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By Andrew Holland on Jan 23, 2014 with 15 responses

A Choice America Needs to Make: Reform Fossil Fuel Export Regulations

LNG CarrierThe 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).

 

  1. By Jennifer Warren on January 23, 2014 at 6:56 pm

    Great piece Andrew. I expect the O&G lobby to ramp up, to capture this potentially not easily repeatable advantage.

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  2. By Russ Finley on January 23, 2014 at 8:58 pm

    All good points. As I mentioned in a comment underJennifer’s earlier article, maybe regulations supporting corn ethanol in the name of energy independence should be added to the list of regulations that don’t make sense.

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    • By Andrew Holland on January 24, 2014 at 9:55 am

      Ethanol is not going away – those ethanol plants all across the midwest are far too integrated into rural communities (and the politics that support them) for it to go away…

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      • By Robert Rapier on January 24, 2014 at 10:47 am

        Agree with that. I have an article percolating that would propose rules to make it even more integrated into Midwest communities while freeing up communities outside the Midwest to choose a different path if that made sense.

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      • By Russ Finley on January 24, 2014 at 7:47 pm

        True …if ending government mandated consumption would make it go away, then the mandates will stay. But the energy independence argument for mandating its use is certainly less valid. It is, in reality, a means of subsidizing farmers without the government writing checks. The checks are written by citizens forced to buy a product, to oil companies, who then write a check to the farmers. Bit of a shell game. I’m fairly agnostic about subsidizing farmers because I honestly don’t know if it is a good or bad idea overall. Certainly it is good for farmers.

        But I do think it is a bad idea to put so much land under the plow from a nature conservation perspective just to subsidize them. I’d rather the government just wrote checks rather than launder the money through corn fields, ethanol refiners, and oil companies.

        http://ens-newswire.com/2014/01/24/crops-eating-into-worlds-natural-land-base

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      • By TimC on January 27, 2014 at 2:08 pm

        Eventually corn ethanol will go away. Politics trump economics only in the short term. There are economically superior ways to make ethanol and other synthetic fuels, ways that use less labor, less capital, less land, less water, and about the same amount of fossil inputs. At some point, corn ethanol will be forced into direct competition with those superior processes, and then the corn ethanol bidness will start to shrivel up and die. Corn growers will hardly notice, because by then worldwide demand for food and feed will support high corn prices without a corn ethanol industry. All of this will take time, but will happen faster than you might think.

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        • By Andrew Holland on January 27, 2014 at 2:32 pm

          I think I agree with this. But – ethanol itself isn’t going away… Just corn ethanol.

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        • By Optimist on January 27, 2014 at 9:01 pm

          Have to disagree. Ethanol is a terrible fuel: as a pure fuel (E100) it burns with a colorless flame, which is obviously VERY dangerous and is the reason E85 has at least 15% gasoline in it. In a blend with gasoline its affinity for moisture causes all sorts of corrosion issues, in storage, transport and consumption. It also increases the vapor pressure of the blend, causing increased emissions and loss.

          There is a better option: drop in replacements. Sooner or later a company like KiOR and a customer like the US Navy will get it right.

          Maybe then Iowa can throw a big party, showing people the proper way to consume ethanol…

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      • By Forrest and Jan Butterfield on January 28, 2014 at 12:41 pm

        Agree with ethanol not going away. Auto companies have communicated the need of higher octane fuel for future of high efficiency engine. Nothing beats ethanol for that task. Also, the ethanol plant technology is adjusting and advancing. Corn ethanol plants replacing hammer mills with trade equipment that maximize grind consistency to ethanol process. Corn oil co-product production increased enough that some plants building bio-diesel production capability within process. Also, the quality of farm feed improved per elimination of corn oil. Enzyme development continues to boost gallons/bushel. A broad spectrum GMO type that converts larger variety of sugar to ethanol. The process can now convert the corn kernel skin (cellulose) to ethanol. The kernel skin alone is expected to produce one billion gallons. This process pushes ethanol up to 3 gallons/bushel corn. Soil fertility tests conclude gleaning a percentage of corn plant fiber actually beneficial. Ethanol plants like the Poet Liberty utilize a hybrid system of both corn and cellulose processes that maximize utilization of equipment and byproducts. This new plant expected to be capable of energy independence. Corn ethanol will migrate to farm ethanol per the mix of starch and cellulose production. To date Miscanthus the leader offering equal value to corn per acre upon poor soil conditions. Future looks bright for farm ethanol, competing mightily with liquid fuel market. Modern farm practices and GMO technology upon a high rate of improvement.

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    • By Forrest and Jan Butterfield on January 27, 2014 at 10:02 am

      Only current regulation of ethanol is the RFS, which requirement are born upon the petrol industry than currently manages distribution and supply of fuel. The 10 percent ethanol blend welcomed cohabitant of their fuel as ethanol provides cheap oxygenate, octane boost, cleaner, moisture absorbent, and ability to utilize the RBOB blend stock that consists of higher supply and easier to distil cheaper oil product composition. As of lately much brew ha ha over RINS that spiraled up in cost per the perceived blend wall. This media and internet concern blitzkrieg across the country when ethanol producers requested an E15 product from EPA and got the approval. It was a campaign to thwart the acceptance of such a product. Oil a natural opponent as well as cattlemen and small engine manufacturers. Automotive also shy to support a new fuel that lead to warranty claims justifiable or not. Also, automotive will not readily commit their resources to support other causes without the federal money grants, i.e. check pollution control equipment and operation. So, after evaluating the dangers of blend wall, RIN cost, price increase, engine damage, etc…..not much there. First RIN trading credits achieved some suspicion per dubious trades that appear to do little than hype concern. E85 sales can be increased to offset such problems. Also, independent CARD sponsored study has this economic activity displacing gasoline. The net effect is lower consumer cost at pumps, even with E10 fuel. E15 is currently making it’s way within fuel stations. Auto companies have all approved the fuel with new model production. The days of cattlemen getting cheap subsidized corn feed probably over. Also, consumer demand for corn fed beef is trending down per nutrition concerns. E15 is concern with 2 cycle engines that run on edge. The gas to air ratio needs to be adjusted and the fuel must be consistent. No switching back and forth. BTW, E85 would be a great fuel for small engines operating with out pollution control equipment. Just pollutes less. Also, the fuel is better per 2 cycle operation as the engine has poor exhaust scavenging. Also, more hp would develop. Chain saws would enjoy 30% more hp and run cooler if designed per fuel. Also, alcohol fuel better environmentally upon waterway that petrol.

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      • By Optimist on January 27, 2014 at 1:09 pm

        As RR pointed out before: the whole blendwall debate goes away if more E85 is sold. Which raises the obvious question: If E85 is so great, why isn’t it selling? If Ethanol is such a great fuel, why isn’t Iowa declaring its energy independence and burning every drop of ethanol that it produces? Why dump ethanol on the rest of us?

        The answer seems quite obvious, but I’m sure in Mythland they have a different explanation…

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  3. By ben on January 24, 2014 at 5:05 pm

    Holland’s efforts to focus attention on a rational framework to begin assessing what policies truly advance rather than hinder our national energy interests are commendable. Regrettably, as he rightfully cites the nearly century-old Jones Act as one of the practical, cost-contributing factors to product distribution, we are a long way from allowing rationality rather than the debilitation influences of “faction” to drive the policy train. Until we embrace a strategic perspective on the increasingly rigorous demands of highly competitive, global commerce of today’s marketplace, we will confront major opportunity cost losses here at home for American industry and households. Of course, such sensibilities are hardly the preoccupation of overly ideological Greeners who view economic growth and concomitant expansion of fossil fuel exploration and development as the symbiotic evils of a “Capitalism without a soul” that had too-long plagued the industrialized west and that has more recently bred an even larger monstrosity of resource depletion in Pacific Asia.

    In short, don;t look for much bipartisanship in the Congress on reforming/enhancing national energy policy given an appreciation for how the special interest tail dependably wags the national dog. Sad, but true in an era that witnesses rulings out of the High Court allowing an interpretation of the law that a corporation enjoys nearly equivalent rights as that of the very citizenry who long ago framed and who have so valiantly fought and died over the generations to preserve our remarkable system of self-government sustained under the rule of law. Wow, that speaks volumes about any near-term prospects for good ole tail-wagging!

    Thanks for the invite to the ASP breakfast. It sounds like a very sensible focus.

    Ben

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    • By Forrest on January 31, 2014 at 7:47 am

      Jones Act is a relic of past, just fodder for lawyer abuse. But, it does demonstrate how federal regulations a poor tool as they increasingly become out of date and inefficient upon passage. Greeners better described per the color red. They hate Capitalism as this system is ungovernable per top down control. Also, this system of commerce provides highest standard of living for both poor and rich. If your an idealist of Environmentalism that means society consumes more and supposedly pollutes more. My Family Relations prof struck down any creative ideas to improve environment. We left the class with hopelessness feeling of running out of crude oil in 20 years (that was almost 20yrs ago) and the best thing for society was to eliminate children. That was a mandatory 3 credit class. Also, our history of law has treated legal entities such as corporations to many of the same liberties as private citizens. They can’t vote, but can use their assets for representation or influence. This isn’t some modern corruption of politics. It is a good thing, but something easily politicized per the modern education system and politics of division.

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  4. By piterqqq Savka on January 25, 2014 at 4:07 pm

    The result is a checkerboard of regulations, leading to some strange outcomes. http://autosavingenergy.com/

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  5. By Forrest and Jan Butterfield on January 27, 2014 at 8:23 am

    Promulgating regulations shouldn’t be a one time act of Congress, but a process of review, evaluate, and update. Business is often stuck with odious regs that have little value except to appease a steady growing appetite of populace desires to control/hamstring business. The public is fed a continuous diet of propaganda (thank you NPR and Disney) of profit makers savaging the environment, corrupting politics, stealing from poor, etc.. So, best for country to take politics out of the establishment of regulations. Best for country to take government out of the loop, also. We need cost effective, intelligent, efficient, and working regulations. This type of regulation won’t be generated from a no compete government employee loaded with the usual anger issues of open market business operations. These good regulations won’t appear from pens of political chieftains whom career was akin to used car salesman. The best regs that I’ve noticed come from the quasi federal organizations that were established for such purpose and given independence to function properly. Organizations such as the National Electric Code or Federal Building Code. Banking industry was attempting this with a highly respected leader from the field whom retired. To entice the individual to serve leadership position for establishing effective regs for his industry. What a legacy of one’s career to promulgate GOOD regs that have a enduring positive impact to the country.

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