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.

The Deck is Depressingly Stacked Against Subsidy Reformers

It's long been known that folks who support significant reforms to state and federal subsidy programs face a really uphill battle.  They're easily demagogued as "anti-farm/environment/jobs/whatever," and taxpayer subsidies are a classic case of "concentrated benefits and diffuse costs," with subsidy recipients far more organized and motivated than reformers (and Joe Taxpayer) to push their agendas through the government.  However, there is another reason why real subsidy reform is so darn difficult: government benefactors brazenly rig the game in favor of their cronies.

And during last week's House debate on the bloated, subsidy-packed Farm Bill, we got a rare glimpse into one way that the riggers do it.

Before I get to that, however, a little background is necessary.  You may recall that in late-December of last year Congress passed a slew of temporary extensions to certain farm subsidy programs in order to avoid what the media dubbed the "Dairy Cliff."  Congress' motivation for this last-minute action was suddenly-intense media attention and fear of voter backlash to the skyrocketing milk and other commodity prices that would've resulted from the subsidies’ expiration and the resumption of a dormant 1949 farm law that fixed food prices well above current levels.  (A good summary of the mess is here, if you're interested.)

With this in mind, let's now fast-forward to last week's House debate over the new Farm Bill.  In order to avoid another "Dairy Cliff" when/if the bill expired, an enterprising congressman – Rep. Paul Broun (R-GA) – proposed an amendment to the House version of the Farm Bill that would repeal the dairy provisions of the 1949 law, thus protecting US consumers from the threat of sky-high dairy prices.  Although passage of such an amendment would seem like a no-brainer, this is Congress, and Broun's amendment was easily defeated by a bipartisan vote of 309-112.  Apparently the House has no desire to prevent another Dairy Cliff in the future, and in a rare moment of candor, Rep. Collin Peterson (D-MN) - former Chair of the House Agriculture Committee and arguably the US Farm Lobby's BFF - explained why he has worked to keep the 1949 law - a ticking time bomb embedded in US agriculture policy -  on the books.  In rising to oppose Broun's amendment, Peterson stated:

When I was chairman and did the last farm bill, we maintained the permanent law, and we did it for a reason, which is that it is very hard to get these farm bills done, and sometimes you need some motivation to get people to move. That's the main reason we left it there.

In short, Rep. Peterson admitted on the House floor that congressional refusal to repeal the 1949 law - and its hidden threat of high prices, market uncertainty and serious consumer pain - is solely intended to extort new (or extended) farm subsidies out of future Congresses.  And, as last December showed, it's quite the effective strategy.  So, it seems that, for Rep. Peterson and his subsidy-loving friends in Congress, not only do you "never let a serious crisis go to waste," but if such a crisis doesn't appear naturally, you just hardwire one into US law.  Simply amazing.

As Cato's Sallie James explained on Friday, "so long as this [1949] law is part of the national legislative fabric, we’ll have a dairy cliff (or some other commodity-themed cliff) every five years."  And, instead of actually deliberating the cost and merit of our bloated, archaic farm subsidy programs, sheepish Members of Congress will simply approve those subsidies in order to avoid the media scrutiny and voter backlash that these intentional "cliffs" inevitably produce.

More broadly, this is the uphill battle that subsidy reformers face.  Not only is the playing field severely titled in favor of subsidy recipients due to the simple nature of subsidies and politics, but many of the supposed referees in Congress have intentionally rigged the game even further in the recipients' favor.  It's this kind of institutional disadvantage that makes real change extremely difficult (if not impossible), regardless of the overwhelming evidence in support of reform.

Hopefully, a little scrutiny of revealing statements like Peterson's will help tilt the playing field back a little bit, but I'm not holding my breath.

The Folly of Bilateral Protectionism, China Solar Panels Edition

As you may recall, after a string of very public bankruptcies (*cough* Solyndra *cough*), US solar panel producers - and the Obama administration folks who happily subsidized them - were quick to blame China.  If only the Chinese cheaters were purged from the US market, they argued, America would become a global solar panel powerhouse, and the green jobs would flow like (highly subsidized) milk and honey.  To achieve this purge, the "domestic" industry (led by Germany's SolarWorld) petitioned the US government for steep anti-dumping and anti-subsidy (countervailing) duties on Chinese imports, and the administration - using US laws that tilt greatly in favor of domestic protectionism - was quite willing to oblige.

However, a new story from the Financial Times' Ed Crooks shows just how wrong-headed that move has turned out to be, and provides yet another lesson in basic trade economics.  Prices for panels have risen (slightly), but American producers and workers haven't benefited in the least.  Instead (and as I repeatedly predicted), jobs and output are down here, and other imports - not US panels - have replaced the Chinese ones that have been effectively banned from the US market.

Behold, the folly of bilateral protectionism - and the reality of trade diversion - in all of their glory:

In one respect, the duties do seem to have been effective. US imports of cells from China have dwindled, from an average of 11m per quarter in 2011 to just 900,000 in the first quarter of 2013. 

The pay-off in US manufacturing and jobs, however, has been elusive. The US has capacity to produce about 1,845 megawatts of solar panels per year, according to IHS, a research company. That is down from 2,027MW a year ago. 

The Solar Foundation, an industry-backed think-tank, found that solar companies lost about 8,200 manufacturing jobs last year, about 22 per cent of their total, and expected to regain only about 2,600 this year. 

SolarWorld itself has continued to cut jobs in Oregon.... 

Robert Petrina of Yingli Green Energy, the Chinese group that was the world’s largest solar panel manufacturer last year, said it was untrue that the duties have had no effect, citing higher cell prices in the US than in some other markets such as South Africa, as evidence of the distortions they were causing.... 

Yingli has been sourcing cells from Taiwan to avoid being caught by the duties on Chinese products. It had its second-best quarter on record in the US in the three months to March and is on track to double its sales to US utilities this year. 

Another source of supply to the US has been a surge in imports from Malaysia. The US imported almost as many Malaysian solar cells in the first three months of this year, as in the whole of 2011. 

Analysts said much of the increase was probably caused by First Solar, an Arizona company that was the world’s second-largest manufacturer of solar panels last year. It has 85 per cent of its production capacity in Malaysia, and is building several large solar plants in the US....

As I mentioned when the original decision to impose duties on Chinese solar panels, part of the reason for the trade diversion at issue here is because the Chinese producers achieved a small victory during the investigation, omitting solar panels made in third countries (like Taiwan) from Chinese parts.  This allowed a few Chinese companies to lawfully circumvent the AD/CVD order and still ship large quantities of their product to the United States.  That said, the surge of Malaysian and other imports make clear that even closing this "loophole" would do nothing to help US producers and workers for one simple reason: other countries' producers are still cheaper than their American counterparts.

Yet another reminder that protectionism doesn't work, and all those US subsidies were a horrible waste of taxpayer dollars, regardless of those dastardly Chinese cheaters.