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?

Wednesday Quick Hits

Plenty of great links to share today (the last day of my 34th year on the planet), so let's get right to it.

• The Economist reports on how increasing labor costs in China are once again changing the globalization dynamic - in many cases, back in US manufacturers' favor: "'Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,' says [BCG's] Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.... Companies are thinking in more sophisticated ways about their supply chains.  Bosses no longer assume that they should always make things in the country with the lowest wages.  Increasingly, it makes sense to make things in a variety of places, including America."  The whole article is definitely worth a read.  (h/t Mark Perry)

• The WSJ's Mark Gongloff throws some cold water on the "China is dumping US Treasury debt" hysteria.

• Heritage's Bryan Riley makes a great catch:   "People who believe the United States no longer manufactures anything need to check out the newest Consumer Reports “Best Cars” list. The magazine recently selected the top cars for 2011 in 10 categories. Five 'best models' are made in the USA, three in Japan, one in Canada, and one in Mexico. Four of the made-in-the-USA models carry foreign nameplates; by contrast, the one Chevy on the list is made in Mexico."

• Cato's Dan Griswold provides clear and concise arguments for allowing Mexican trucks to travel on US roads.

• AEI's Michael Auslin provides a roadmap for expanding US-India trade and explains why it should be a point of emphasis.

• A must-read story in USA Today shows that US visa restrictions may be driving companies out of Silicon Valley and the United States entirely: "Silicon Valley may be the cradle for tech start-ups, but some foreign-born executives, engineers and scientists are leaving because of better opportunities back home, strict immigration laws here and California's steep cost of living."  I totally get the need for us to secure our borders and staunchly police illegal immigration, but the United States is suffering (and will suffer a lot more in the future) because of our government's inability to develop and implement policies to efficiently and lawfully keep super-smart foreign entrepreneurs and workers here.  Our lack of such policies is, ahem, bordering on the insane. (Sorry, I couldn't resist.) 

• The White House has surprisingly announced that it won't move pending FTAs with Colombia, Panama and South Korea unless the House GOP ties it to the now-expired Trade Adjustment Assistance program.  IBD dismantles the administration's political motivations, while Cafe Hayek's Don Boudreaux eviscerates TAA's shoddy economic foundations.  (More on this issue to come.) 

• Logistics improvements in China would mean huge gains for consumers and exporters, further proof that trade facilitation efforts can dramatically improve global trade when market access negotiations break down: "Logistics costs as a percentage of GDP are around 21%, compared with 10% in the U.S. and 13% in India.... [T]he country has a fragmented system, high tariffs for road transport and multiple providers piling on fees.... A Chinese government investigation found that two-thirds of the retail price of vegetables represents logistics costs. And even though costs are high, service is often poor.  Local logistics providers are famously slow and unreliable. Assuring end-to-end delivery of products across provincial boundaries is a real challenge."  Unfortunately, things appear to be getting worse instead of better:

• Looks like we're seeing a serious bubble in US farmland, yet American agriculture subsidies keep, ahem, plowing ahead. (Sorry, I couldn't resist... again)

• Good news: US exports surge to a new record high.  Less-good-news: as the graphic below makes clear (courtesy of Mark Perry), US exports are still below their pre-recession trendline.

That's all for today.  Enjoy!

New Study: More Trade = More Jobs

One of the big problems with the political debate over US trade policy is that politicians and much of the American public demand that trade policies be sold in terms of jobs, regardless of whether good data tying trade to employment actually exist.  Free traders typically refuse to speak of trade in terms of net-jobs-created because they know that basic economics teaches us that trade liberalization is really about better jobs, not necessarily more jobs.  Protectionists, on the other hand, rarely display such, ahem, economic limitations and are thus all too eager to cite bogus studies tying free trade policies to ridiculously specific numbers of lost American jobs.  (For a great example of this unfairly tilted political playing field, check out this classic column by AEI's Phil Levy on protectionists' absurd claims about supposed US job-losses caused by NAFTA.)

Thus, the typical exchange at a Congressional hearing (or your local watering hole) goes something like this:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Naive free trader: Well, sir, free trade really isn't about creating more jobs, it's about productivity gains, creative destruction and better jobs, and, of course, it's about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will destroy 734.6 jobs.

Seriously, is it any wonder why the poll numbers on trade routinely stink?  Unfortunately, today's economic environment has exponentially increased the political pressure to tie trade (or any other) policies to specific job numbers, so the disadvantage that free traders face in the political arena is even more acute than ever.

That's why a new study in the European Economic Review called "Trade and Unemployment: What Do the Data Say?" could be a really great new resource for those seeking to advocate free trade policies using intellectually honest arguments.  According to the study's authors, there is strong empirical evidence that nations that trade more - through exports and imports - have lower long-term unemployment.  Here's the paper's abstract (emphasis mine):

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Did you get that?  Ok, me neither.  Fortunately, Reason Magazine's Ronald Bailey translates this nerdspeak into regular English for us regular folk:

[The study] forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

Roughly speaking, U.S. GDP was $15 trillion in 2010, and exports and imports combined totaled just over $4 trillion, yielding a trade openness index figure of 27 percent. Without going into detail, the European economists derive a real trade openness index by taking differing price levels among countries into account.

The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance....

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

In short, the study's authors have demonstrated through oodles of hard data that all the increased productivity and long-term economic growth caused by trade ends up eventually translating into not only better jobs, but also more jobs.  (And please note that trade deficits and surpluses don't matter - what does matter is total trade, regardless of the "balance.")

Pretty cool, huh?  Actually, it's more than cool - it's a very, very helpful little nugget for the upcoming congressional debate over pending US trade agreements with Korea, Colombia and Panama, which will doubtlessly increase total trade by eliminating barriers on goods and services traded between the countries involved.

Now, let's go back to our earlier hypothetical:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Emboldened free trader: Well, sir, countries that trade more have significantly lower unemployment than those that don't, and this FTA will inevitably increase US trade with Korea/Colombia/Panama.  And, of course, free trade is also about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will, umm, destroy 734.6 jobs.  Hey, stop laughing at me.  Seriously, stop.  That's not cool.

Much, much better.

UPDATE: In a case of crazy coincidence, Cato's Dan Griswold just published a new blog post on the latest bogus "jobs" study.