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The Crude Oil Export Ban

Presented by
Bob Slaughter





2

The Crude Oil Export Ban



Additional Support in Congress and the Executive Branch is
Needed to Improve the Chances for Crude Oil Exports


3



How Did We Get Here? A Short History


4


What is Involved in Securing a Waiver from the Crude Oil
Export Ban?


6



The Jones Act


8


What Happens to Gasoline Prices if the Crude Oil Ban is
Lifted?


8


Possible Ways Forward

9


3

Additional Support in Congress and the Executive Branch is Needed to
Improve the Chances for Crude Oil Exports

This month the chairman of the U.S. House Homeland Security
Committee, Michael McCaul (R-Texas), introduced legislation to lift the existing
U.S. ban on exports of crude oil. Senator Ted Cruz (R-Texas) has also
introduced a bill -- in the Senate -- that would eliminate the ban, among other
provisions. It is highly appropriate that Texans in Congress would take the bit
between their teeth and craft legislative provisions that address the need to
revisit the controversial crude oil export ban.

For one thing, Texas is a petro state in the process of tripling its own oil
production over the current four years (2012-2016) to reach 3 million barrels per
day. Texas oil production will soon be above that of most OPEC member
countries. Tight oil formations like Eagle Ford and Permian Basin are at the
forefront of unconventional fuel production, and, along with production from other
areas in Texas and New Mexico already added roughly 1 million barrels per day
to total U.S. liquids output between 2008 and 2012.

Also, the debate over crude oil exports can use some Texas initiative to
gain and maintain the attention of policymakers in Congress and at the White
House on the critical issue of enabling some level of crude oil exports.

The participation of the House Homeland Security Chairman in introducing
and pushing this legislation demonstrates the continuing importance of energy
supply issues to U.S national security. The need for this was most recently
evident in Russias absorption of Crimea and its aftermath. There is still little
evidence that Russia is seriously concerned about effective reprisal.

Still, given the connection between U.S. foreign policy and oil and gas
production, it is good to know that those responsible for Americas energy
defense are at the forefront of the congressional debate over energy issues and
in the loop. And it is especially reassuring to see that House and Senate GOP
leadership will be actively engaged in efforts to reconsider the wisdom of
continuing the crude oil ban, at least in its current form.

It is also a positive step to see other key policymakers speaking up in
support of the many things that have been done by ranking Republican Senator
Lisa Murkowski (R-Alaska) to keep the export ban issue before policymakers and
the general public. The new Chair of the Senate Energy Committee, Mary
Landrieu, also seems ready to demonstrate bipartisan support for addressing the
export ban issue. In the interest of completeness, it should be pointed out that
Senators Murkowski and Landrieu are interested in demonstrating that the
Commerce Department retains authority to repeal the ban or restructure it
through a regulatory pathway. Regulatory and/or piecemeal revisitation of the
export ban issue could in the end be the only path forward for 2014, given the
fact that this is and will remain a highly politicized election year.

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How Did We Get Here? A Short History

The ban on crude oil exports was born in reaction to the events of the
early 1970s. Despite the general impression that the United States in the Sixties
was the absolute model for a nation in disarray, the 1970s were at least as
disruptive as the 1960s, perhaps many more times so.

That decade began with the imposition of wage and price controls across
the nation for 90 days, as a means of implementing the end of the gold standard
and U.S. abandonment of the Bretton Woods agreement. Crude oil, oil products
such as gasoline and diesel, and natural gas prices became subject to federal
wage and price controls declared effective on August 15, 1971.

Almost simultaneously, the most threatening international situations
developed. The war in Vietnam was coming to an ignominious end and still
occupied much of the attention of President Nixon and his advisors. Trouble was
also brewing in the Middle East, which had been an extremely volatile region
since the establishment of the Israeli state and the Suez Canal crisis. The U.S.
dodged a bullet in the 1967 six day war, but it resulted in a whole new set of
grievances that were front and center at the outbreak of the Yom Kippur War on
December 6, 1973. Egypt and Syria, in league with other Arab producers, set
out to raise world oil prices.

American oil production reached its peak in 1970, beginning a slow but
persistent decline until most recently. This situation was compounded by the cut
back or elimination of oil imports headed for the United States. The reduction in
available energy supplies resulted in sharp price increases and shortages of
crude and product. The situation manifested itself through long lines at gasoline
stations if and when they were open and product was available. As a rule, there
were no gasoline sales on Saturday nights or on Sunday. Many policymakers
were advocating adoption of permanent price controls and gasoline rationing.

On October 16, 1973 OPEC raised its posted oil price to $5.11 per barrel,
a 70% price increase. The next day OPEC cut production again by 5%. Western
policymakers, and particularly those from the United States, realized two things:
(1) an accommodation of some kind must take place with OPEC and others in
the Middle East to restore some sense of continuity and stability; and (2) the
West must face the reality that it could not continue to increase energy
consumption by 5% annually. A former U.S. Ambassador to Saudi Arabia
accepted a secret mission to conduct an audit of the U.S. energy position after
the embargo. Ambassador Akins determined that the United States had no
spare capacity and that U.S. oil production would continue to decrease. The
outlook was bleak; but there was nothing left to do but face the facts and move
on.

In the meantime, the Ford Administration continued Nixon economic and
energy policies. The most significant action taken was passage of the
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Emergency Petroleum Allocation Act, which imposed price, production, allocation
and market controls implemented by the Executive Branch on November 27,
1973.

Meanwhile, the Arab oil embargo doubled the real price of crude at the
refinery level, causing the street price of oil and oil products to quadruple. The
White House sent out Secretary of State Henry Kissinger to sell Project
Independence as an antidote; and the Democratic majorities in the House and
Senate decided instead to legislate. The vehicle was an omnibus energy bill
entitled the Energy Conservation and Policy Act, EPCA, 1975. The statute was
crafted in an atmosphere of fear of resource scarcity, especially of oil and gas.
Among many other things, the statute extended the authority under the
Emergency Petroleum Allocation Act to regulate price and allocation of oil and oil
products. (Natural gas was already regulated under the authority of the Natural
Gas Act.) In the timeframe of EPCAs consideration by the House and Senate
there were tremendous debates and all-out arguments regarding oil and gas
price controls. Liberal, pro-regulation lawmakers won both fights, but just by the
skin of their teeth. And time was not on their side. In another time (1981) and
place (the White House) both oil and natural gas price controls would ultimately
be abandoned.

The sponsors of the EPCA bill also incorporated CAF (corporate average
fuel economy) standards for automobiles and authorized establishment of the
U.S. Strategic Petroleum Reserve (SPR). They also added a provision to the bill
that for all intents and purposes legislated a ban on crude oil exports,
implementation of which was delegated to the Department of Commerce.
Senator Henry Jackson (D-WA) was a major player in developing and advocating
the crude oil export ban.
The statute had little or no impact on domestic production or prices because U.S.
consumption far surpassed production.

With the advent of the modern energy revolution, however, and the strong
increase in U.S. oil and gas production fuel from shale gas and tight oil, the ban
suddenly became very relevant. Industry and policymakers sought to bring the
subject of crude exports into tighter focus. Hence, the question

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What is Involved in Securing a Waiver from the Crude Oil Export Ban?

The following is a brief summary of the regulatory regime governing crude
oil exports. The law establishes a general policy of crude oil export prohibition;
exports are possible only under certain narrow exceptions. Bear in mind the fact
that market analysts, companies, and even the current Secretary of Energy have
publicly commented on the need to reconsider current export regulations, which
are both arbitrary and confusing. Lets quickly address the policy governing each
hydrocarbon:

Natural gas: can be exported. Permits for LNG terminals are granted on
a project-by-project basis, and the process differs, based on destination.
LNG products also must go through a safety and environmental review
process. The DOE will grant export authorizations unless the export is
found to be not consistent with the public interest. And the requests are
swiftly and automatically approved if submitted for or by countries with
which the U.S. has a free trade agreement.

Natural gas liquids - can be exported to any country, regardless of the
needs of the U.S. market. The five natural gas liquids are butane,
isobutane, natural gasoline, propane and ethane.

Crude oil Crude oil can be exported to Canada (so long as it stays in
Canada or if the product is exported back to the United States).

Petroleum products There are no restrictions on gasoline, diesel and
other petroleum products; they can be exported to any nonsanctioned
country, regardless of the needs of the U.S. market.

Condensate Like crude oil, condensate comes straight off a wellhead
and is lightly processed, while plant condensate results from the
processing of natural gas in a natural gas processing plant. Chemically,
lease condensate and plant condensate (natural gasoline) are essentially
the same thing. This material can end up either as natural gasoline or
plant condensate, depending on whether the weather is hot or cold at the
time of production. Also, field-derived lease condensate can only be
exported to Canada, while natural gasoline is treated as an NGL and can
be exported to any nonsanctioned country, regardless of the needs of the
U.S. market.
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After reviewing these classifications, it is difficult to reach any other
conclusion but that the different categories are arbitrary and, frankly,
inconsistent. And there are additional details used for classification of oils that we
havent discussed yet.

There are also different categorization of types and locations of oil:
Alaskan North Slope Crude that travels through the TAPS pipeline system,
California heavy crude, crude to Canada, Cook inlet crude, and swaps. As a
matter of fact, the two most obvious categories for waivers or exceptions to the
ban would involve crude of Canadian origin, and crude from countries with which
we have a trade agreement.

The Department of Commerce has generally approved U.S. exports to
Canada for domestic consumption but, as is the case with tight crude (light,
sweet crude), at some point there could quite possibly be a glut on the market,
resulting in having to shut in some or all of this production. There are signs that
the U.S. may be approaching that point. Throughout this discussion one can not
escape the conclusion that we in the U.S. have shifted from a position of energy
shortage to one of surplus, and that policy has yet to catch up.

Due to the Modern Energy Revolution that has already greatly increased
tight oil and natural gas production, hydrocarbon production is still accelerating.
U.S. oil production is at the highest level in 25 years. Analysts point out that the
U.S. has added the equivalent of an Iraq to world markets in the past five years.
The U.S. finds itself in a position of abundance of natural gas liquids, natural gas
and crude oil of the lighter grades. It is difficult to fathom how the markets can
work efficiently if there is not an escape valve so that exports of these plentiful
products can proceed.

According to the EIA and others, U.S. oil demand is flattening out and
American production is rapidly increasing. And most of the growth in oil
consumption is occurring in China, Japan and the third world. Doesnt that
indicate that some level of exports should be available to help balance supply
and demand??

This situation calls clearly for a change in current law. The ban distorts the
energy market and creates inefficiencies. Keeping the ban could result in
artificially low prices which in turn discourage investment in new wells both at
present and in the future. Opponents of a ban also stress that the United States
is a longtime proponent of free trade and seems hypocritical when it condemns
other trade restrictions while hanging on to one that protects its own crude oil
exports.

The Secretary of Energy recently mentioned that some of the regulations
in the energy area have not been reviewed for some time. But the Commerce
Department, which is responsible for regulations involving crude oil exports, has
not yet entered the fray. It is clear that there is already some interest in this issue
in the House and Senate as discussed in the opening section of this study. But
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Congress is currently tied up in knots and may not be able to resolve this
problem in the immediate future. Legislative action to eliminate the ban would
seem to be very difficult to come by before the midterm elections.


The Jones Act

One issue that should also be taken into consideration is the impact of the
Jones Act, which requires that shipping between two American ports requires an
American boat with an American crew. The earliest statute to this effect was
approved by Congress in 1789, so the idea has been around for a while. It is
theoretically possible to obtain Jones Act waivers, but very difficult. The impact
of the Act is to increase shipping charges where the Act applies, and to create
bottlenecks that benefit some market participants and penalize others, all in the
name of protecting the American maritime fleet.

In practice, it would be difficult if not impossible to address Jones Act
issues at the same time that the issues of crude oil exports are addressed.
However, the issue can be expected to appear as an example of a market
distortion that might be used in an attempt to shelter or sustain other market
distortions that arise when the crude export issue is discussed and debated.

Senators Menendez (D-NJ) and Markey (D-MA) have come out strongly
against making changes in the statutes that authorize the ban. They argue that
the rationale for the ban remains valid. Analysts and industry supporters of
changing the policy on crude exports are increasingly concerned that outright
repeal this year might be too heavy a lift. But, at the same time, economic theory
and historical experience have demonstrated that bans cause bottlenecks and
wasteful spending and constitute a poor policy choice.

In the meantime, crude oil production in the U.S. continues to ratchet up.
There are strong ongoing efforts to explain the need for crude exports, supported
by most corporate trade associations such as API and the U.S. Chamber of
Commerce, among many others. Hopefully this broad outreach effort will help the
oil and gas industry and its allies achieve their goals regarding the crude oil
export ban. As the debate unfolds, the available paths become more and more
evident.


What Happens to Gasoline Prices if the Crude Oil Ban is Lifted?

One of the most contentious issues in the debate about whether the crude
oil export ban should be lifted is how U.S. gasoline prices will increase, decrease
or remain unchanged. Resources for the Future addressed this issue in a recent
policy paper: Crude Behavior, Brown, Mason, Krupnich and Mares, RFF, 2014.
RFF: In this issue brief we offer economic logic and estimates from our (RFFs)
modeling and data analysis suggesting that the price of gasoline will likely fall by
around three to seven cents a gallon. As for the danger of higher prices for
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crude and product in the Midwest if the ban is lifted: RFF: lower crude oil
prices in the Midwest do not seem to have resulted in lower prices (for
consumers) in the Midwest.

And as for the growing mismatch between burgeoning light, sweet tight crude
production and appropriate refining capacity RFF found that lifting the ban on
U.S. crude oil exports would allow for a more efficient distribution of crude oil
among refineries in the Western Hemisphere and elsewhere in the world.
(op.cit.)


Possible Ways Forward:

Legislative Changes: it is possible, but rather unlikely, that Congress will
choose to repeal the EPCA language that establishes the ban. Congress will be
in session only rarely this year, given the advent of the Midterm elections.
Repeal of the ban outright is a controversial matter, and it is not clear that
industry has yet convinced policymakers that Congress should put this item on its
limited agenda for this year. Outright repeal would seem more likely in the next
Congress, especially if one party controls both chambers.

Administrative Changes: The President or Department of Commerce could
establish new and different criteria for approving export licenses. EPCA and
other related statutes give the administration some discretion in this area. For
example, the OCS Act sets up criteria for a waiver subject to Congress right to
disagree with the Presidents decision via a joint resolution. Many different
guidelines or criteria could be established. This waiver could be accomplished
through the Presidents own authority or by direction of Congress. Much
evidence indicates that the President has broad discretion in this area, and his
authority could be strengthened by working with Congress.

But one thing is clear: lawmakers need to rationalize policy on this issue
and to make best use of the many benefits that result from the new energy
revolution. It is very important that the executive and legislative branches work
together, if at all possible, to make changes that promote vigorous competition
and maximum reinvestment in the energy sector.



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Thomas Advisors, Inc.
Thomas Advisors, Inc. specializes in advising corporations, both domestic and
international, on how to work through the governmental maize to do business and also
represents them in the political process. Currently, Thomas Advisors, Inc. has expertise
in the fields of energy (coal, pipelines, power generation, wind, solar, refining and oil &
gas), drinking and wastewater, environmental services, land management, homeland
security and transportation. In addition to experience with the Legislative Branch of
government, Thomas Advisor professionals work with the Executive Branch including
the EPA, Department of Defense, Department of the Interior, and the Department of
Energy.

Bob Slaughter
Bob Slaughter is a recognized professional who brings more than 40 years of
Washington experience to Thomas Advisors. Prior to joining the firm, Mr. Slaughter
worked for the National Petroleum Refiners Association where he was the President
from 2002 until 2007 when he left Washington to pursue other interests. NPRAs
membership largely consists of the nations oil refiners and petrochemical
manufacturers. While at NPRA, he had extensive experience testifying before
Congressional committees on a host of sensitive and crucial subjects, including gasoline
production and supply, the importance of the refining and chemical industries to the
nation, facility security, and the most significant environmental initiatives. He also
represented the industry in interviews and informal discussions with all national news
media including the Wall Street Journal, New York Times, Washington Post, Los
Angeles Times, National Public Radio, the major television networks, plus Fox News,
Bloomberg News and CNBC.
Prior to NPRA, Mr. Slaughter was employed by Amoco Corporation (later to become BP)
being hired in 1985 to serve as their senior representative in Washington. During this
period he lobbied the Administration and the House and Senate on all major domestic
and international initiatives affecting the petroleum industry and many in the chemical
industry. He took a short leave of absence to serve as the Administrative Assistant to
Senator Robert Krueger (D) while the senator served a brief tenure as the appointed
Senator from Texas.
Before joining Amoco, Mr. Slaughter was in charge of Pacific Resources Incorporateds
Washington office, and served as liaison to the corporations General Counsel involved
with refining, alternative energy and synthetic gas-related issues as well as non-energy
issues important to the state of Hawaii. He also worked for the Natural Gas Supply
Association working on natural gas issues.
From 1979 until 1981, Mr. Slaughter was the energy advisor to Ambassador at large and
Coordinator of U.S.-Mexican Relations, Robert Krueger, at the State Department in
Washington. In this position he worked with the Mexican desk and other State
Department personnel, up to and including the Secretarys office. His focus was largely
on energy-related issues that directly affected U.S.-Mexican relations. Prior to this
international experience, Bob served then Congressman Bob Krueger (D- Texas) as his
energy legislative assistant, helping to manage consideration of a bill to deregulate
natural gas prices in addition to managing several energy and other legislative initiatives
on the House floor.
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Bob began his career as an entry-level staffer in the offices of his two home state
Senators, William Saxbe (R-OH) and Howard Metzenbaum (D-OH). Mr. Slaughter
earned a JD (cum Laude) from Georgetown Law School and a B.A. from Yale University.
Thomas J. Medaglia, III
In 1986, Mr. Medaglia was employed by Amoco Corporation as their company lobbyist in
Michigan, Ohio, Indiana and Kentucky. Later, he was promoted to Director of State
Relations with responsibility for overseeing the companys state government affairs
program in the U.S. In 1994, Mr. Medaglia was promoted to Washington, D.C. as
Director of Federal Relations where he was responsible for upstream and pipeline
issues. International Washington assignments included the Middle East, India and
Eastern Europe. After the merger with British Petroleum where he was part of the
Amoco merger team, he continued to have the same responsibilities for upstream and
pipeline issues with the newly created company named BP with emphasis on areas such
as the Gulf of Mexico and Alaska activities.
Mr. Medaglia retired from BP to become president of RWE North America Corp, the U.S.
holding company for RWE AG, a large German energy company. During this time he
was responsible for external affairs in addition to coordinating the U.S. CEO messaging
of their U.S. operations with that of RWE AG, the worldwide parent company. U.S.
subsidiaries included American Water, CONSOL Energy, NUKEM and Turner
Construction. Additionally, Mr. Medaglia was successful in growing the domestic
reputation of RWE AG and achieved support from the U.S. Administration for RWE AGs
Nabucco pipeline. This proposed pipeline would transport gas from the Caspian Sea via
Turkey to Europe. Mr. Medaglia was part of the team that successfully petitioned and
secured the various state approvals for RWE AGs Thames Water acquisition of
American Water, the largest private water and wastewater company in the United States
at the time.
Prior to Amoco, Mr. Medaglia practiced law in Ohio and Michigan specializing in
corporate, real estate, workers and unemployment compensation law in addition to
representing professional athletes in contract negotiations. During this time, he also
designed, developed and owned a restaurant and comedy club chain in the Midwest.
Mr. Medaglia is currently an Adjunct Professor of Law and Public Policy at Northwood
University where he teaches an interim Public Policy and Constitutional Law course in
Washington, D.C. He is also an advisor to the U.S. Oil and Gas Association and is a
yearly guest speaker at The American Association of Professional Landmens (AAPL)
Washington fly-in.
Mr. Medaglia holds a B.A. in Education from The Ohio State University and a Juris
Doctor degree from Thomas M. Cooley Law School, Michigan. He is licensed to practice
law in Ohio and Michigan and is a member of the United States Supreme Court. Tom is
a Board Member of the Ripon Society and a founding Board Member of the German
American Business Council. He is also a member of several business associations.