Thursday, June 27, 2013

The Coming Crude Calamity (Due Solely to Government)

Today Reuters published a new oped of mine on crude oil export restrictions.  The whole thing is (obviously) worth your time, but here's a taste:
The American “shale boom” is poised to revolutionize global energy markets. It could transform the nation from a longtime net oil importer into an export powerhouse. Consider that the 2012 increase in U.S. crude oil production, announced last week, was the largest not just in U.S. history but the world.

To help this transformation, a bipartisan swath of federal and state officials is pressing for new infrastructure, like the Keystone XL pipeline, to move a glut of domestic oil from the center of North America to Gulf ports. This is a crucial step, but unless Congress reforms archaic restrictions on crude oil exports, all that black gold’s going nowhere....

[B]y curtailing exports and subjecting license approvals to the whims of bureaucrats, the current system slows domestic production, breeds economic distortions, discourages investment and destabilizes energy markets.

U.S. oil producers, for example, lose an estimated $10 billion a year due to their inability to sell crude in foreign markets. They’ve also spent hundreds of millions of dollars building “mini-refineries” in the Midwest and Gulf region to circumvent the current restrictions and export a slightly processed, cheaper product — leaving another $1.7 billion in potential profit on the table.

As Rube-Goldbergian as this sounds, producers have few alternatives, given that U.S. oil consumption has collapsed in recent years and building new refinery capacity is virtually impossible in many “environmentally friendly” states. These problems prompted the head of the International Energy Agency to warn recently that U.S. export restrictions put the “American oil boom” at risk.
Like I said, be sure to read the whole thing, but before you click over to Reuters, let me pick up on some of the points above for a second.  The Wall Street Journal just this week wrote a fantastic piece explaining the impending calamity facing US oil and gas producers - and the US energy market more broadly - if we don't reform the current ban on crude exports (emphasis mine):
New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas' Gulf Coast, boosting the fortunes of the area's big refineries and further fueling a decline in oil imports.

Magellan Midstream Partners' Longhorn pipeline began shipping oil from West Texas to Houston in April—the first of at least seven pipeline projects that could send as much as two million barrels a day from oil-saturated choke points in Oklahoma and the interior of Texas to the largest concentration of refineries in the country. But domestic oil production is at such a high level that the Gulf Coast refineries won't be able to process all of the crude....

Refiners on the Texas Gulf Coast, which process about a quarter of U.S. gasoline, are poised to be the beneficiaries of the new pipelines. They have been largely stuck paying for more-expensive imported crude, or paying extra transport costs to have the cheaper, stranded U.S. crude brought in on rail cars, which are generally more costly than pipelines. Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp., as well as Exxon Mobil Corp., which runs a major refinery in Baytown, Texas, all stand to gain....

However, Texas refiners won't be able to take full advantage of the influx of U.S. oil, most of which is of the variety known as light sweet. That is because many of those refineries were modified years ago to also deal with heavier crudes from Mexico, Venezuela and Saudi Arabia, preventing significant portions of their plants from refining light crude.

"It's rare to find a refinery down there that can take the majority of its crude" from the U.S. supply of light, sweet oil, said Cowen Securities analyst Sam Margolin.

Some industry experts think the pipelines will simply ease the oil glut in Cushing and create one in the Houston area as U.S. crude pours into the area faster than refiners can process it.

Trying to sell the crude abroad instead won't provide refiners a relief valve: U.S. law prohibits most crude exports, although refined products can be shipped overseas.
In short, we're producing tons of oil (and related jobs) and have the seemingly-infinite potential to produce even more.  New pipelines will be able move this oil from places like North Dakota, Oklahoma and Texas to Gulf-state and other refineries, but for various reasons we simply won't have the domestic refining capacity to handle all of it.  When we hit the point at which production officially outstrips refinery capacity, we'll have only two choices: lift the current, decades-old export ban or leave the excess oil in the ground (and sacrifice the jobs and growth associated with such activity).

So given the glacial pace of natural gas export license approvals (under a much more permissive legal system, by the way), the general proclivities of the current occupant of the White House, and the complete dysfunction of our beloved Congress what do you think's gonna happen here?

Yeah, I'm not holding my breath either.

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