Energy Exports, Energy Policy, Oil, U.S. House, U.S. Senate

Exploring the Impact of Lower Oil Prices on the U.S. – Exports, Economics, Energy Security & Diplomacy

iStock_000006627327Medium[1]Rapidly changing global energy dynamics, particularly the dramatic decline in crude oil prices, have left many struggling to predict what the fall out will be – on energy prices, American energy companies and workers, and nations heavily dependent upon oil exports.  Despite falling oil prices, U.S. crude oil production is currently on the rise.  The U.S. Energy Information Administration (“EIA”) recently released data showing that U.S. crude oil production in December 2014 was the highest since May 1973.  The EIA also projected that crude oil production will increase through next year, averaging 9.5 million barrels/day (bbl/d) in 2016, which is just 100,000 bbl/day below the high reached in 1970.  Nonetheless, oil price declines are impacting U.S. companies and oil production.  Recent data released by Baker Hughes reportedly indicated that the U.S. oil rig count at the end of February dropped to its lowest since mid-2011, which is 39% lower than its peak.  On March 3, the U.S. House Energy & Commerce Committee’s Subcommittee on Energy & Power held a hearing “21st Century Energy Markets: How the Changing Dynamics of World Energy Markets Impact our Economy and Energy Security” to examine several issues arising from current market dynamics, including (1) the U.S. energy outlook and the effects of relatively lower oil prices on the U.S. economy, energy security, and foreign diplomacy;  (2) International competitiveness of U.S. energy supplies; and, (3) Federal polices implicated by the changing dynamics of world energy.

The Subcommittee considered testimony from various witnesses, including representatives from the EIA, the oil and gas exploration sector, the airline industry, leading academic energy & sustainability research, labor unions, fuel & petrochemical manufacturing, and financial services.  To frame the discussion, Subcommittee Chairman Ed Whitfield noted that “[t]here is no question that the America’s oil and natural gas boom has been very good news for America, but that is not to say that it doesn’t bring new concerns – we have simply traded one set of challenges for another.”  Among the challenges that took a prominent place in the hearing was whether or not to lift or modify the current ban on crude oil exports.

Witnesses offered several interesting points for consideration regarding the impact that choosing to lift, or not to lift, the export ban would have on the U.S.’s international influence and economy, as well as the energy industry, including:

  • Energy Hoarding & International Influence: The U.S. limits on natural gas exports and ban of crude oil exports has implications that are broader than domestic political considerations.  The U.S.’s stance on “hoarding energy supplies” will impact its role as an international leader and may encourage other countries to hoard their energy or otherwise lead to international conflicts due to artificial restrictions on energy flow.
  • Gasoline Prices are Linked to International Crude Oil Prices: Research has shown that domestic gasoline prices are driven by prices of international crude oil rather than domestic oil.  Some argued that lifting the ban on U.S. crude oil exports would increase global supply and drive the cost of gasoline down.  How the U.S. would fare on the global crude oil market, however, was not presented as a sure thing by all witnesses, with one stating: “as to how U.S. crudes would do battle in an international market if export bans were lifted, all we can say is: we’ll see.”
  • Investments in U.S. Oil Production: Data shows that there has been a 35 percent reduction in capital expenditures from exploration and production companies. The export ban will discourage investment in U.S. oil production in the current highly competitive environment.
  • Comprehensive Policy Change: Any change in policy regarding the export ban should be considered within the context of a comprehensive regulatory modification.  For example, the Jones Act requires U.S. refiners seeking to ship crude oil between U.S. ports to use U.S. built and flagged vessels that are U.S. majority-owned with a crew of at least 75% U.S. citizens.  The Jones Act makes it more costly to ship crude from the gulf coast to an east coast refiner than it would be to ship the crude to Europe.  Lifting the export ban, without doing more, would make east coast refiners less competitive than foreign ones and ultimately encourage the decline of the American refinery sector and loss of associated jobs and economic activity.
  • Threatened Energy Security: Energy security is a multifaceted concept that must take into account our ability to produce enough “feedstock” in conjunction with our capability to transform the feedstock into necessary end products.  If lifting the oil ban will lead to the demise of the domestic refinery sector, we would diminish domestic energy security.  An additional security consideration stems from instability in foreign oil producing countries.  Given the instability of foreign oil sources, it may be the wrong time to choose to export crude oil when the U.S. will remain a net petroleum importer for some time.

Chairman Upton assured that “[i]f we choose to change the law on exports of oil and other liquids, it will only happen after an open review of the current policy.”  It has been suggested that any significant policy changes, including any modifications to the oil export policy, be postponed until the global oil market is stable enough to better understand the economic realities of U.S. oil production.  A webcast of the House hearing and copies of witness testimony are available.

The Senate Energy and Natural Resources Committee will also explore the crude oil export ban in a hearing on March 19, 2015. We will keep you updated.

Brian Heslin

About Brian Heslin

Brian Heslin represents energy companies in regulatory proceedings at the state and federal level. In addition, he provides advice on busines and strategic planning, upstream natural gas supply and capacity negotiation, compliance and other related services.

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The landscape of the energy industry is rapidly changing, with a focus on the development of clean, domestic energy sources and a secure, reliable energy infrastructure driving significant changes in the interdependency of energy industry segments and an increase in government regulation. Continued growth in the domestic production of oil and natural gas has positioned the U.S. to be an energy exporter in the global market and will have a marked impact on the course of the industry’s development.

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