The US Oil Export Ban

The U.S. Energy Information Administration (EIA) yesterday added to the pressure on the US Government to remove the ban on crude oil exports. President Obama can remove the ban with an executive order. Speaker John Boehner has stated that legislative action will be considered in the Fall. Earlier Penley on Education and Energy had urged the removal of the export ban that originated with the 1975 Arab oil embargo and ensuing gasoline shortages in this country. Part of the reasoning for this blog’s support for the ban’s removal was the added foreign policy leverage that the US gains and the positive impact of its removal on the US economy.

The varying scenarios of the EIA report add additional support for the ban’s removal. The report confirmed the limited impact of the ban’s removal on domestic gasoline prices. It would leave US gasoline prices unchanged or slightly lower. The EIA report confirmed that the ban’s removal would produce downward, but limited pressure, on the global price of crude oil. US laws now allow for unlimited exports of the products from petroleum. Domestic crude oil can only be exported with a license, as is the case for Alaska’s North Slope oil and in certain cases with crude from California.

Yesterday’s release of the report from the EIA offered relatively complex analyses of the consequences of the ban’s removal based on various scenarios of oil price and production by 2025. Those scenarios included (a) the current reference price, (b) a low oil price, (c) high crude availability, and (d) high availability but a low price. The report confirmed that, under current, reference oil prices (Brent price of $90 per barrel in 2025) and under lower oil prices, domestic production would continue along current paths. With higher production versus the reference scenario, the Brent price is held to $88 per barrel by 2025. Domestic production has been rising steadily since 2010. It has now reached more than 9 million barrels per day, which was the production level in the mid 1970s.

The removal of the export ban does have the potential to add additional pressure to produce more crude domestically. Domestic production promotes US oil independence, as Penley on Education and Energy has previously observed. For some, this pressure is viewed negatively because of the non-traditional sources of the additional production. But we remain highly energy dependent. While renewables continue to grow, and this blog has documented their growth, renewables remain a small proportion of energy production and are insufficient to meet the demand for energy. We will continue to need fossil fuels for the foreseeable future. Of course, technological changes will alter supplies and availability of both fossil fuels and renewables and their growth paths. And, additional renewables are highly desirable as a means to stem the growth in carbon with its damaging impact on climate.

As part of a mix of energy policies, including ones that support renewables, there is now even more evidence that the export ban on crude oil should be lifted. It remains this blog’s recommendation that President Obama speedily do so by executive order.


Good News on US Energy Availability

The US Energy Information Administration recently published its monthly report with good news about the increasing supply of domestic petroleum.  For the third consecutive year, total field production of petroleum rose.  From 7.5 million barrels per day in 2010, it has risen to 8.5 million in 2012, nearly a 12 percent increase.  Net imports of petroleum have fallen by 29 percent in the same period.

The downward slide in domestic energy production that began over fifteen years ago has finally turned around, and the US is more energy secure today because of it.  As this blog has detailed in the past, the US is headed toward a far more secure energy future.  Some might have thought that greater security was due entirely to the increase in the availability of natural gas from hydraulic fracturing, or “fracking.”  But in fact, domestic petroleum production has increased as well.  The US is now on target to go from 8.5 million barrels a day to 15.6 million barrels per day by 2020.

The development of domestic crude oil wells hit its lowest point in 1999 when fewer than 5,000 wells were drilled.  Despite some yearly fluctuation, the last four years have seen a 15.5 percent increase in number of wells drilled, and more than 15,000 wells were developed in 2010, the most recent year for which the US Energy Information Administration reported.

Why then have US gasoline prices not fallen in line with increased domestic oil production?  The answer is rising global demand for oil, which I discussed in an earlier blog.  World demand for energy and petroleum products such as gasoline determines price, not merely domestic supply and demand.  The October report from the US Energy Information Administration reports rising world crude oil production – and with it rising demand of course.  Since the early eighties, annual production has risen almost steadily.  With an average of more than 75 million barrels per day in the last seven months of 2012, worldwide crude oil production has risen almost 4 percent from 72.8 million barrels per day just five years ago.

Globally we are an energy consuming people.  As developing countries increase their desire for lifestyles like those familiar to Europeans and Americans, demand will increase.  It is not surprising that renewable energy supply, along with more traditional carbon fuels, is also increasing.  And the speed with which renewables are increasing is becoming steeper.  Between 2006 and 2011, renewable energy production increased 27 percent.

The good news on US energy availability is that both renewables and more traditional forms of energy generation are increasingly available domestically.  While the US cannot contain rising gasoline prices, it can benefit in energy security from the apparent domestic increase in both traditional and renewable sources of energy.

Tax Policy and US Strategic Interests

The political climate of a presidential race often leads to distortions.  Candidates necessarily position their arguments in ways that are intended to be starkly different from one another as a means of definition and attracting our votes.  The media sometimes abet the distortion by representing one candidate’s views as extreme when compared with the competitor.

This is exactly what is occurring now with regard to energy policy.  Recently, the Center for American Progress Action Fund (CAP) criticized Governor Romney’s proposed corporate tax plan for allegedly providing reductions for oil companies like ExxonMobil, BP, etc.  The report claims that oil and gas companies pocket $2.3 billion annually through “special tax breaks” and that the proposed reduction to the corporate tax rate could double those.  But the thinly veiled argument makes clear what appears to be its fundamental interest – portraying oil companies negatively and distorting the differences between Governor Romney’s tax plans and those the President has espoused.

Governor Romney’s proposal is to reduce corporate taxes from 35 percent to 25 percent.  Today, the US has the highest rate among developed countries, however, the US still collects less corporate tax revenue as a percentage of GDP than most other industrialized countries.  See my blog, “A Revenue Neutral Tax Swap: A Sensible Approach to Climate Change.”  The complexity of our tax code leaves plenty of room for strategically designed tax incentives, but leveling the corporate rate will make the American business environment more competitive.

The tax code has very different impacts by industry.  The oil industry ‘s effective tax rate is not one of the highest rates; petroleum producing companies have an effective federal corporate tax rate of 11.3 percent according to a report in the Economist.  This rate is lower than banking, trucking and tobacco, but it is higher than medical supplies, drugs, and computer software.  Yet, the oil and gas industry pays a higher effective rate compared to the average S&P Index company, according to the Wall Street Journal, and between 2006 and 2010, ExxonMobil paid more in tax than it made in earnings.

The corporate tax code has numerous purposes but it should be as neutral as possible in order to promote creative economic growth with the understandable constraints of our strategic national interests.  One can certainly argue that we have a strategic interest in sufficient energy to promote economic growth; one could also maintain that we have a strategic security interest in domestic sources of energy, including not only oil and natural gas but renewables as well.

While opponents try to tie Governor Romney to “Big Oil,” they largely ignore President Obama’s failure to make promised reforms to the corporate tax code.  Similar arguments can be made that the President has promoted tax policies and federal programs that support select industries and businesses – e.g., those from the renewable energy industry.  As a result the Administration has been tied to failed federal investments in risky renewable energy endeavors and efforts to limit the growth of atmospheric carbon via energy policy.  The Obama Administration has provided loans with rates well below those indicated by the risks inherent in the renewable energy industry, and some of those companies have failed.  It has supported tax breaks – call them subsidies – for solar energy which has a very minimal carbon footprint.

Unfortunately, because of the nature of campaigns it will likely have to wait until after November, but we should be focused on formulating policy good for the US.  That policy should include reform to the federal corporate tax code with the goal of making it as neutral as possible in order to encourage innovation and economic prosperity.  But it must also recognize critical social, health, economic and security interests that will drive us to limit the code’s neutrality with selected tax breaks.  Those are likely to include domestic energy production – from drilling, fracking, and harnessing the energy of the sun, wind etc.  Call them special interests with special interest tax breaks if you wish; they should however be defined in terms of US strategic interests and held to a high standard for evaluating their impact in leading to indicated strategic outcomes.