesday morning, January 28 for breakfast! RSVP here). Since we first began writing this report in 2011, there has been a sea change in the production of fossil fuels in the U.S.- particularly oil. This article builds off that report and a paper we are releasing detailing the “Five Energy Choices America Needs to Make.”
Today, one of the consequences of the boom in oil and gas production is that there is a growing surplus of oil, natural gas, and even coal (some of which has been displaced by natural gas as an electricity source) that producers want to export. While there is not (and likely never will be) an absolute surplus in crude oil, the different types of crude match up with different refinery capabilities, and it can make more economic sense to export light, sweet crude from the Bakken and import heavy crude from Venezuela.
A Maze of Export Regulations
Over time, a litany of government regulations has been put in place to regulate or restrict the export of fossil fuels. However, they each reflect the time in which the legislation was passed. The result is a checkerboard of regulations, leading to some strange outcomes. For instance, under the 1975 Energy Policy and Conservation Act, the export of crude oil is illegal without a permit from the Department of Commerce, unless that crude was produced on Alaska’s North Slope and travels through the Trans-Alaska Pipeline. On the other hand, the export of refined petroleum products (like diesel fuel, kerosene, or refined gasoline) is virtually unregulated.
Regulations for natural gas are similarly convoluted. Under the 1938 Natural Gas Act, the export or import of natural gas is illegal unless the Secretary of Energy finds that it is in “the public interest” – a finding that is guaranteed in statute if the gas is exported to a free-trade agreement partner. On the other hand, the exports of natural gas liquids (like propane, ethane, or others) are unregulated, even though they often come directly from the same wells as natural gas (methane).
Finally, the export of coal is unregulated, even though coal is generally the most polluting source of fossil fuels.
To further complicate the issue, the Jones Act of 1920 requires that all trade between U.S. ports be carried solely on American ships, crewed and owned by U.S. citizens. This means that, because of this artificial scarcity, it can be twice as costly to send oil from the Gulf Coast to the East Coast as it would be to send it further around to Maritime Canada. This makes it more cost effective for a company to export fuel from Gulf Coast ports abroad and import refined fuel from Europe to the East Coast than it is to simply ship refined fuel from the Gulf of Mexico to the East Coast. The same would be true of crude oil if exports were allowed.
Needed: Export Regulation Reform
This complexity is crying out for a rationalized approach. A coherent government policy for trade in fossil fuels exports would have a single government department determine which fossil fuels it was in the national interest to export – not a different policy for different fuels, and no policy for others. Such a policy would take into account the harm that burning that fuel does to the atmosphere, noting that the location of greenhouse gas emissions does not matter – the U.S. is harmed equally whether the hydrocarbon is burned inside or outside our borders.
On natural gas, the consequences of this irrational policy are most clear. Around the world, producers are racing to build Liquefied Natural Gas (LNG) terminals. The longer that American producers have to wait for permits, the greater the likelihood that they may lose out to foreign competitors. As of January, 2014, there are 25 export applications currently under DOE review. The longer American businesses wait to begin exporting LNG, the more likely that foreign competitors in Russia, Australia, Norway, Qatar, Indonesia, or elsewhere will seize market access.
A liberalization of natural gas exports from the United States is a new geopolitical tool for the U.S. that can undercut monopoly gas producers like Russia. Exports of coal have no similar benefits – and yet our current system gives a default preference to coal exports over natural gas exports. While this bias towards the status-quo is an untenable position over the long term, as I write in this week’s Energy Trends Insider newsletter, there is little appetite on Capitol Hill for a fight over exports (sign up to read more).