America's Really, Really Messed-up Energy Policy

As readers of this blog know, I've long been a critic of US green energy policy and spent a lot of time in my new Cato Institute paper bolstering those positions.  And just last week I detailed why the Obama administration's policies related to natural gas - particularly exports of LNG - were economically and legally misguided (and blatantly hypocritical).  Now comes further evidence that our crude oil policies are equally problematic.

According to a recent Financial Times article, booming crude oil production in the United States - due mainly to revolutionary drilling techniques - has us poised to become a global crude oil exporter for the first time in decades.  This development sounds pretty great... until you read the rest of the article and discover several very serious - and utterly unnecessary - problems.

First, the main reason for the "export boom" is that the United States lacks adequate refinery capacity and transport infrastructure to process new crude oil in order to satisfy domestic demand for gasoline and diesel.  The FT hints at this when it notes that "Refineries in Canada are important fuel suppliers to US markets. Irving [Oil] says its St John refinery supplies 20 per cent of total petrol and diesel imports to the US northeast."  But a new editorial in today's Washington Examiner elaborates on this problem:

[M]ost of this new [oil] production is in areas that lack the needed refinery and transportation infrastructure that is currently located near our traditional public land sources. Without new pipelines and refineries better positioned to transport oil from private land to market, there will continue to be an oil bottleneck that drives up the price of gas at the pump, even as the price of oil falls.

The solution to this problem is to build new refineries and new pipelines, like the planned Keystone pipeline that would connect Canada's oil sand with existing oil refineries along the Gulf of Mexico. But of course, Obama and his environmental allies have blocked this and many other oil infrastructure projects.

There has not been a major new oil refinery built in the United States since the Marathon Garyville Refinery was built in Louisiana in 1977. True, our existing refinery capacity is higher today than it was 30 years ago, but all that refining is being done at 137 refineries today, versus 254 refineries 30 years ago.

Fewer refineries means more miles of pipe must be built and maintained, and it also means bigger problems whenever a key refinery goes down. That is exactly what happened this fall in California, when the Richmond Exxon refinery caught fire and the Kettleman-Los Medanos pipeline was contaminated. With two key delivery system points at reduced capacity, and without other refineries and pipelines to back them up, gas prices shot up almost a full dollar from $3.73 in the first week of July to $4.65 today.

In other words, Californians are now suffering at the pump because they have let their energy infrastructure become too fragile. Instead of developing the resources closest to them (including the more than 300 million barrels of oil sitting off of California's coast in the Pacific Ocean), California has chosen to become dependent on other states for its oil supply. And instead of building a diverse group of smaller refineries and shorter pipelines, California relies on a big dog that can suddenly take ill.

Without adequate pipelines in the United States, the oil transport and refinery bottleneck could be solved by shipping crude to other US states, but there's one big problem: a little-known bit of 1900s protectionism called the "Jones Act" makes it really expensive to do so.  The aforementioned FT article explains:

One advantage of exporting the crude to Canada is that the US’ Jones Act demands more expensive US-flagged ships for domestic routes. Poten & Partners, a ship broker, estimates it would cost less than $1.50 per barrel to ship crude in a foreign-flagged medium-sized Aframax tanker from Texas to the largest Canadian refinery at St John, New Brunswick. A shorter journey from Texas to refineries in Philadelphia recently cost $4.55 a barrel. 

“This is not about exports or imports,” said Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington. “It’s about transportation and processing efficiency.”

Because the Jones Act drastically inflates the cost of shipping crude from, for example, booming shale oil producers in Texas to Philly refineries, oil producers are looking to foreign markets to refine their crude and then ship it back to the United States.  Yet even this somewhat-messy relationship isn't the end of the story.  It turns out that the United States government severely restricts exports of crude oil via an arcane (dating back to the Energy Policy and Conservation Act of 1975 (P.L. 94-163, EPCA)) export licensing system intended to address "short supply" conditions that, given all that new oil production, likely no longer exist here in the United States.  As the FT notes, the only country to which American companies can export crude oil is Canada, and even that ain't easy:

US federal rules and the country’s dependency on imports have kept all but a trickle of crude from leaving the US. But a surge in supplies from states such as Texas and North Dakota have prompted companies to seek out refinery customers in Canada. As rising crude volumes reach the coasts, “pressure should build and will trigger policy debates about whether to expand the list of allowable countries beyond Canada”, said Ed Morse, head of commodities research at Citi.... 

Exporting US crude requires a licence from the Bureau of Industry and Security, a branch of the US Department of Commerce. The US has exported less than 100,000 barrels per day of crude in the past decade, a fraction of the 9m barrels imported daily. “It’s generally prohibited except for a whole host of exceptions,” said John Felmy, chief economist at the American Petroleum Institute. By contrast, the US is exporting record amounts of refined fuels such as petrol. 

Shell confirmed it recently applied for licences to export domestic crude. “Crude oil trades on a global scale and imports/exports will follow supply and demand,” it said. BP received a licence to export to Canada but has not yet used it, while Vitol has applied for a licence, people familiar with the matter said. Both BP and Vitol declined to comment.

The Department of Commerce refused to confirm or deny the existence of licences or licence applications, citing US law. But it said exports to Canada had a “presumption of approval”.

As I noted in my recent post on LNG exports, restrictive export licensing systems like the one applied to crude oil very likely violate WTO rules (namely, GATT Article XI which prohibits Members from imposing export restrictions), but it's possible that the United States' crude oil export regime would qualify for the GATT's "national security" exception (Article XXI).  However, this legal loophole doesn't change how totally and utterly nonsensical our crude oil policies are.  To recap: because the federal government and many states refuse to allow the domestic construction of new refineries or interstate pipelines, domestic producers are forced to ship crude oil by ship to other, out-of-state refineries; however, because the Jones Act makes interstate maritime transport of crude oil prohibitively expensive, oil producers are forced to look to export markets to ship crude oil to be refined and then imported back into the United States; however, because a decades-old US export licensing system severely restricts the exportation of crude oil, even this last-ditch effort to ship and refine crude oil faces serious legal and logistical problems.

And gas prices continue to climb.

Seriously, this is one messed-up policy, folks.  While oil and gas prices are admittedly a result of global supply and demand, it's impossible to argue that the aforementioned policies aren't making things worse in the short-term, and that things here would be better - for US consumers and producers/workers - if the federal government reformed arcane, conflicting regulations like the Jones Act and the crude oil licensing regime (not to mention the refinery and pipeline approval process).

Is that really too much to ask?