Barach vs Crude Oil

Crude Oil's Coming Clash With Obama's New Climate Policy

By MARK P. MILLS
Posted 07/02/2013 06:03 PM ET

President Obama's speech at Georgetown University last week provided clarity, if there was ever any doubt, as to why the administration equivocates on approving the Keystone XL oil pipeline, heel-drags on permits for natural gas exports and restricts federal lands from hydrocarbon development.

The president is doubling-down on policies unfriendly (to put it politely) to hydrocarbons: coal, natural gas and oil.

There is no small irony in the fact that, despite the policy head winds, U.S. coal exports have doubled since Obama became president. And two years ago America became a net exporter of refined petroleum products — gasoline and diesel — for the first time since 1949.

Those exports, when combined with a huge decrease in crude imports occasioned by massive growth in domestic oil production, are now driving down the nation's economically debilitating trade deficit, nearly half of which came from oil imports.

But, given Obama's stated willingness to make policy by executive fiat, maybe we should take note of a little-known provision in the still-in-force 1975 Energy Policy and Conservation Act.

The EPCA gives any president authority to restrict exports of coal, petroleum products, natural gas or petrochemical feedstock "under such terms and conditions as he determines to be appropriate and necessary." No president, thus far, has ever invoked that authority.

We are likely to learn more about the EPCA, and how far Obama will go in his attempts to throttle back America's hydrocarbon machinery, as soon as some brave company, likely in Texas, applies for permission to export large quantities of American crude oil.

Such a remarkable possibility is practically guaranteed by virtue of the state of today's oil markets (massive global demand), juxtaposed against incredible U.S. productivity in hydrocarbons (where all the growth has been on private and state lands).

But while exporting gasoline is permitted (though it can in theory be constrained) under the EPCA the export of crude oil requires presidential permission; indeed, the act directs the president to restrict the export of crude.

The imminent completion of a network of pipelines from the American heartland (source of the new production) to the Texas Gulf
Coast will soon flood refineries there with more crude than can possibly be processed.

It's not just that there are too few refineries. Many Gulf Coast facilities were built to process heavy crudes from Venezuelan and Canadian oil sands; they can no more switch to the prolific light crude of U.S. shale fields than a diesel truck can switch to gasoline.

Some argue we should build new refineries before we begin exporting crude. But that takes time. And why not do both?

Benefits from exporting crude immediately accrue because it is easier and cheaper to transport than LNG, since the latter requires massive gas-liquefaction facilities costing tens of billions and expensive specialized ships. And there's currently a glut of tankers on the high seas offering low transport costs to a world hungry for oil.

It's a good bet there will be opposition to crude exports, and it will be based on the same two claims used against selling natural gas and coal overseas: a) exports will contribute to increased carbon dioxide emissions, and b) America's resources should stay in America since "using them up" won't lower, and could even contribute to, higher energy prices.

To argue the former is to subscribe to the patently silly notion that America can set an example that will lead to lower global energy use by billions of people seeking prosperity, and that other nations (often not our friends) won't supply those hydrocarbons if we don't.

As for the second trope, it continues the myth that both technology progress and hydrocarbon reserves have peaked. But the reality is U.S. oil production is growing fast because of technology and America's unique infrastructure, which together have unleashed our vast resources.

The U.S. is the world's fastest-growing oil and natural gas producer, and the most efficient extractor of coal. This hydrocarbon abundance is stimulating a manufacturing renaissance in industries chasing low-cost energy rather than low-cost labor, and attracting a rush of foreign investment, $150 billion in the past four years alone.

Adam Smith, in the "Wealth of Nations," said nations should produce and sell what they're particularly good at. No nation is as good at producing hydrocarbons as America.

Trade has been an engine of economic growth for centuries, and free trade championed, if not pioneered by Adam Smith was arguably the accelerant of global prosperity over the past two centuries. At the beginning of this high-tech 21st century, hydrocarbons comprise the biggest class of products traded in the world, at $2 trillion annually.

In terms of job and business creation, America's hydrocarbon industry has been the brightest light in the dark economic times since the
Great Recession began. Now is the time to encourage, not throttle it back.

But Obama's newly articulated climate policies will, if successful, prevent the United States from becoming the rising star of global trade in hydrocarbons.

• Mills, a physicist, is senior fellow of the Manhattan Institute and author of "The Case for Exports" and "The Bottomless Well."