[Senate Hearing 113-355]
[From the U.S. Government Publishing Office]
S. Hrg. 113-355
CRUDE OIL EXPORTS
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
TO
EXPLORE OPPORTUNITIES AND CHALLENGES ASSOCIATED WITH LIFTING THE BAN ON
U.S. CRUDE OIL EXPORTS
__________
JANUARY 30, 2014
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the
Committee on Energy and Natural Resources
__________
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89-383 PDF WASHINGTON : 2014
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
RON WYDEN, Oregon, Chairman
TIM JOHNSON, South Dakota LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan DEAN HELLER, Nevada
MARK UDALL, Colorado JEFF FLAKE, Arizona
AL FRANKEN, Minnesota TIM SCOTT, South Carolina
JOE MANCHIN, III, West Virginia LAMAR ALEXANDER, Tennessee
BRIAN SCHATZ, Hawaii ROB PORTMAN, Ohio
MARTIN HEINRICH, New Mexico JOHN HOEVEN, North Dakota
TAMMY BALDWIN, Wisconsin
Joshua Sheinkman, Staff Director
Sam E. Fowler, Chief Counsel
Karen K. Billups, Republican Staff Director
Patrick J. McCormick III, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Baldwin, Hon. Tammy, U.S. Senator From Wisconsin................. 12
Barrasso, Hon. John, U.S. Senator From Wyoming................... 9
Burnett, Graeme, Senior Vice President, Delta Air Lines, Atlanta,
GA............................................................. 17
Cantwell, Hon. Maria, U.S. Senator From Washington............... 9
Franken, Hon. Al, U.S. Senator From Minnesota.................... 5
Hamm, Harold, Chairman and Chief Executive Officer, Continental
Resources, Inc., Oklahoma City, OK............................. 13
Heinrich, Hon. Martin, U.S. Senator From New Mexico.............. 11
Hoeven, Hon. John, U.S. Senator From North Dakota................ 6
Jaffe, Amy Myers, Executive Director, Energy and Sustainability,
Institute of Transportation Studies, Graduate School of
Management, University of California, Davis, CA................ 20
Landrieu, Hon. Mary L., U.S. Senator From Louisiana.............. 6
Manchin, Hon. Joe, III, U.S. Senator From West Virginia.......... 7
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 3
Portman, Hon. Rob, U.S. Senator From Ohio........................ 10
Scott, Hon. Tim, U.S. Senator From South Carolina................ 11
Weiss, Daniel J., Senior Fellow and Director of Climate Strategy,
Center for American Progress................................... 27
Wyden, Hon. Ron, U.S. Senator From Oregon........................ 1
APPENDIX
Responses to additional questions................................ 47
CRUDE OIL EXPORTS
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THURSDAY, JANUARY 30, 2014
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:40 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Ron Wyden,
chairman, presiding.
OPENING STATEMENT OF HON. RON WYDEN, U.S. SENATOR FROM OREGON
The Chairman. The Senate Committee on Energy and Natural
Resources will come to order.
We are going to have a very busy morning today. But I want
to start with some particularly exciting news. Senator Landrieu
will be having her first grandchild in a few hours.
[Applause.]
The Chairman. She has been up most of the night. We will
give her a round of applause. I'm not sure I would have even
been conscious this morning. But Senator Landrieu, with her
inimitable energy, is with us. We are glad that she is.
Senator Murkowski and I wanted, particularly, to have this
hearing because America's energy renaissance has sparked a
conversation on whether exporting crude oil is in the national
interest. I think it is fair to say that this conversation is
not going to be resolved any time over the next few weeks.
Certainly there is a lot of interest here in the Congress on
this subject and that is why we thought it was important to
hold this hearing to begin a real conversation on a very
important issue.
Personally I believe deeply in expanded trade. In my State
one out of 6 jobs depends on international trade. Trade jobs
often pay better than the non-trade jobs because they reflect a
higher level of productivity which is often required to get
American goods and services into international markets. When
I'm asked to summarize my economic views I often say that one
of my principle goals is to help make things in America, grow
things in America, add value to them in America and then ship
them somewhere. I have promoted that philosophy as Chairman of
the Finance Subcommittee on International Trade.
That is why today's debate is especially important.
The fact is energy is not the same thing as blueberries and
accordingly it is treated differently under Federal law. The
Energy Policy and Conservation Act allows for the export of
crude oil only when doing so is in the national interest. There
simply isn't that kind of requirement for blueberries or other
commodities. National security, of course, is involved when
Americans talk about exporting energy.
Right now there are several armed conflicts around the
world, in South Sudan, Libya, Mozambique and elsewhere that are
certainly being inflamed by fights to control oil. Now I'll put
Oregon blueberries up against just about anything. But the last
time I looked, nobody is fighting a war over blueberries.
It's hard to believe that only a few years after campaigns
for America's energy independence, having been dominated by
slogans such as ``drill, baby, drill,'' our country now finds
itself having a serious discussion on whether it should export
crude oil. Energy independence has been a well-worn staple of
virtually every politician's energy speech for decades. Now our
country is in the enviable position of having choices about our
energy future.
In other words the question becomes how can this energy
boon create the greatest benefit for America?
Can energy help grow our economy and create jobs?
The answer is, of course.
Can this new production ease the pain at the pump for
hardworking, middle class families?
Of course.
Can our country reduce its dependence on fuel from
countries that do not always have our best interest in mind?
Again, of course.
Those are the easy questions.
The harder question is how can you come up with a policy
where America can have it all?
Can our country get both the domestic benefits from exports
and still retain a cost advantage for domestic consumers, both
businesses and families?
That is certainly my goal. But in an effort to keep today's
hearing under 7 or 8 hours, we're obviously going to have to
have a focus. I want it understood for this hearing I have a
particular interest in focusing on the consumer.
In any energy debate it's never very hard to find a voice
for the various regions of America, for various industries in
America and for various ideological points of view in America.
Consumers, however, often don't have one. I just want it
understood that on my watch, the consumer is not going to get
short shrift.
Now it looks like a number of influential voices want to
start exporting oil. I just want to hammer home the point this
morning that, for me, the litmus test is how middle class
families are going to be affected by changing our country's
policy on oil exports. It is not enough to say some algorithm
determines exports are good for the Gross Domestic Product or
some other abstract concept.
American families and American businesses deserve to know
what exports would mean for their specific needs when they fill
up at the pump or get their delivery of heating oil. Simply
charging forward and hoping for the best is not the way you get
the best policy decisions. The responsibility of our committee,
and we have always worked on these issues in a bipartisan way,
is to make sure consumers are not going to get hammered by the
cost of gas going up because of some theory that everything is
just going to turn out hunky dory in the end.
I'll wrap up by saying that I think there are important
issues with respect to timing. There may be a time when crude
oil exports are appropriate. One of the questions we're going
to have to explore is whether that time is now.
When a conversation has begun on exporting crude oil, I am
not hearing a similar conversation on ending imports. Our
country is still importing about 40 percent of our crude oil,
including from those places that do not have our best interests
in mind. Every member of this committee understands the debate
about energy as a global commodity.
We've all heard about how it's a global price. I'm sure
we're going to hear that again today. But a global price does
not automatically mean a stable price. If oil stops flowing
from Saudi Arabia next week, American consumers and businesses
would feel it in a hurry.
So the question is, does real energy security mean having
the ability to be energy independent even if we never actually
do it?
I think most Americans think our government would choose
not to import oil and provide funding to regimes unfriendly to
the United States if given the option.
All that said, we're going to listen to the arguments pro
and con. I personally need to hear more. I will not be making
any judgments today.
I look forward to working with Senator Murkowski, all of
our colleagues, so that our country can maximize, I think, what
we all would say is a historic set of circumstances that we
want to think through carefully about how to tap the potential
of.
Senator Murkowski.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman.
I appreciate your considered remarks and the opportunity to
bring up this issue before the committee. As you and I have
both noted over the past year we haven't shown any reticence in
taking up the difficult issues that face this Nation when it
comes to energy, energy production, the issues of export
whether it's natural gas or now oil. This is what people expect
us to do is take up the hard issues, have considered,
thoughtful debate, dialog and then where and when appropriate,
to act on that.
My hope is that today's discussion is the beginning of many
very considered and thoughtful discussions on what is certainly
a very timely issue given the position that this country is in
when it comes to our dramatically increased oil production.
So again, I appreciate the opportunity to discuss this
today. I would note that it has generated a fair amount of
discussion. We haven't seen a full hearing room in a while.
We've got good representation here on the committee. So I'm
pleased to see that.
Mr. Chairman, you will recall that you and I were speaking
together at the Center for Strategic and International Studies
on unconventional natural gas production. It was last year,
just about this time, I think, maybe a week or so off. But
during the Q and A after our presentation one of the attendees
asked us about the ban on crude oil exports from the United
States.
You proceeded to answer the question in a very thoughtful
manner. When it came time for my response I said isn't it
amazing that you're able to ask that question and not be
laughed out of the room because a year prior to that it would
not have even been possible to have that discussion. So where
we have come in just a year in recognizing, again, that as a
Nation when it comes to our energy production on several
different fronts, the landscape has changed dramatically.
Thanks to my colleague at the end here what we're seeing
coming out of North Dakota has really changed the dynamic from
an energy perspective. It has helped with, clearly, with our
jobs and our opportunities. But it's not just North Dakota.
It's what we're seeing in Texas. It's what we're seeing in
California.
Unfortunately we're not seeing it in Alaska. I regret to
inform my colleagues that we're not going to see the
opportunity for exploration up in the Beaufort or the Chukchi
this year. Shell has just announced that they are not going to
be moving forward in 2014 because of the recent decision by the
ninth circuit and the lack of certainty from a regulatory and a
permitting perspective from this Administration. Very troubling
to me.
But let me get back to where I think we want to take the
conversation here this morning.
Just a couple weeks ago I addressed the Brookings
Institution. I presented a white paper on the energy trade. I
called, at that time, for ending the prohibition on crude on
condensate exports.
I will tell you I have been really gratified by the
thoughtful responses. It hasn't been a knee jerk, oh my gosh,
we can't do it. The sky is falling. It is much more considered
and much more thoughtful. I think that's where we need to be
with these discussions.
I want to prompt further discussion and debate on the
issue. The analytical and the trade winds are blowing fiercely.
It's not just the polar vortex. It's this discussion on a very
important issue.
The architecture of U.S. energy exports must be renovated
if our Nation is to lead the world on issues of trade, the
environment and energy. The highest profile example is the
outdated de facto prohibition on crude oil and condensate
exports. This ban threatens record breaking U.S. oil production
and American jobs by creating inefficiencies, gluts and other
distortions.
It is my hope and expectation that this hearing continues
the conversation that began at Brookings, raising all the
issues, considering all sides and most important, reaching
conclusions so that we can move forward rather than let the
global energy markets developing around the world pass us by
and having said that, I don't expect that we're going to either
see the Administration moving forward with a decision next week
or legislation coming from--forward from me or from other
members of the Energy Committee here.
What I am hoping is that we can advance this discussion so
that it is clearly understood that from the consumer's
perspective it is understood and appreciated why exports would
make sense. Is the timeliness issue that you bring up, Mr.
Chairman, is critically important because timing is key here.
The impact on American consumers is critical.
I happen to believe that opening up world markets to U.S.
crude oil will lower the global price which will in turn lower
the global prices for petroleum products. All things equal, the
American consumer will benefit from this interaction as will
those Americans that are employed directly and indirectly as a
result.
Geopolitical impacts are also noteworthy here. The
international trade dimension, given the ongoing trade talks
with Europe and Asia, is just beginning to be understood. From
today's vantage point I believe that national security will
also be enhanced by our strengthened posture on energy trade.
We cannot let short term thinking distract us from the long
haul. Gasoline prices will fluctuate. We know that. We see it
every year.
There will be variations across different regions of the
United States. This is due to a constellation of variables
including infrastructure challenges, differing tax structures
across states, various economic inefficiencies and other
aspects of the Nation's refining and distribution system.
Regional variations and prices are still, ultimately,
variations on global prices.
Lifting the ban is about production. It's about jobs. The
International Energy Agency, IEA, has warned that maintaining
the ban may actually result in decelerating or shut in
production which would be to the detriment of the Nation's
livelihood.
So many things to chew on this morning, many things to
carry forward in further discussions, but we've got a panel in
front of us, Mr. Chairman, that I think is clearly
knowledgeable, poised, to speak to these issues. I think we
will gain from their input this morning. I thank them for being
here and thank you for allowing us to have this opportunity on
this important discussion.
The Chairman. Senator Murkowski, thank you for a thoughtful
statement.
Without the committee being hit by one of those politi-
facts, I'm told by our committee historians that this is the
first hearing in the Congress in 25 years on this topic. So
given that and the fact we have more than 10 percent of the
Senate here, a number of Senators have indicated that they'd
like to make a short statement.
Senator Franken did. Senator Landrieu.
STATEMENT OF HON. AL FRANKEN, U.S. SENATOR
FROM MINNESOTA
Senator Franken. Yes, I didn't want to interrupt the
Ranking Member, but when she was talking about our--where we've
come in the last few years in oil production and thanked my
esteemed colleague from North Dakota, Senator Hoeven.
I just wanted to point out that while as Governor he did
all kinds of things to make sure that the Bakken was developed
there. He did not discover the oil there.
[Laughter.]
Senator Franken. I just wanted to point that out. But, if
you would please discover some oil in Minnesota it would be
most welcome.
[Laughter.]
Senator Hoeven. You need to talk to our guest, Harold Hamm.
He may do that yet.
Senator Franken. OK.
The Chairman. We're clearly going to have a rollicking
morning.
[Laughter.]
The Chairman. Let me just go back and forth.
Is there a colleague on the other side who would like to
make a quick comment?
Senator Landrieu would like to have one. I just know that a
lot of you are under a time crunch.
Is there a colleague on the other side who just wanted a
minute or two or we'll go to Senator Landrieu?
Senator Hoeven.
STATEMENT OF HON. JOHN HOEVEN, U.S. SENATOR FROM NORTH DAKOTA
Senator Hoeven. Thank you, Mr. Chairman.
I'd just like to welcome Harold Hamm today. He really has
been a pioneer in the Bakken. Senator Franken is not too far
off when he talks about discovering oil.
He didn't discover the oil, but he certainly was a pioneer
in discovering the methods including hydraulic fracturing and
directional drilling and developing those methods in a way that
made that oil recoverable in the billions of barrels. It is
absolute leading an energy renaissance in this country.
So by way of introduction, I'm very pleased to welcome and
introduce Harold Hamm this morning.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Hoeven.
I very much enjoyed my visit to North Dakota as well and
appreciate your giving that opportunity.
Senator Landrieu.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Mr. Chairman, I think for your purposes
we have an excellent panel this morning. I want to thank both
you and Senator Murkowski for such a thoughtful opening
statement.
I'm going to submit my statement for the record.
But I do want to say that we are witnessing an energy
revolution in the country today producing more energy at home
here than we have in decades and to translate that into
numbers. The EIA predicts this year the U.S. will average 8.5
million barrels a day in production, one million per day more
than the average in 2013 and most importantly very near the
record of 9.6 million barrels a day last achieved in 1970.
That's why we're having this hearing today.
I think the testimony that Mr. Hamm and others will provide
is that this number could be increased substantially based on
new technologies, new opportunities which will benefit not just
the exploration and production companies of which many hail
from Louisiana and we're proud. But also the landowners, also
the oil supply and gas suppliers, also the general
manufacturers that make products completely unrelated to oil
and gas, but that employ a great deal of Americans that are
experiencing the excitement about additional supply and
potentially stable prices and reasonable prices.
So I'm going to put the rest of my statement in the record.
Most importantly I think for our refineries we do need to
get on the record what our refineries in the country are
positioned to process today and the kind of crude that's being
produced and the mismatch that's there. We have to be very
aware and sensitive of the investments that have been made by
our refineries. So I think we're going to hear some of that
today. I'm really looking forward to the testimony,
particularly the users of it like Delta Airlines that uses a
tremendous amount of fuel and has an important perspective for
us to consider.
So thank you, Mr. Chairman. I'll submit the rest of my
statement for the record.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
I would like to begin today by thanking Chairman Wyden and Ranking
Member Murkowski for convening a hearing on this incredibly timely and
vital topic.
The U.S., as every witness has noted, is in the midst of an energy
revolution, producing more energy here at home than we have in decades
and reaping the incredible economic benefit that has come with it.
To put this into numbers, the EIA predicts that this year the U.S.
will average 8.5 million barrels per day of production, 1 million
barrels per day more than the average in 2013 and very nearly the
record of 9.6 million barrels per day, last achieved in 1970.
This revolution is driven in large part by increased unconventional
production, which has grown from nearly nothing 10 years ago to
represent 1/3 of our current domestic production.
This is expected to rise, with EIA predicting that new
unconventional production in the Bakken, Eagle Ford and Permian basin
will drive the U.S. to match its record high domestic oil production
level of 9.6 million barrels per day by 2016.
However, a barrel of oil produced in these unconventional plays is
not the same as a barrel produced in Canada or elsewhere. We produce
light to intermediate sweet crude-very high quality crude, but one that
almost half of the 115 refineries in the U.S. are not designed to
efficiently handle.
This mismatch, combined with decreasing demand for refined products
such as gasoline, could lead to a surplus of supply without a readily
available way to use it, barring retooling a large number of U.S.
refineries or moving the crude elsewhere.
This raises the question we have arrived at today-what to do with
this new wealth of supply? It is apparent from your testimonies that
there are widely varying opinions on this matter, and I believe that
discussions like this one are essential to creating a consensus.
I believe that this discussion, and the one ones certain to follow,
hold exciting promise for our nation, and I look forward to working
with my colleagues to develop a strong, fact-based policy.
The Chairman. Thank you, Senator Landrieu.
Let's go to the other side. Is there anyone on the other
side who wanted to make a brief comment?
Senator Manchin I know was interested.
Senator Manchin.
STATEMENT OF HON. JOE MANCHIN, III, U.S. SENATOR
FROM WEST VIRGINIA
Senator Manchin. Thank you, Mr. Chairman.
I want to thank both you and Senator Murkowski for holding
this historic hearing today. But I just can't help but think
that where we are today and we're thinking about this which
would have never had this discussion a year, 2 years, 5 years
ago. It really speaks of the innovation and the changes that
you all have been able to develop for our country to make us
much more secure.
I can only think about the LNG discussions we're having
now, LNG exports, where we were going to import a couple years
ago. So that's part of this too will play into it.
I think, Senator Wyden, you've put it so succinctly that
basically that sweet spot. I can only think about 100 to 150
years ago the coal industry. What the coal industry did coming
from my little State of West Virginia, the best coking coal in
the world, making the steel that built the ships and built the
industrial revolution as we have it, gave us the life that we
have today that so many people have forgotten about and what
they're still depending from our little State and where we
would be if we would have sent that product out of the
marketplace.
There's a balance to be had. I think that we're able to
find that sweet spot, Mr. Chairman. I'm also going to introduce
my statement for the record in more detail.
But I'm most interested in this topic and this discussion
not just for us, but for our children and grandchildren and
basically for the security of our Nation.
So I thank all of you for what you've done and what you've
contributed.
The Chairman. Thank you, Senator Manchin.
[The prepared statement of Senator Manchin follows:]
Prepared Statement of Hon. Joe Manchin, III, U.S. Senator From West
Virginia
Thank you, Chairman Wyden and Ranking Member Murkowski for holding
this very timely hearing. I know that this whole issue of whether to
lift the oil export ban is a very new one--so much so that the Energy
Information Agency, universities, and think tanks are still in the
process of doing basic research into what lifting this longstanding ban
would do. I truly appreciate having this opportunity to hear from our
witnesses, who I understand have differing opinions on this topic. I am
also eager to hear from my colleagues on this Committee regarding their
views.
Personally, as we talk about the oil export issue, I can't help but
think of the ongoing debate about LNG/natural gas exports. Just a few
years ago, we were so short on natural gas here in the U.S. that we
were building import terminals to bring it in from the Middle East and
elsewhere. Then the shale boom happened. My home state of West Virginia
is one of the places blessed to have a huge shale reserve, in the
Marcellus and Utica shale plays. But we need to be very thoughtful and
deliberate in how we choose to use these resources.
A hundred and fifty years ago, if the U.S. had exported our coal as
a raw commodity, we would not have had the industrial revolution that
made us a world economic power, creating buildings, ships, bridges, and
rail lines out of the steel forged using that coal.
We need to find the right balance, where we are able to meet our
domestic energy needs--for things like rebuilding our manufacturing
base--while still allowing for some level of exports. I agree with
Chairman Wyden, who refers to this as the ``sweet spot'' when we are
talking about finding that level for natural gas.
I am interested to hear from our witnesses today about whether they
view oil exports in the same way they would view gas exports, and if
not, why not. And whether, in both cases, they think allowing wholesale
export of crude oil is good for our economy and national security.
Thank you.
Senator Barrasso.
STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR
FROM WYOMING
Senator Barrasso. Yes, thank you, Mr. Chairman, for holding
this important meeting.
I read a book this past weekend called Break Out. There's a
whole section on what Mr. Hamm has been able to accomplish.
It's about pioneers of the future. He truly is one. It goes
into the epic battle that is going to decide America's fate. A
lot of it has to do with our energy resources, the
availability, the production and the new technology that's made
it possible.
So I want to thank you, Mr. Chairman, for your leadership
and bringing this group together.
Thank you.
The Chairman. Thank you, Senator Barrasso.
Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR
FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman. Thank you for
the indulgence of statement. I'll try to be as brief as
possible.
I guess there are two issues that I want to make sure are
addressed. I don't know if they're going to be addressed at
this morning's discussion. But those are the issues of safety
and price.
I'm not saying you can't have oil transported safely. But
we had a huge fire at our Tesoro Anacortes refinery that killed
seven people, and a report is being released today about what
happened. Certainly we've also had smaller incidents.
Now oil. If you think of the North Dakota and export
opportunities, where is that going to go? On rail. So what are
the safety issues? How do we address them?
So to me that's a very important issue.
Second, this issue of price.
I certainly believe that it's a global market and a global
price. I definitely think we could do more to continue to
police those markets to make sure that manipulation of oil
futures doesn't affect the day to day price of oil which isn't
really part of today's discussion either or part of the oil
industry, but a little bit more about the banking industry. How
many people have their fingers in the oil futures pot when they
really aren't taking delivery for an end user.
But my point is is that this price issue, for us in the
Pacific Northwest, given the world market and yet still being
an isolated market, we've had some of the highest gas prices in
the Nation constantly. So it affects us. So we're going to pay
attention to that.
When the Congressional Research Service gave an informal,
back of the envelope, estimate about this particular issue on
exports, it's saying that some consumers could pay as much as 5
to 10 cents more per gallon if the ban is lifted. Now that's an
informal discussion. I know the Chairman and the Ranking Member
will get back to this at some point in time.
But to me, this is the issue. We know that oil markets and
energy supplies are going to be tight in the future. How do we
best police them so they're functioning like true markets? How
do we protect consumers in delivering the most cost effective
resources so that our economy can continue to grow?
So I thank the Chairman for this indulgence today. It's a
historic occasion. You're letting us have historic input before
the witnesses. So thank you for that.
The Chairman. Thank you, Senator Cantwell.
Any colleagues on the other side?
Senator Portman.
STATEMENT OF HON. ROB PORTMAN, U.S. SENATOR
FROM OHIO
Senator Portman. Thank you, Mr. Chairman.
I hadn't expected to have this opportunity either. But I
appreciate your holding the hearing. You're right, it is
historic that we're talking about this. Since 1975 we really
haven't had a discussion because we haven't had a reason to and
now we do thanks to hydraulic fracking and horizontal drilling
and the technologies and the shale finds.
LNG exports issue is, I would think, more controversial a
year ago than it is now. It's because we have found ourselves
in a situation where, based on the economic analysis, it looks
like we can afford to export. Still help our manufacturers in
places like Ohio achieve what is happening which is
unbelievable.
It is a revolution in the sense that we're finding more
natural gas and oil and prices are low. But it's much more as
to the impact on jobs in my State and other states where
manufacturers are coming back. They're adding jobs because
they're seeing that there will be a long term and stable price
for energy which is an important input, particularly in some of
the energy intensive industries in my State.
On the issue of oil, the one thing I'd love to hear today,
Mr. Chairman, is whether the price at the pump is determined
through the global market because I appreciate what Senator
Cantwell said. She made some good points. We also hear that in
effect what happens at the pump in Ohio and around the country
is affected by the global marketplace, predominately.
We see that, you know, when there's an issue overseas where
there is no disruption of supply but the potential for it we
see the prices go up. So I would like to hear more about that,
understanding how this differs from natural gas in terms of the
market and ultimately what it can mean for our consumers.
Finally, since Senator Manchin talked about the sweet spot
I'd love to hear a little more about what could be done in
terms of maybe a swap specifically with Mexico that's been
suggested by some folks where we would be exporting light,
sweet crude in exchange for heavy crude and whether that makes
sense. So it may not be a wholesale lifting of the export ban
at this point, but it might be some opportunities for us to
actually enhance our competitiveness in this country and be
sure we have the right balance of energy resources in the
context of again, this revolution that's really put the United
States in a position to be more competitive across the board.
So those are things I'd love to hear, Mr. Chairman, today
in the conversation. Again, really appreciate the witnesses
being here. We've got a great panel.
The Chairman. Thank you, Senator Portman.
Senator Heinrich.
STATEMENT OF HON. MARTIN HEINRICH, U.S. SENATOR
FROM NEW MEXICO
Senator Heinrich. We're going on a long time here so I'll
try to be brief.
But----
The Chairman. It's been 25 years.
Senator Heinrich. That's a good point.
[Laughter.]
Senator Heinrich. Yes, there's a lot of bottled up ideas
here.
The Chairman. Ah, yup.
Senator Heinrich. But I just want to remind my colleagues
that one of the reasons why we're having this conversation, one
of the reasons why the market has changed so much, is because
of this technology that's been developed, as you said,
horizontal drilling, but also hydraulic fracturing. Much of the
basic research for that came out of our national laboratories
including Sandia National Labs in New Mexico. My point is only
that after several years of declining budgets and sequestration
I think it's incredibly important for us to realize that things
that we consider mature and industries that have been around a
long time can be radically changed by our investments in basic
research.
We need to continue to make sure that we don't lose sight
of that.
The Chairman. Very good.
Other colleagues?
Senator Scott.
STATEMENT OF HON. TIM SCOTT, U.S. SENATOR
FROM SOUTH CAROLINA
Senator Scott. I'd feel left out if I didn't say something.
The Chairman. Alright.
Senator Scott. So I'll say something.
[Laughter.]
The Chairman. Not on our watch you won't be left out.
Senator Scott. Thank you, Mr. Chairman. You are always so
kind and gracious.
Having the opportunity to go to Midland, Texas recently and
see the results and the impact of hydraulic fracturing as well
as horizontal drilling. It's quite remarkable where we find
ourselves today especially when you look back over the history,
2004, 2005, 2006 that we were at a plateau. The end was coming
very soon.
The reality of it is because of yourself, sir and I think
it was George Mitchell, perhaps, that invested a lot of
resource and took amazing risks to get us, as a country, into a
position where we should have a larger conversation at some
point in the near future about the impact of these export
opportunities on our national security. One of the things that
we recognize is that as we become more aggressive with our oil
production and our oil, hopefully, exporting I think it puts
our Middle East competitors in a very unique position to take a
serious look at their own budgets, their own revenues.
Certainly as I look in our future, ours is pretty positive. But
I think it does more for our national security that we've
really articulated in the last several years.
The Chairman. Thank you, Senator Scott.
Any others?
Senator Baldwin.
STATEMENT OF HON. TAMMY BALDWIN, U.S. SENATOR
FROM WISCONSIN
Senator Baldwin. Thank you, Mr. Chairman.
I wanted to talk a little bit about the context in which
I'm going to be listening to the testimony and thinking about
this input. I mentioned it actually at our hearing quite
recently because this winter in Wisconsin families and business
owners have had one issue on their minds. That's the cost and
availability of propane.
It's an especially cold winter in Wisconsin this year. For
many people who have for years relied on a steady propane
supply, this year they're unable to find fuel to fill their
tanks. At the same time regional suppliers have been depleted.
Prices have risen from about $2.20/gallon to over $6.00/gallon.
It's risen in just 3 weeks.
This is really devastating and very frightening for
thousands of families across Wisconsin. I'm hopeful that the
committee will take a close look at how we can solve this
problem and figure out how we can prevent it from ever
happening again.
But in addition to very tight domestic supplies this season
we've also witnessed a dramatic, a fairly dramatic, increase in
propane exports. In fact in the last 3 months at the very same
time that Midwestern supplies were dwindling the export
industry nearly tripled exports. The propane supply crisis
should give us pause and should inform the larger discussion
about another fuel that is also critical to our economy.
Consumer supply protections are a central part of any serious
debate about the future of crude oil exports.
Let me just add one other issue. I don't know if I'm going
to get a chance to stay long enough to ask questions, so maybe
I'll just suggest one area of interest. One of the major causes
of the propane shortage in the Midwest has been as a result of
infrastructure changes. Pipelines that have served the region
for decades are being repurposed to serve new oil fields. As
oil production increases these infrastructure pressures, I
think, will only increase.
So all part of what I'll be--the context in which I'll be
viewing today's discussion.
Again, Mr. Chairman and Ranking Member Murkowski, I very
much appreciate our chance to hear the testimony today.
The Chairman. Thank you.
I think we're ready to go to our witnesses and our guests.
Any other comments from the other side?
Alright, let's go forward then.
Mr. Harold Hamm, Chairman and Chief Executive Officer,
Continental Resources in Oklahoma City.
Mr. Graeme Burnett, Senior Vice President of Fuel
Optimization for Delta.
Ms. Amy Myers Jaffe, Executive Director of Energy and
Sustainability at the Graduate School of Management in the
Transportation Studies area at the University of California at
Davis.
Mr. Daniel Weiss, Senior Fellow and the Director of Climate
Strategy at the Center for American Progress.
We welcome all of you.
We'll make your prepared statements a part of the record. I
think the 4 of you could see that there is great interest among
the Senators. You will have plenty of questions.
Mr. Hamm, welcome.
STATEMENT OF HAROLD HAMM, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
CONTINENTAL RESOURCES, INC., OKLAHOMA CITY, OK
Good morning, Chairman Wyden, Ranking Member Murkowski and
members of the committee. My name is Harold Hamm. I serve as
Chairman and Chief Executive Officer at Continental Resources,
an Oklahoma City based independent oil and gas exploration and
production company. We do not have refineries.
It's an honor to address you today on this critical subject
of crude oil exports. Whether blueberries or barrels of oil
restrictions hamper growth in the market and the same is with
this critical product that we're talking about, crude oil
because we need to lift this restriction sooner than later.
As Chairman of Domestic Energy Producers Alliance and as
CEO of the company that co-developed the first field ever
drilled exclusively with horizontal drilling, no fracks and a
company that has the largest lease holder and most active
driller in the Bakken Play in North Dakota is in a unique
position to be one of the first to see American energy
independence on the horizon 3 years ago. As technology
continues to advance and new supplies of premium crude oil are
discovered, today I see firsthand what's necessary to continue
this American oil and gas renaissance and achieve energy
independence for our country.
I appreciate you inviting me to share my experience and
insight with you here today.
In October 2011 DEPA put a stake in the ground and
predicted American energy independence by 2020. America's
independent oil and gas producers have unlocked the technology
and resources that made this a reality, not the majors. As a
result we can today mark the recent 40th anniversary of the
OPEC oil embargo by ending their oil scarcity in America and
along with it ending the last short sighted regulation passed
during that same period.
The laws passed in the 70s artificially controlled the
supply, demand and price of U.S. energy and brought about
unintended consequences. One law even banned the use of natural
gas as a boiler fuel and mandated U.S. power plants to switch
to less friendly alternative, coal. We understand what's
happened.
Thankfully in response to dramatic changes in our global
energy industry legislators have repealed or let expire nearly
all post embargo regulations save two, the Energy Policy and
Conservation Act of 1975 and the Export Administration Act of
1979 which essentially banned crude oil exports. The scarcity
mentality that originally led to the creation of these export
restrictions no longer reflects the economic reality of the
global energy marketplace that we have today.
We are entering a new era of energy abundance in America
and the world. Heretofore we have only been able to extract
hydrocarbons from reservoir quality rock primarily through
vertical wells. But through technological breakthroughs in
horizontal drilling we can develop resources previously thought
to be unattainable by drilling two and 3 mile along laterals.
America now counts their natural gas supplies in centuries.
Experts agree we'll be energy independent in terms of crude oil
within this decade. This phenomenon was brought about by a
group of independent American producers and missed by the
general consensus of the industry. It was in complete contrast
to the popular belief that the United States would be running
out of oil and gas at the turn of the 21st century.
Today we must correct another popular misconception that
we're not exporting petroleum. Nothing could be further from
the truth. Major oil companies are exporting refined petroleum
products without any limitations. Why should an independent
producer be allowed to do the same?
Are we going to be their milk cows forever?
Over the years some have argued granting U.S. crude oil
producers free access to world markets would drive up the cost
of gasoline. The opposite is actually true. Unlike the exports
of crude oil, exports of gasoline and other refined products
are not restricted. Under current law our government has
arbitrarily subsidized in some U.S. refineries, many of which
are foreign owned, by giving them the ability to buy American
oil at artificially low prices yet sell petroleum products in
the higher priced global markets.
The true benefits of exports to the American consumer will
be competition for the refining of gasoline. Indeed crude oil
is no different than any other commodity demanded by consumers.
The lower prices are only brought about by increased supply,
greater competition, weaker demand or improved efficiency in
the market. When governments attempt to legislate lower prices,
it don't matter how well meaning the laws may be, market
restrictions, market distortions and unintended consequences
inevitably result. Supply and competition fall short of
potential and the consumer ends up paying higher prices.
Over the past 18 months consumer prices for both gasoline
and diesel have been reduced almost 20 percent due to the
American energy renaissance brought about by horizontal
drilling. A recent, released only yesterday, a report by ICF
International states American consumers cost for these
commodities can be reduced another $6.6 billion per year if the
export ban is removed.
We find ourselves at a crossroad. Do we cap oil production
or modernize Federal rules and regulations to reflect the
reality of today? Lifting export restrictions will strengthen
our domestic oil industry, a critical component of our economy
whose impact reaches far beyond the American consumer.
The energy sector has added jobs for millions of Americans
and has also served as a job multiplier for our Nation's
growing chemical and manufacturing industries.
Energy independence doesn't mean being isolationist. As
we've seen in Cuba, Venezuela, North Korea, closed societies
don't work. Energy independence means energy security.
In conclusion, the world has drastically changed since the
OPEC oil embargo and reactionary enactment of Federal
regulations in the 1970s. Even then that ban was symbolic, as
we had no oil to export. Americans and consumers of all nations
would benefit from the lifting of these restrictions that
inhibit the export of crude oil produced in the U.S.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hamm follows:]
Prepared Statement of Harold Hamm, Chairman and Chief Executive
Officer, Continental Resources, Inc., Oklahoma City, OK
Chairman Wyden, Ranking Member Murkowski and Members of the
Committee, my name is Harold Hamm. I serve as Chairman and Chief
Executive Officer of Continental Resources, an Oklahoma City-based
independent oil and gas exploration and production company. It's an
honor to address you today on the critical subject of crude oil
exports. As Chairman of the Domestic Energy Producers Alliance and as
CEO of the company that co-developed the first field ever drilled
exclusively with horizontal drilling and the company that is the
largest leaseholder and most active driller in the Bakken Play, I was
in the unique position to be one of the first to see American energy
independence on the horizon three years ago. And as technology
continues to advance and new supplies of premium crude oil are
discovered, today I see first-hand what's necessary to continue this
American oil and gas renaissance and ultimately achieve energy
independence for our country. I appreciate you inviting me to share my
experience and insight with you here today.
In October 2011, DEPA put a stake in the ground and predicted
American energy independence by 2020.\1\ America's independent oil and
gas producers have unlocked the technology and resources that make this
a reality. As a result, we can today mark the recent 40th anniversary
of the OPEC oil embargo by ending the era of oil scarcity in America
and, along with it, ending the last of shortsighted regulations passed
during that period.
---------------------------------------------------------------------------
\1\ Stephen Moore, ``How North Dakota Became Saudi Arabia,'' Wall
Street Journal (October 1, 2011)
---------------------------------------------------------------------------
The federal laws passed in the 1970s artificially controlled the
supply, demand, and price of U.S. energy and brought about unintended
consequences. For example, one law even banned the use of natural gas
as a boiler fuel and mandated U.S. power plants switch to a less
environmentally friendly alternative, coal.\2\ Today America is still
struggling to rectify the aftermath of this rash regulation.
---------------------------------------------------------------------------
\2\ Powerplant and Industrial Fuel Use Act of 1978 (Repealed in
1987) http://www.eia.gov/oil_gas/natural_gas/analysis_publications/
ngmajorleg/repeal.html
---------------------------------------------------------------------------
In the years since the enactment of these laws, our elected
officials have recognized our global energy industry has changed
dramatically. Thankfully, in response to these changes, legislators
have repealed or let expire nearly all post-embargo regulations save
two: the Energy Policy and Conservation Act of 1975 and the Export
Administration Act of 1979, which together essentially ban crude oil
exports.
As the world has changed and other similar, post-embargo
legislation has been phased out, the question has to be asked, ``Why
does the United States, a nation historically very supportive of free
trade, continue to impose export barriers for domestic crude oil?'' The
fact is the supply and demand factors and ``scarcity mentality'' that
originally led to the creation of these export restrictions in no way
reflect the economic reality of the global energy marketplace of today.
We are entering a new era of energy abundance in America and the
world. Heretofore, we have only been able to extract hydrocarbons from
reservoir-quality rock, primarily through vertical wells. But through
technological breakthroughs in precision horizontal drilling, we can
develop resources previously thought to be unattainable. America now
counts our natural gas supply in centuries, and experts including
Raymond James,\3\ Citi\4\ and the International Energy Agency\5\ all
agree we will be energy independent in terms of crude oil within a
decade or two. In comparison, this offsets a 2005 high of 60% crude oil
imports.
---------------------------------------------------------------------------
\3\ Raymond James ``Yes, Mr. President, We Believe We Can Drill Our
Way Out of This Problem'' April 2, 2012, Accessed January 27, 2014
\4\ Citi GPS ``Energy 2020 North America, the New Middle East?''
March 20, 2012, Accessed January 27, 2014
\5\ International Energy Agency ``World Energy Outlook 2013''
November 12, 2012, Accessed January 27, 2014
---------------------------------------------------------------------------
This phenomenon was brought about by a group of independent
American producers and missed by the general consensus of the industry.
The American oil and gas renaissance was in complete contrast to the
popular belief that the United States was running out of oil and gas at
the turn of the 21st century. In fact, under expectations of a far
different domestic production outlook only a decade ago, the U.S.
refining industry invested many tens of billions of dollars to retool
refineries to process heavy, high-sulfur bitumen and tar sands from
South America, Canada and Saudi Arabia.
Not only has horizontal drilling increased America's supply of
crude oil, but also it has improved the quality. Primarily the oil
produced through horizontal drilling is light, tight, low-sulfur crude,
making it the best quality in the world. It's environmentally friendly,
it promotes jobs, it's fueling a manufacturing and petrochemical
industry comeback in America, and we need to make sure we don't
disadvantage this high quality oil with refining capacity, wherever it
may be located in the world.
The popular belief is that we're not exporting petroleum. Nothing
could be further from the truth. Major oil companies are exporting
refined petroleum products like gasoline and diesel with no
limitations.\6\ Why shouldn't independent producers be allowed to do
the same? Are we to be their subjugate milk cows, just like being able
to export flour, but not wheat? No one will go for that.
---------------------------------------------------------------------------
\6\ Exports of petroleum products have nearly quadrupled from 870
thousand bpd in 2006 to nearly 3.6 million bpd in 2014, making the U.S.
a net exporter of finished productshttp://www.eia.gov/dnav/pet/
pet_move_wkly_dc_NUS-Z00_mbblpd_whtm
---------------------------------------------------------------------------
Over the years, some have argued granting U.S. crude oil producers
free access to world markets would drive up the cost of gasoline and
other petroleum products for American consumers. The opposite is
actually true. By imposing trade restrictions on a single segment of
the energy industry, namely domestically produced crude, our government
is arbitrarily subsidizing some U.S. refineries--many of which are
foreign-owned--by giving them the ability to source American oil at
prices well below the world market price, while at the same time giving
them the ``green light'' to sell petroleum products into higher-priced
international markets.
Energy independence is working--U.S. gasoline and diesel prices are
down 20%. But America's oil and gas renaissance is in jeopardy. These
outdated crude export restrictions have prevented domestic oil
exploration and production from achieving its full potential--slowing
potential job growth, restricting supply, and negatively affecting
global refined product balances, which sends the wrong message to our
trading partners around the world. Many refineries overseas designed to
only process light, sweet crude similar to U.S. grades find it
difficult to compete profitably with U.S. refiners with access to
domestic crude at artificially low prices, forcing many to close and
thereby reducing supplies of refined products on the global market.\7\
This effectively raises prices for consumers in the U.S. and all around
the world. Many refineries in the Caribbean, Europe, India and South
America are closing or operating at sub-optimal levels as they cannot
compete with U.S. refiners running on discounted domestic crude oil.
And, when supplies of gasoline and diesel fuel are restricted in the
global market, the global demand for U.S. gasoline and diesel
increases, thereby driving up the price U.S. consumers must pay at the
pump.
---------------------------------------------------------------------------
\7\ Valero Investor Presentation November 12, 2013 http://
www.valero.com/InvestorRelations/Pages/EventsPresentations.aspx,
Accessed January 27, 2014
---------------------------------------------------------------------------
The true benefit to the American consumer will be competition for
the refining of gasoline. Indeed, crude oil is no different than any
other commodity, product, or service demanded by consumers. Lower
prices are only brought about by increased supply, greater competition
amongst sellers, weaker demand, or improved efficiency in the
manufacturing and distribution process. When governments attempt to
legislate lower prices through regulations, no matter how well-meaning
the laws may be when introduced, market distortions and unintended
consequences inevitably result; supply and competition among producers
is rendered short of potential, and the consumer ends up paying higher
prices at the gas pump and in their monthly energy bills.
America is at a crossroads. Do we cap oil production or allow
exports? Lifting export restrictions will strengthen our domestic oil
industry, a critical component of our economy whose impact reaches far
beyond the American consumer. At a time when unemployment sits at
nearly 7% and, more importantly, U.S. labor force participation has
fallen to just 63%,\8\ the energy sector has added jobs for millions of
Americans--both directly and indirectly through energy service and
equipment companies. It has also served as a job multiplier for our
nation's growing chemical and manufacturing industries. To this point,
a recent IHS\9\ report issued in September 2013 on unconventional oil
and gas--or oil and gas produced by horizontal drilling--found that:
---------------------------------------------------------------------------
\8\ Bureau of Labor Statistics. http://data.bls.gov/timeseries/
LNS11300000. As of December 2013.
\9\ IHS ``U.S. Unconventional Oil and Gas Revolution to Increase
Disposable Income by More than $2,700 per Household and Boost U.S.
Trade Position by More than $164 billion in 2020, New IHS Study Says,''
September 4, 2013. http://press.ihs.com/press-release/economics/us-
unconventional-oil-and-gas-revolution-increase-disposable-income-more-
270. Accessed September 24, 2013.
Employment attributed to unconventional oil and gas and
petrochemical activity currently supports more than 2.1 million
jobs. IHS projects it to grow to 3.3 million jobs by 2020 and
3.9 million jobs by 2025.
In 2012, the unconventional oil and gas and petrochemical
industries contributed nearly $284 billion to GDP. IHS projects
this to grow to $468 billion in 2020 and $533 billion by 2025.
Unconventional energy increased U.S. household disposable
income by $1,200 in 2012. IHS projects the contribution to
increase to $2,000 per household in 2015 and $3,500 per
household in 2025.
Unconventional energy activity and employment contributed
more than $74 billion in government revenues in 2012 and is
projected to increase to $138 billion per year in 2025.
By supporting the export of domestically produced crude, U.S.
lawmakers can add to these totals in the form of increased jobs, GDP
and tax revenues.
Beyond its economic benefits, supporting domestic oil production is
vital for our national security. Indeed, the growth in domestic oil
production over the past several years has contributed to a significant
drop in U.S. reliance on imported oil.\10\ But national security and
oil exports are not mutually exclusive; in fact, they go hand-in-hand.
The authorization of oil exports promotes investment in additional
energy resource and infrastructure development at home, enabling our
nation to better control its own destiny.
---------------------------------------------------------------------------
\10\ Bureau of Economic Analysis, ``U.S. Trade in Goods (IDS-
0182).'' Accessed July 12, 2013.
---------------------------------------------------------------------------
But energy independence doesn't mean being isolationist. As we've
seen in Cuba, Venezuela and North Korea, closed societies don't work.
Energy independence means energy security. It means a chance for
America to step back into a global leadership role by creating a world
of balanced interdependency as opposed to dysfunctional
interdependency. And it means no one can choke off supply, turn on the
tap, or otherwise distort the market.
In conclusion, the world has drastically changed since the OPEC oil
embargo and reactionary enactment of federal regulations in the 1970s.
Even then the ban was symbolic, as we had no oil to export. Americans
and consumers of all nations would benefit from the immediate lifting
of restrictions that inhibit the export of crude oil produced in the
U.S. The net result of taking this timely action would be:
1. Lowering fuel costs to American consumers and businesses
by matching light, tight, low-sulfur domestic oil with refining
capacity designed to efficiently process this type of premium
quality crude.
2. Promoting job growth in the domestic energy sector by
encouraging tight oil production.
3. Raising tax revenue at the local, state and federal level
through GDP growth.
4. Advancing America's march to energy independence.
The Chairman. Thank you very much, Mr. Hamm.
Mr. Burnett.
STATEMENT OF GRAEME BURNETT, SENIOR VICE PRESIDENT, DELTA AIR
LINES, ATLANTA, GA
Mr. Burnett. Chairman Wyden, Ranking Member Murkowski and
members of the committee, thank you for inviting me to testify
before you today. I'd ask that my full remarks be included in
the record.
My name is Graeme Burnett. I'm the Senior Vice President
for Fuel Optimization at Delta Airlines. In this position I
manage Delta's jet fuel supply as well as serve as Chairman of
the Board of Monroe Energy, the company that owns and operates
Delta's refinery in Pennsylvania.
Behind the U.S. military Delta is the largest user of jet
fuel in the world and jet fuel is our largest expense. Because
of this we are uniquely situated both as an end user of crude
oil and as a refiner to comment on the crude oil export ban and
the current debate over whether to lift it. We believe strongly
that the ban on U.S. crude oil exports is good policy and that
lifting export limits now would come at the expense at the
American consumer, who would pay more for gasoline, more for
heating oil and more for the price of an airline ticket.
Today the going price for a barrel of U.S. crude is $11
less than a barrel sold in Europe. This price differential can
be easily explained. The U.S. crude market is a competitive one
with price determined by supply and demand. Once the U.S.
domestic market incorporated the increased supply of crude from
places like North Dakota, the price of a domestic barrel of oil
came down.
In contrast the global market is influenced by a cartel
where OPEC countries control production in order to set prices.
If we lift the export ban we would, in essence, be allowing the
transport of crude out of a competitive market in this country
and into a less competitive global one controlled by a few oil
producing states.
The results would be easy to predict. U.S. crude would flow
out of this country and onto the world market. OPEC would
reduce supply to maintain high global prices. The United States
use of home grown oil would diminish and prices here at home
would rise to match the higher global price for a barrel of
crude.
As one commentator put it, allowing for the export of home
grown U.S. crude would do nothing more than import higher OPEC
prices into the U.S. market.
It's clear who gains from this scenario. The oil
exploration and production companies, many of which are foreign
owned. With the increased supply of U.S. crude helping to push
prices down these companies want to sell U.S. crude on the
global market at higher prices largely determined by OPEC. It's
equally apparent who would lose, the American consumer, who
will see prices rise for gasoline, for petroleum products and
for most consumer goods that rely on fuel to get to market.
Our country's refinery workers also stand to lose from
lifting export limits. Some recent history can help explain
why. Before the shale oil boom there was too much capacity in
the refineries in the Northeast, along the Gulf Coast and many
were closing. In fact Delta purchased its Pennsylvania refinery
in 2012 from ConocoPhilips after their facility had been closed
nearly 1 year. The shale oil revolution breathed new life into
U.S. refineries and created jobs for thousands of refinery
workers.
In thinking about the merits of the export ban we should
also consider one of its goals which was to help achieve energy
independence. By independence I mean the ability to meet our
energy needs from sources within North America.
Notwithstanding the upswing in domestic production this
country still imports around 33 percent of its daily crude oil
needs from outside of North America. That's why exporting U.S.
crude makes little sense. If we allow for the export of U.S.
crude we'll have to import more oil from overseas and subject
ourselves once again to an increasing degree of price
volatility and higher global prices.
In sum, the export ban works. It may have taken a bit
longer than we anticipated in the 1970s but we're now seeing
its benefit, lower prices for crude in this country compared to
global markets and an increase in home grown energy. The ban
may be unnecessary at some point in the future, but we still
have a long way to go to protect against oil market volatility
and achieve true energy independence. That's why and I'll close
with a sports metaphor here, lifting the ban now would be like
ending the game after the first quarter.
Thank you, Mr. Chairman. I look forward to answering any
questions that you and other members of this committee may
have.
[The prepared statement of Mr. Burnett follows:]
Prepared Statement of Graeme Burnett, Senior Vice President, Delta Air
Lines, Atlanta, GA
Good morning. Chairman Wyden, Ranking Member Murkowski, and Members
of the Committee: Thank you for inviting me to testify before you
today.
My name is Graeme Burnett. I am the Senior Vice President for Fuel
Optimization at Delta Air Lines. In this position I manage Delta's jet
fuel supply as well as serve as Chairman of the Board of Monroe Energy,
the company that owns and operates Delta's refinery in Trainer,
Pennsylvania. I have over 30 years experience in the petrochemical and
refining sectors of the energy industry and, before coming to Delta, I
worked in various capacities in Texas and across the globe for one of
the top five oil companies.
Delta Air Lines is the largest non-military user of jet fuel in the
world and, like all airlines, we participate in oil markets on a daily
basis. Jet fuel after all is our largest expense. It contributes to the
price of an airplane ticket, influences the types of aircraft we
purchase, and helps determine whether we serve certain routes. Because
of all this, we are uniquely situated--both as an end user of crude oil
and as a refiner--to comment on the crude oil export ban and the
current debate over whether to lift it. We believe strongly that the
ban on U.S. crude oil exports is good policy. It is good for American
consumers. And it is good for the airline industry and our passengers.
As we all know, the ban dates back to the 1973 oil embargo. With
gas prices then soaring, Congress established a crude oil export ban to
limit our nation's reliance on foreign oil and minimize the impact of
volatile global oil markets on domestic gas prices.
While U.S. oil imports did drop in the 1970s and early 1980s, the
ban did not--as critics will point out--insulate the country from
foreign oil. In the years after the ban was created, this country
remained vulnerable to volatility in oil markets and the price of a U.S
barrel of crude--known in the industry as West Texas Intermediate or
WTI--tracked the price of a barrel of crude that traded on the global
markets.
All that changed a just a few years ago. Beginning in 2011, when
the country began to feel the impact of the domestic shale oil boom, a
barrel of U.S. produced crude became cheaper than a barrel of crude
trading on the global markets. See Attachment 1.* And today the going
price for a barrel of U.S. crude is $96. That's about $11 less than a
barrel sold in Europe.
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* Attachment has been retained in committee files.
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This price differential can be easily explained. The U.S. crude
market is a competitive one with price determined by supply and demand.
Once the U.S. domestic market incorporated the increased supply of
crude from places like North Dakota's Bakken formation, the price of a
domestic barrel of oil came down. In contrast, the global market is
influenced by an oligopoly where OPEC countries control production in
order to set prices.
If we lift the export ban we would in essence be allowing the
transport of crude out of a competitive market in this country and into
a less competitive global one controlled by a few oil?producing states.
The results would be easy to predict: U.S. crude would flow out of this
country and onto the world market. OPEC would reduce supply to maintain
high global prices. The United States' use of homegrown oil would
diminish and prices here at home would rise to match the higher global
price for a barrel of crude. As one commentator put it, allowing for
the export of homegrown U.S. crude would do nothing more than import
higher OPEC prices into the U.S. market.
It's clear who gains from this scenario: The oil exploration and
production companies, many of which are foreign owned. With all the
crude coming out of North Dakota, Wyoming, Texas, Pennsylvania and
other states helping to push prices down, these companies want to lift
the ban and sell U.S. crude on the global market at higher prices
largely determined by OPEC. And it's equally apparent who would lose:
The American consumer, who would pay more for gasoline, more for
heating oil and more for the price of an airline ticket. In fact,
according to Barclays PLC, lifting the export ban would stop the
decline in U.S. crude prices and cost American motorists as much as $10
billion a year in higher prices at the pump.
Our country's refinery workers also stand to lose from lifting
export limits. Some recent history can help explain why. Before the
shale oil boom, there was too much capacity in refineries in the
Northeast and along the Gulf Coast and many were closing. In fact,
Delta purchased its Pennsylvania refinery in 2012 from ConocoPhillips
after that facility had been closed for nearly one year.
The shale oil revolution breathed new life into these refineries
and created jobs for thousands of refinery workers. By lifting the
export ban and sending our crude overseas, we would reverse that trend.
Refineries in Europe--where there is currently excess refining
capacity--would be more than happy to refine our oil using European
workers to do so. Put simply, lifting the ban will benefit European
refinery workers at the expense of thousands of American jobs.
Furthermore, in thinking about the merits of the export ban, we
should consider one of its goals: To help this country achieve energy
independence; and by ``independence,'' I mean the ability to meet our
energy needs from sources within North America.
This country has benefited tremendously from increased domestic
energy production in recent years. The shale boom and advances in
production and extraction technology have helped us create jobs and
reduce our dependence on foreign oil--and foreign regimes.
Notwithstanding the upswing in domestic production, this country still
imports around 33% of its daily crude oil needs from outside of North
America. That's why exporting U.S. crude makes little sense. If we
allow for the export of U.S. crude, we'll have to import more oil from
overseas and subject ourselves, once again, to an increasing degree of
price volatility and higher global prices.
In sum, the export ban works. It may have taken a bit longer than
we anticipated in the 1970s, but we're now seeing its benefits: lower
prices for crude in this country compared to global markets and an
increase in homegrown energy. The ban may be unnecessary at some point
in the future. But we still have a long way to go to protect against
oil market volatility and achieve true energy independence. That's
why--and I'll close with a sport's metaphor here--lifting the ban now
would be like ending the game after the first quarter.
Thank you Mr. Chairman. I look forward to answering the questions
that you and other Members of this Committee may have.
The Chairman. Thank you very much, Mr. Burnett.
Ms. Jaffe, welcome.
STATEMENT OF AMY MYERS JAFFE, EXECUTIVE DIRECTOR OF ENERGY AND
SUSTAINABILITY, INSTITUTE OF TRANSPORTATION STUDIES, GRADUATE
SCHOOL OF MANAGEMENT, UNIVERSITY OF CALIFORNIA, DAVIS, CA
Ms. Jaffe. Thank you very much, Chairman Wyden and thank
you to Ranking Member Murkowski and the members of the
committee for this opportunity to talk to you about this
important subject.
I have been writing about the influence of OPEC on our
country since I was a junior in high school, believe it or not.
I won a term paper contest in the State of Massachusetts with
an essay on that topic. I'm so glad to be here to be able to,
for the first time in 25 years, talk about the fact that we
might get the goal post to take a sports analogy, get the ball
through the goal post.
So the United States is a leading global power and economy.
We promote open markets and free trade. We have for the last 30
years spent a tremendous amount of diplomatic effort to promote
open markets and free trade in energy. That is a vital interest
of the United States.
I appreciate the thoughtful comments of the committee in
terms of stimulating full debate on this subject. We do not
want to take policies or actions that enhance rather than
weaken the monopoly power of OPEC or Russia to use energy as a
weapon or a tool of stay craft. We want to lead from the front
not from behind.
It is important for us to have this thoughtful debate and
reevaluation of our current export policy. In doing so we need
to consider how to avoid creating market distortions whether
they temporarily benefit some consumers in a particular region
or some industry we want to make sure that we are doing things
that are more helpful than damaging. We need to consider the
following things.
No. 1, we actually export our new oil and gas. We export
our oil in the form of refined products directly so we don't
have an export ban on gasoline or diesel fuel or propane. So
therefore we're exporting that instead of exporting the crude
oil.
So what we're really discussing is No. 1, what is the best
way to organize free markets and to eliminate distortions and
who gets the profit from the exports. Will the refining
industry get the profits from the export or the upstream oil
and gas industry get the profits from the export or will other
industries get the profits from the exports because we're not
in here to discuss banning all energy exports from the United
States. We need to keep that in mind.
Because we have physical bottlenecks that prevent us from
exporting our surplus of natural gas we are currently exporting
coal. We need to understand that when you block, like the
little boy with the finger in the dike, when you block a hole
in one point of the dike, water pressure comes to another point
in the dike and something will be exported that's a different
thing. I think the natural gas example is the best example
because nobody expected the United States, with its best, new
abundance of natural gas and the industry and lower electricity
prices that it is promoting, nobody expected the result of that
to be the export of coal to Europe.
I'm just returning from the World Economic Forum in Davos.
I can tell you that the entire discussion focused around
Europe's need to reevaluate their entire energy policies
because they are importing coal. Their emissions are going up.
They are not drilling for natural gas. They realized that they
have these huge distortions that have created a great economic
advantage for the U.S. economy and a great disadvantage for the
European economic system.
So we want to make sure that the policies that we promote
here in our country will continue to allow us to achieve the
advantages that we have.
I want to address for one moment the issue of gasoline
price volatility because that is of such great concern. The
solution to gasoline or any kind of consumer volatility in
prices is to mandate minimintory, minimal standards for
inventory. That is what happens in Europe. That is what they do
in Japan and in South Korea. That is how industrialized, full
economies protect consumers against sudden disruptions like a
refinery fire or a sudden cold snap in the winter. Inventory
levels are the critical issue to tide markets under--through
temporary swings that come for this week or that week or a
month or a period of time.
I just in closing my remarks, I want to remind the
committee and our public that when we had a temporary
disruption gas land supply during Hurricane Rita and Katrina as
Senator Landrieu might remember, Europe loaned us gasoline
supplies from their mandatory strategic stocks that they
require industry to hold. That is how we weathered through our
crisis. We need to consider our relationship with our allies
like Europe when we think about our future export policies.
[The prepared statement of Ms. Jaffe follows:]
Prepared Statement of Amy Myers Jaffe, Executive Director of Energy and
Sustainability, Institute of Transportation Studies, Graduate School of
Management, University of California, Davis, CA
The rapid growth of oil and natural gas production from
unconventional shale resources in the United States has reopened debate
on the question of U.S. oil and natural gas export policy. Foreign
policy considerations should be central to the discussion of this
issue. To date, the debate in the United States has focused mainly on
domestic economic aspects and the possible benefits of actively
promoting artificially low domestic prices through barriers to trade.
Today, I will discuss the risks inherent the continued promotion of
logistical bottlenecks, even in the face of rising domestic production.
I will also elaborate on the national security and foreign policy
benefits that the United States can reap by promoting an open energy
trade policy that permits exports of natural gas, condensate, refined
petroleum products and crude oil.
The United States has for many decades been the leading nation in
championing open markets and free trade in energy. Open trade and
investment in energy is important to U.S. vital interests for many
reasons. First and foremost, artificial restrictions on energy flows
can be a source of international conflict and, in fact, has been a
factor contributing to armed conflict in modern history. Moreover, the
United States, by virtue of both its superpower role and its position
as the largest oil consuming country, has a direct interest in
preventing energy supply from being used as a strategic weapon.
Finally, barriers to foreign investment in energy resources in key
countries generally contribute to supply constraints, leading to rises
global prices and potentially harming economic growth in major oil
consuming countries such as the United States and its key
industrialized trading partners. For these three reasons, the United
States should continue to actively support open markets and free trade
in energy and to do so, it cannot restrict its own energy exports. By
leading the charge on new energy technologies and exports, the United
States now has the ability to fashion a global energy world more to its
liking where petro-powers can no longer hold American drivers hostage
or turn off the heat and lights to millions of consumers in the United
States or allied countries to further geopolitical ends.
Beyond these core American values and interests, it is important
for the United States to conduct a thoughtful debate and re-evaluation
of current export policy to avoid creating market distortions that,
while temporarily benefiting some consumers in particular U.S. regions,
may create more questionable medium to longer-term trends that could
turn out to be more damaging than helpful. Our history of energy policy
is replete with such negative examples, such as President Nixon's
inflation-targeted price controls on natural gas which ultimately
caused a long lasting shortage of natural gas supply in the United
States and a two-tiered system of oil pricing that ultimately, in
practice, incentivized imports of foreign oil.
An evaluation of export policy needs to consider the following key
variables:
1) Long term geopolitical considerations are likely more
important to our nation than the expediency of any short term
commercial gain to a particular set of vested industry
interests.
2) Transportation and supply bottlenecks can create
distortions that can become very costly in economic terms over
time even if they bring some short term benefits to consumers.
3) The United States participates in international trade and
thus, blocking exports of one or more particular commodities or
manufactured products cannot ``protect'' U.S. consumers from
international prices. Ultimately, the discussion of banning
some exports and not others is a question of who in the United
States economy gets the profits from tapping the arbitrage of
higher international prices. So for example, if gasoline prices
are higher in the international market than in the United
States, refiners will have a financial incentive to export
gasoline until that arbitrage window closes. These U.S.
gasoline exports will eventually produce the same boost in
retail prices to U.S. consumers as crude oil exports.\1\ That
is because rising exports of U.S. gasoline to international
markets will eventually erode profit margins for European,
Asian and Latin American refiners, causing them to reduce their
own refinery throughputs, lowering demand for crude oil and
thereby weakening international crude oil price levels. In this
way, rising U.S. crude oil production impacts global crude oil
markets through displacement via U.S. refined product exports.
Thus, it is not correct to say that the United States, by
continuing to ban U.S. crude oil exports, can isolate American
consumers from global prices. The often cited figures in
Barclay's assessment of the financial savings resulting from
the export ban oversimplifies the mechanisms and correlations
of the interactions of U.S. and global gasoline pricing.
Differences in elasticity of gasoline demand in the United
States and Europe over different time periods (ie consumer
responsiveness to price changes), differing refinery
configurations and costs, weather trends, and local inventory
levels all influence the differences between gasoline prices in
the U.S. and Europe in 2008-2010 vs today, not just changes in
the price of U.S. midcontinent crude oil relative to UK
benchmark Brent crude.
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\1\ In the case of gasoline exports, refining companies like Valero
get a larger share of the profits. In the case of direct crude oil
exports, oil exploration and production companies get the bigger piece
of the pie.
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4) The ``tyranny of distance'' for oil, refined products and
natural gas trade flows will in most circumstances guarantee
U.S. users a continuing energy cost advantage over foreign
competitors even if export bans are lifted due to the generally
lower cost of transportation within the United States compared
to long distance, waterborne exports. This transportation cost
advantage is, in many cases, of significant size and will
ensure that U.S. energy prices are lower than those of
countries that would buy U.S. oil and gas ex-ship. U.S. oil and
gas short haul exports to Mexico and Canada are already
protected by the NAFTA free trade agreement.
5) The best way to protect U.S. consumers from sudden price
movements in gasoline, heating oil or natural gas from
unexpected supply disruptions or weather related events is to
ensure that adequate inventories are on hand in regional
markets. To protect U.S. consumers against volatility in fuel
pricing due to shifting levels of global demand for refined
petroleum product and/or natural gas exports, the United States
should require U.S. producers and refiners to hold reasonable
minimum inventories to guard against temporary domestic
shortfalls of supply or seasonal volatility. Such minimum
product inventory standards are already used successfully in
Europe and Japan to enhance energy security and protect
domestic markets in the event of an unusual event such as the
Fukushima nuclear accident. In fact, the United States was able
to weather Hurricane Rita and Katrina partly by borrowing
gasoline from these mandated European minimum inventory
stockpiles. As the United States shifts to a lower percentage
of crude oil imports, it may want to consider holding a higher
proportion of strategic stocks in the form of mandated
commercially held stocks of refined products, rather than
publicly held crude oil stores.
6) Crude oils and condensates from different geologic basins
have different properties and are not fully fungible when it
comes to refining them into usable fuels by various refineries.
In particular, the light field condensate being produced in the
United States from tight formations and shales require
different forms of refinery distillation and other secondary
processing than heavy oil production from offshore U.S. Gulf of
Mexico, Canada, and Mexico. Top specialized analysts such as
Alan Troner of Asia Pacific Consulting are forecasting that a
large overhang of unusable condensate will emerge in the U.S.
market by 2016 due to limitations on U.S. refiners' ability to
process this particular quality of liquids. Relaxation of
export rules for this class of associated liquids production
would be desirable to maintain growth in production of natural
gas and crude oil wells that also produce high levels of
associated condensate. Asia Pacific Consulting estimates that
as much as 500,000 b/d of the 3.5 million b/d to 4 million b/d
of U.S. condensate production in the United States would not be
easily absorbed into the U.S. refining and processing system by
2016 and might have to be simply shut-in until refiners can
make investments to expand new units to handle such supplies,
depriving the U.S. of export revenues and related trade and
fiscal benefits (see appendix for more details).
geopolitical benefits
Energy trade can be used to strengthen our ties to important allies
and trading partners and thereby enhance American power and influence.
For example, U.S. LNG exports from the Gulf coast could be an important
strategic back-up role to shaky Russian or Middle East gas supplies,
for example, much the way the US served as an oil swing producer back
in the 1960s, rendering an Arab oil boycott during the 1967 Arab-
Israeli war infeasible. US Asian allies Japan and South Korea are
seeking flexible US Gulf coast LNG contracts for reasons of economic
and geopolitical leverage. Our ability to serve as a source for
critical swing energy supplies enhances our importance to our energy
trading partners in other geopolitical and economic spheres and allows
us to help our allies in times of market instability.\2\ It would, for
example, constrain Russia's ability to use its energy supplier role as
a wedge between the United States and its European allies.
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\2\ It is easy to imagine the expansion of American power if its
natural gas companies could gear up to supply LNG to a European country
cut off by Russia, such as happened in the winter of 2006. If the US
can become an energy supplier of last resort, its geopolitical
importance will rise significantly along with its diplomatic freedom of
movement.
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As American shale production expands from natural gas to oil, the
geopolitical benefits will mushroom both by improving U.S. financial
strength and by eliminating U.S. vulnerability to economic blackmail.
The upshot of shale oil will be to reverse the course of history and
roll back the clock to pre-1973. Oil producing states will no longer be
able to use the lever of a possible energy supply cut-off to America to
pressure Washington to adjust its foreign policy. If domestic shale oil
abundance someday more closely matches shale gas abundance and the US
has no imports to replace, then we will have more discretion on when
and how to use the Strategic Petroleum Reserve. In such circumstances,
a President could consider using the SPR to either loan oil to other
countries for geopolitical aims (for example, to counter the economic
blackmail of the ``oil weapon'' against an allied country) or to
provide extra oil into the market to head off attempts by coalitions of
other energy producers to create artificial rises in global prices,
should such oil price spikes start to cause financial or economic harm
to the global economy.
In this regard, U.S. energy exports will weaken some of our
adversaries such as Iran and Russia. US shale gas has already played a
key role in weakening Russia's ability to wield an energy weapon over
its European customers by displacement. By significantly reducing US
requirements for imported liquefied natural gas (LNG), rising US shale
gas production has increased alternative LNG supplies to Europe in the
form of LNG displaced from the US market, limiting some of Russia's
power. It has also already curbed Iran's ability to tap energy
diplomacy as a means to strengthen its regional power or to buttress
its nuclear aspirations by eliminating the need for Iranian natural gas
to potential importing customers by creating surpluses of alternative
supplies. This remarkable development, by allowing the U.S. to impose
tighter sanctions, has brought Iran to the negotiating table on
limiting its nuclear program.
Energy exports also improve our balance of trade. The health of the
US economy and fate of the US dollar come under pressure when rising
oil prices raised our massive oil import bill, worsening the US trade
deficit.\3\ Such economic pressures are multiplied when we are forced
by oil dependence to deepen our military commitments in the Middle
East, thereby similarly adding to the US deficit. All this weakens the
United States relative to China, which holds a large chunk of US
indebtedness and free rides off expensive US naval activities to
guarantee the free flow of oil from the Persian Gulf. Over time, shale
development will reverse this strategic and economic disadvantage. As
the years pass, it will be the Chinese economy that is more exposed
than the United States to Middle East developments. Citibank estimates
that rising domestic shale oil and gas production, by reducing oil
imports and keeping ``petro-dollars'' inside the U.S. economy, will
reduce the U.S. current account deficit by 1.2 to 2.4 percent of gross
domestic product (GDP) from the current value of 3 percent of GDP.
Energy exports would enhance this trend by adding gains to the balance
of trade. As energy exports improve our global financial footing, it
will not only give us an upper hand with China, which will still be
highly dependent on foreign oil imports, but it could even allow the
United States the luxury to regain its strong influence as a donor to
global institutions such as the World Bank and United Nations, again
enhancing our national power and influence.
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\3\ For a detailed discussion of the link between the US dollar and
oil prices, see Amy Myers Jaffe and Mahmoud El-Gamal, Oil, Dollars,
Debt and Crises: The Global Curse of Black Gold, Cambridge, UK:
Cambridge University Press, 2010
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Finally, energy exports are already an important part of our free
trade obligations to important neighbors such as Mexico and Canada as
well as more distant long-standing allies such as South Korea. U.S. law
requires the U.S. Department of Energy (DOE) to review and approve any
natural gas exports to countries with which the United States does not
have a free trade agreement. Current rule making requires that exports
to our free trade partner countries be approved expeditiously. For
nations not covered by applicable free trade agreements, the review is
supposed to lead to approval unless the project is determined to ``not
be consistent with the public interest.'' As a practical matter, the
United States is already an exporter of domestic natural gas. The U.S.
exported a total of 436.3 bcf of natural gas in the first quarter of
2013, mainly to Canada and Mexico. Canada has also been a major buyer
of U.S. condensate. U.S. pipeline gas exports to Mexico are important
to Mexico's economic health and to border relations and therefore it is
unlikely the United States would ever consider cutting off Mexico's gas
trade with us. South Korea now holds a Free Trade Agreement (FTA) with
the United States. South Korea has indicated its desire to import U.S.
Gulf coast LNG. Under normal economic conditions, it would not be in
the U.S. economic and foreign policy interest to fail to honor our free
trade obligations to South Korea while continuing to honor our
obligations to Mexico. By extension, the United States, as an
established exporter of natural gas, should not be turning away close
allies like Japan and Europe. Since U.S. trade with Asia is important
to our economic health, on balance it would not be in the U.S. interest
to turn down Asian trading partners wanting to expand already massive
trade to include natural gas, especially given that a preponderance of
analysts have concluded that U.S. shale resources are large enough to
minimize the pricing impact of LNG exports from the United States. This
logic could also apply to refined petroleum products and condensates,
which are already an important part of our current foreign trade.
Thus, I would argue that these many foreign policy considerations
must be taken into account in any review on the question of the
advisability of U.S. crude oil and condensate exports. We must consider
all aspects of the implications of the energy export question on our
national security and foreign policy interests. To focus only on the
uncertain impact that exports might have on the U.S. industrial sector
or gasoline prices in a specific region of the United States is
foolhardy, given the complexity of interactive forces that will
influence prices in the long run. Rather than second guessing price
impacts which remain highly uncertain, we should widen the export
debate to consider U.S. global priorities as well as domestic economic
concerns.
In theory, the United States could behave like Russia and members
of the Organization of Petroleum Exporting Countries (OPEC) and
restrict hydrocarbon exports in general or to particular countries for
political or nationalistic reasons. But we need to resist this
temptation. Flows of U.S. oil and gas should follow profit incentives
and market signals. The participation of American suppliers to the
global market and foreign oil companies in the U.S. market extends the
reach of U.S. anti-trust restrictions beyond our borders. It is true in
general that foreign demand for American oil and gas can, all things
being equal, put upward pressure on prices. But removing bottlenecks
can smooth the functioning of markets, allowing arbitrage to promote
flows to and from the most efficient geographic supply sources,
eliminating localized volatility and easing sharp localized price
movements during times of disruptions or unexpected events.
Efforts to engineer particular market responses on a local level
can have unintended consequences. Greater U.S. cooperation on the
global climate change agenda is of critical importance. Climate
protection advocates worry that increased natural gas exports will lead
to even greater use of natural gas instead of renewable sources. But
bottlenecks preventing the free export of U.S. natural gas have, for
example, led to the unintended consequences of increased exports of
cheap displaced U.S. coal to Europe, unwittingly raising Europe's
carbon emissions despite strong EU clean energy directives. Efforts to
stop the construction of the Keystone XL Pipeline to ship Canadian oil
sands has led to an increase in rail traffic of crude oil around the
U.S., again with unintended environmental and safety consequences.
The more oil supplies there are and the more liquid those supplies
are, the more the global market will mirror the competitive U.S.
market. Supply bottlenecks are what aggravate price volatility to begin
with, as any Bostonian can attest this time of year. New England's
historical lack of local storage and limited pipeline deliverability
has over the years produced sudden price climbs in cold winters. Had
new pipelines like the Rex Express, which connects Colorado and Ohio,
not been in place this year, recent winter price swings would be even
higher and more prolonged. It is the same with the disruptions of light
crude from Libya and elsewhere around the world this past year; but for
U.S. products exports and the lower requirement for light crude imports
to the United States, global crude price levels would be far higher.
As U.S. domestic production levels rise, the United States will
have to think carefully about the kind of exporter it wants to be and
how to promote the ideal level of free trade and energy investment
wherever possible. The United States needs to consider the usefulness
of past experiences when we counted on our European allies to provide
us with badly needed gasoline from Europe's strategic stocks during our
difficulties with the U.S. fuel manufacturing and distribution systems
during Hurricane Rita and Katrina. And we need to think carefully about
what our global economic and security obligations might be, should an
oil supply crisis of major proportions emanate sooner rather than later
out of the Middle East--both before, and even after, the U.S. gets
closer to being energy self-sufficient. The mindset of husbanding
resources out of fear of shortages has never served major producing
countries like the United States well. In the crisis years of the
1970s, such hoarding behavior worsened the dislocations, not eased
them. By contrast, in more recent years, we have fashioned an
international emergency oil supply response system that protected the
global economy in the aftermath of Saddam Hussein's invasion of Kuwait,
and would be important should a similar or even worse kind of conflict
were to arise again in an important oil producing area of the Middle
East or West Africa. I am not saying that President Obama should turn
open the spigot on willy-nilly, given the current instability in the
Middle East. But clearly the circumstances of our energy situation is
changing and we should not cling to historical policies because they
are familiar and thereby politically comfortable. What is required is a
thoughtful policy that is grounded in the realities of how energy
markets operate and taking into account what is best for the economy as
a whole, and not specific consumers or industries.
appendix.--further thoughts on mid-continent gasoline prices
The chart below, compiled with data from the U.S. Energy
Information Administration (EIA) highlights that Midwest gasoline
consumers are not, as has been reported in the media, reaping huge
benefits from the crude oil discounts enjoyed by Midwest (PADD II)
refiners compared to Gulf Coast (PADD III) refiners. The crude oil
feedstock discounts enjoyed by refiners with access to mid-continent
landlocked U.S. production (as illustrated by the blue line which shows
the value difference in the crack spread between Midwest and Gulf coast
refiners) did not lower the wholesale price of Midwest petroleum
products compared to prices linked more closely to international
markets, nor did they lower the retail prices of gasoline or diesel
fuel prices in the Midwest markets served by PADD II refiners relative
to the markets served by coastal refiners that do not enjoy these
discounts. Since petroleum products are freely traded in a global
market, U.S. petroleum product prices reflect international crude
prices, not lower-priced domestic crude.
the special circumstances of u.s. condensate production
Liquid hydrocarbons suspended as particles in natural gas (under
subterranean pressure and temperature) are called natural gas liquids
or NGLs. Many tight oil and shale gas fields also produce NGLs, most
commonly LPGs such as propane, butane, and iso-butane and condensate.
Condensate typically remains liquid without special containment. It can
be used as a petrochemical feedstock, a blending component, boiler
feed, or as a diluent for the transport of heavy crude oil. It can also
be processed directly in a splitter (special distillation tower design
only for manufacture of light products) to produce lighter end refined
products. Condensate is similar to ultra light, low sulfur crude oil
and therefore is currently is being blended in with the rising tight
oil production stream. For some previously marginal Midwest refineries
that lacked sophisticated secondary refining equipment, the increase of
light tight oil and condensate blend has been a godsend, raising
profits by substituting away from scarce foreign imported feedstocks.
But for the more sophisticated refineries on the U.S. Gulf coast,
rising supplies of condensate produce greater challenges. These
refineries need a sufficient volume of heavier fuel oil or heavy gasoil
(VGO) as their feedstock to yield the optimum levels of gasoline, jet
fuel and diesel production given the range of equipment in their
facilities. Thus, there is a physical limit to how much condensate
spiked crude oil they can use and still benefit from expensive coking
units and to optimize the full scale of their distillation towers and
facilities to produce the most valued combination of refined products.
To some extent, refiners can blend some tight oil/condensate into
heavier crude to add marginal volume use and tap the opportunity of the
domestic production surge, but eventually to absorb all the condensate
that is being produced, refineries will have to make large capital
investment in new distillation tower capacity. Condensate's high
naphtha yield reduces the working capacity of the tower. Valero is
reconfiguring its existing tower at its Houston plant to be able to
accommodate more condensate as is Marathon in Ohio and Kentucky
facilities. Kinder Morgan is also commissioning a new splitting
facility in Houston. But a lot of the rising U.S. condensate production
is currently being sold to Canada for use as a diluent. By 2016-2017,
the increase in condensate production is projected to exceed U.S.
refiners and Canada's ability to absorb flows easily. As a result, the
United States may need to relax restrictions for the export of field
condensate or much of the incremental oil output from shale development
will become increasingly physically unusable except outside the United
States. In this case, lack of a clear export policy would lead to a
reduction in further production increases of natural gas and tight oil.
The Chairman. Ms. Jaffe, thank you.
Mr. Weiss.
STATEMENT OF DANIEL J. WEISS, SENIOR FELLOW AND DIRECTOR OF
CLIMATE STRATEGY, CENTER FOR AMERICAN PROGRESS
Mr. Weiss. Chairman Wyden, Ranking Member Murkowski and
Senators of the Energy Committee, thank you for the opportunity
to testify about whether to lift the crude oil export ban.
Since 2008 the United States has produced more and used
less oil due to advances in drilling technology, innovatingly
employed by Mr. Hamm and his company and due to more efficient
vehicles. This reduced oil imports and lowered our
vulnerability to a foreign oil supply disruption that could
cause a gasoline price spike. Lifting the ban on crude oil
exports could squander this recently improved energy security
and price stability.
To maintain these benefits we urge you to defend the
existing domestic crude oil export ban.
When Congress passed it in 1975 the U.S. produced 64
percent of its oil and liquid fuels while importing only 36
percent. In 2013 we produced and imported nearly the same
proportions of petroleum. The only experience we've had in the
United States of lifting an oil export prohibition occurred
following the 1996 removal of a ban on Alaska oil exports.
During the ban much Alaskan oil was shipped to the West Coast.
A Congressional Research Service analysis found that
lifting the oil ban tripled the already existing price
difference between West Coast and national gasoline prices. CRS
concluded that ``when Alaskan oil exports ceased, the gasoline
price differential between the West Coast and the national
average did decline.'' Lifting the nationwide crude oil export
ban could similarly raise gasoline prices.
The analysts Barclays Plc. predicts that lifting the export
ban could add $10 billion a year to consumers' fuel bills.
Without the ban oil companies could sell their oil at the
higher world market price which the Energy Information
Administration projects will average $9 per barrel higher this
year. In fact yesterday the foreign domestic price spread for
oil was $10 a barrel.
Although domestic production has significantly grown over
the past 5 years, thanks to Mr. Hamm and many of his
colleagues, the Energy Information Administration projects that
crude oil, I'm sorry, that crude oil production will peak in
2019 and begin a steady decline after that. This energy
abundance could be a temporary phenomenon.
The EIA also predicts that in 2014 the U.S. will consume 5
million barrels per day more of oil and liquids than we
produce. This gap between demand and supply will continue at
least through 2040 growing by 13 percent. I'd advise you to
look at the chart that the clerk has. Thank you.
This is hardly energy independence. Gesundheit. Any
domestic oil sold overseas, my mother raised a polite son.
[Laughter.]
Mr. Weiss. Any domestic oil sold overseas must be replaced
by more expensive imported oil which could raise gasoline
prices. The replacement oil would likely be heavy crude
imported from Venezuela and Canada. As you know Venezuela is
not very friendly to the United States. Although Canada is our
closest ally, its heavy tar sands oil produces nearly double
the carbon pollution responsible for climate change compared to
conventional U.S. oil as measured from well to tank by the
National Energy Technology Lab. Neither of these are good
options.
The U.S. imports more oil from the Organization of
Petroleum Exporting Countries or OPEC than any other single
source. OPEC oil is vulnerable to supply disruptions. EIA found
recently that interruptions ``may occur frequently for a
variety of reasons including conflicts and natural disasters.''
Oil produced in the United States is significantly less
vulnerable to supply disruptions and therefore provides more
energy security.
As Mr. Hamm and Ms. Jaffe both noted, the U.S. is exporting
3 million barrels per day of refined petroleum products. So we
are exporting oil already, but as a finished product made by
American workers. That explains why AFL/CIO President Richard
Trumka opposes the export of crude oil. He would rather see
that oil kept here and made into a product by American workers
rather than shipped as a raw feed stock to be made into a
product by foreign workers.
Now oil companies are doing quite well. They're already
making huge profits even with the export ban. The 5 largest oil
companies, BP, Chevron, ConocoPhillips, ExxonMobil and Shell,
made a combined total profit of over one trillion dollars in
the last decade and that figure is based on their quarterly
reports.
Our transportation system is almost entirely powered by oil
which makes crude oil different from many other commodities.
American families, the economy and our energy security are
vulnerable to sudden foreign oil supply disruptions and price
spikes. We must invest in alternative, non-petroleum
transportation power including electric vehicles, advanced
clean biofuels and public transit to reduce this exposure of
relying on only a single fuel for such an important part of our
economy.
Now there's no independent evidence that energy security or
fuel prices will remain unchanged after the removal of the
crude oil export ban. President Obama and Congress should
maintain our recent gasoline price stability and energy
security by defending the ban on crude oil exports.
Thank you for having me and happy to answer any questions.
[The prepared statement of Mr. Weiss follows:]
Prepared Statement of Daniel J. Weiss, Senior Fellow and Director of
Climate Strategy, Center for American Progress
Chairman Wyden, Ranking Member Murkowski, thank you for the
opportunity to testify about whether to lift the crude oil export ban.
Since 2008, the United States produced more and used less oil due
to advances in drilling technology and more efficient vehicles. This
reduced oil imports and lowered our vulnerability to a foreign oil
supply disruption that could cause a gasoline price spike. However, the
Energy Information Administration predicts that the growth in oil
production will peak in 2019, and domestic production will slowly
decline after that.
Lifting the ban on crude oil exports could squander this new energy
security and price stability. To maintain these benefits, we urge you
to defend the domestic crude oil export ban.
After the 1973 Arab oil embargo, Congress enacted the Energy Policy
and Conservation Act, which banned nearly all exports of domestically
produced crude oil to keep this precious commodity at home and insulate
drivers from price shocks.\1\ At the time of the ban, the U.S. produced
64 percent of its oil and liquid fuels, while importing only 36
percent.\2\ In 2013, we produced and imported nearly the same
proportions of petroleum.
---------------------------------------------------------------------------
\1\ Energy Policy and Conservation Act, Public Law 94-163, 94th
Cong., 1st sess. (December 22, 1975), available at http://
thomas.loc.gov/cgi-bin/bdquery/z?d094:SN00622:@@@L&summ2=m&.
\2\ Energy Information Administration, AEO2014 Early Release
Overview (U.S. Department of Energy, 2014), Figure 12, available at
http://www.eia.gov/forecasts/aeo/er/early_production.cfm.
---------------------------------------------------------------------------
The only real-world experience of lifting an oil export prohibition
occurred following the 1996 removal of a ban on Alaska oil exports.\3\
During the ban, much Alaskan oil was shipped to the West Coast. A
Congressional Research Service analysis found that lifting the oil ban
exacerbated the existing price differential between West Coast and
national gasoline.
---------------------------------------------------------------------------
\3\ Lawrence Kumins, ``West Coast and Alaska Oil Exports''
(Washington: Congressional Research Service, 2013) available at http://
assets.opencrs.com/rpts/RS22142_20060525.pdf.
In 1995, West Coast pump prices [were] only 5 cents per
gallon above the national average. But by 1999 West Coast
gasoline was 15 cents per gallon higher. When crude exports
stopped in 2000, the average [difference]. . .was 12 cents; it
[later] narrowed further to 7 cents. . . . When Alaskan oil
exports ceased, the gasoline price differential between the
West Coast and the national average did decline.\4\
---------------------------------------------------------------------------
\4\ Ibid.
This experience suggests that lifting the nationwide crude oil
export ban could similarly raise gasoline prices. Barclays Plc.
predicts that lifting the export ban could increase total spending on
motor vehicle fuel by $10 billion a year.\5\ Sandy Fielden, director of
energy analytics at RBN Energy, told Bloomberg that if there are more
oil exports ``The most obvious thing that's going to happen is that
crude prices will go up and so will gasoline.''\6\
---------------------------------------------------------------------------
\5\ Bradley Olson and Dan Murtaugh, ``Falling Gasoline Hurts Exxon
Plea for U.S. Crude Exports,'' Bloomberg Business Week, January 28,
2014, available at http://www.bloomberg.com/news/2014-01-28/falling-
gasoline-hurts-exxon-plea-for-u-s-crude-exports-energy.html.
\6\ Ibid.
---------------------------------------------------------------------------
If the ban is lifted, oil companies could sell some of their oil at
the higher world market price, which the Energy Information
Administration projects will average $9 per barrel more in 2014 for
some domestic oil.\7\
---------------------------------------------------------------------------
\7\ Energy Information Administration, ``Light Louisiana Sweet
(LLS) crude oil now sells at a historically large discount to Brent,''
This Week in Petroleum, December 11, 2013, available at http://
www.eia.gov/oog/info/twip/twiparch/2013/131211/twipprint.html.
---------------------------------------------------------------------------
The Energy Information Administration predicts that in 2014 the
U.S. will consume 5 million barrels per day (mbd) of oil and liquids
more than we produce. This gap between demand and supply will continue
at least through 2040, ultimately growing by 13 percent. Domestic oil
sold overseas must be replaced by more expensive imported oil. This
higher price could be reflected in higher gasoline prices.
The U.S. imports more oil from the Organization of Petroleum
Exporting Countries (OPEC) than from any other single source. OPEC oil
is very vulnerable to supply disruptions.\8\ EIA found that
interruptions
---------------------------------------------------------------------------
\8\ Energy Information Administration, ``U.S. Imports by Country of
Origin,'' available at http://www.eia.gov/dnav/pet/
pet_move_impcus_a2_nus_ep00_im0_mbblpd_a.htm (last accessed January
2014).
May occur frequently . . . for a variety of reasons,
including conflicts [and] natural disasters . . . Total outages
among the Organization of the Petroleum Exporting Countries
(OPEC) producers recently rose to historically high levels.\9\
---------------------------------------------------------------------------
\9\ Energy Information Administration, Short-Term Energy Outlook
Supplement: EIA Estimates of Crude Oil and Liquid Fuels Supply
Disruptions (U.S. Department of Energy, 2013), available at http://
www.eia.gov/forecasts/steo/special/pdf/2013_sp_05.pdf.
A commission of retired senior U.S. military officers recently
noted that ``No matter how close the country comes to oil self-
sufficiency, volatility in the global oil market will remain a serious
concern.''\10\
---------------------------------------------------------------------------
\10\ 10Commission on Energy and Geopolitics, ``Oil Security 2025:
U.S. National Security Policy in an Era of Domestic Oil Abundance''
(2014), available at http://secureenergy.org/sites/default/files/
Oil_Security_2025_0.pdf.
---------------------------------------------------------------------------
Oil produced in the United States is significantly less vulnerable
to supply disruptions and therefore provides more energy security.
There is little benefit to Americans from lifting the ban,
particularly since oil companies are already making huge profits even
with it. The five largest oil companies--BP, Chevron, ConocoPhillips,
ExxonMobil, and Shell--made a combined total profit of $1 trillion over
the last decade, based on their quarterly financial reports.\11\
---------------------------------------------------------------------------
\11\ Daniel J. Weiss, ``Big Oil's Lust for Tax Loopholes: Oil
Prices and Profits Rise While Big Oil Defends Its Tax Loopholes,''
Center for American Progress, January 31, 2011, available at http://
www.americanprogress.org/issues/green/news/2011/01/31/8951/big-oils-
lust-for-tax-loopholes/.
---------------------------------------------------------------------------
In 2013, the United States exported an average of nearly 1.5 mbd of
diesel fuel and finished motor gasoline.\12\ The sale of finished
products enables American workers to provide added value to the crude
oil. AFL-CIO President Richard Trumka opposes lifting the oil export
ban because he believes that American workers should make crude oil
into refined products here, rather than export it and refine it
overseas.\13\
---------------------------------------------------------------------------
\12\ Energy Information Administration, ``Exports,'' available at
http://www.eia.gov/dnav/pet/pet_move_exp_dc_NUS-Z00_mbbl_m.htm (last
accessed January 2014).
\13\ Clare Foran, ``AFL-CIO President Opposes Lifting Ban on Crude-
Oil Exports,'' National Journal, January 14, 2014, available at http://
www.nationaljournal.com/energy/afl-cio-president-opposes-lifting-ban-
on-crude-oil-exports-20140114.
---------------------------------------------------------------------------
Our transportation system is almost entirely powered by oil and
liquid fuels.\14\ Since we continue to import one-third of our oil,
American families, the economy, and our energy security remain
vulnerable to sudden supply disruptions and price spikes. We must
invest in alternative, non-petroleum transportation fuels, including
electric vehicles, advanced clean biofuels, and public transit to
reduce our dependence on vulnerable oil supplies. These investments
would also reduce carbon pollution responsible for climate change.
---------------------------------------------------------------------------
\14\ Energy Information Administration, ``Energy Consumption by
Sector and Source, United States, Reference Case,'' available at http:/
/www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2013&subject=2-
AEO2013&table=2-AEO2013®ion=1-0&cases=ref2013-d102312a (last
accessed January 2014).
---------------------------------------------------------------------------
Currently, there is no independent analysis that predicts that
energy security and fuel prices would remain unchanged after the
removal of the crude oil export ban. President Obama and Congress
should not trade away our enhanced gasoline price stability and energy
security. Instead, you should join together to defend the ban on crude
oil exports.
The Chairman. Mr. Weiss, thank you.
Thank all of you. It's been very helpful.
I'm just going to ask one question to start this off and
particularly about what jumped out at me.
Mr. Hamm and Mr. Burnett have different views. Mr. Hamm is
for lifting the restriction on oil exports and Mr. Burnett is
not. But both believe the same benefits and potential pitfalls
exist for their preferred policy position. Lower prices, if the
Senate follows their advice, higher prices if we don't.
So the question then becomes for me how can this be?
We've got two very thoughtful individuals here and they
have diametrically opposed views. They think the same benefits
and same pitfalls will ensue for their position.
So is this a lack of knowledge on the effects of the
policy?
Is it possible, as Ms. Jaffe alluded to in her written
testimony, that different regions of the country would be
affected in different ways and is the question if export
restrictions are lifted is it possible that America would see
prices go up in some parts of the country and down in others?
So let me just zip down the row and hear the 4 of you weigh
in on that.
Mr. Hamm.
Mr. Hamm. Thank you, Chairman Wyden.
I think it comes down to one example I can give. Recently
Bill Day, spokesman for Valero Energy, the largest oil refinery
in the United States, they used to talk about the nationwide
export ban. He said it insulated American consumers from
geopolitical price shocks.
But in reality he told the market recently and these graphs
that he handed out was that it provided a particular unfair
advantage, if you will, in the market to Valero because they
were seeing pressure on refineries outside of the U.S. and
closures occurring. In fact this year projected about a million
barrels a day refinery closures, last year about a half million
barrels and 1.6 million barrels per day the previous year.
Now I think we all realize that refinery closures is not
good for consumer prices anywhere that they're occurring.
They're not good for my business. We need refineries that we
can get oil to. If we're forcing the refineries out of business
with an unfair advantage that they have, that they've been
given, that's not good for anyone.
So the difference between me as the producer without a
refinery and this gentleman with a refinery is considerate.
The Chairman. Same question, Mr. Burnett.
Mr. Burnett. I think the fundamental difference in our
position is whether U.S. oil prices would go up or go down as a
result of exports. It's my position that if the U.S. begins
exporting crude oil the OPEC producing countries in Saudi
Arabia in particular will act to maintain crude oil price by
reducing their output. So my logic is based on the fact that
crude oil prices will rise to an international level will not
decrease.
The net result of that would be increased feed stock cost
to our refineries and the closure of refining capacity in the
United States, particularly in the Northeast. The consequences
of that is less supply of gasoline and other fuels and higher
costs.
Thank you.
The Chairman. Alright.
Ms. Jaffe, you sort of started this by the allusion that
there may be regional differences. So let me let you take a
crack at this.
Ms. Jaffe. So first I have to talk about how the
international oil market works because sometimes people are
unclear. When we export refined products globally it means that
refiners in Europe have bought those products and they have cut
their refinery runs. So therefore OPEC is already affected
because they cannot sell more of their crude oil to Europe
because those refinery runs are shut and our gasoline exports
are already hurting OPEC.
Whatever OPEC policies they will take, they will take
whether we export the products or whether we export the crude
oil. So that is not the issue. Right?
The issue is the oil market. We have a slogan in the oil
market. We call it the Tyranny of Geography.
The Tyranny of Geography means that whether I'm selling
refined products or whether Mr. Hamm is selling his crude oil,
he wants to sell it to the closest possible refiner because
that is how he makes the highest amount of money because the
transportation cost eats into his profits. That means that even
if we were to lift the export ban the crude oil would first and
foremost look for a buyer inside the United States because that
is how it would be most profitable, because that would be the
cheapest transportation.
Now if it happened that there was a refinery in Mexico or
Canada that would benefit, actually most of our condensate
today is going to Canada for use as a diluent for the
transportation of heavy crude. The oil will flow to the best
possible use.
Now what that can mean in when we have bottlenecks whether
that's a pipeline bottleneck or we have some kind of a
transportation bottleneck or we have some kind of regulatory
bottleneck is that those bottlenecks create some distortions
that might artificially lower prices in one particular
geography for a particular time until that bottleneck is
removed.
The Chairman. I'm over my 5 minutes.
Mr. Weiss, quickly.
Mr. Weiss. I'll be very quick, thank you.
It's important to note that we really don't export very
much gasoline right now, a little bit less than 400,000 barrels
a day. The primary product we export, particularly in Europe is
low sulfur diesel. That's about a million point two barrels per
day.
So I don't see that as being a real challenge.
I would agree with Mr. Burnett that it's tough to try and
lower the price when the price of the commodity is controlled
by a cartel that is committed to having at least $100 barrel
oil. So I would see that it would not lower prices at all to
allow exports of gasoline, sorry, exports of oil.
The Chairman. Alright.
We'll continue this discussion. Just know that the Pacific
Northwest has a history of some of the highest gasoline prices
in the country. So if there are issues relating to the Tyranny
of Geography in some way, you can be sure that the people that
I represent are going to be very interested in that issue and
steps taken to protect them and their well being.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Weiss, you had made reference to the Alaska export
issue. There was also an essay that was recently released from
the Center for American Progress. I guess it was published this
week that also made some claims about Alaska and crude oil
exports.
Mr. Chairman, I want to insert into the record a 1999
study* from the GAO that examined the impacts of lifting the
ban on crude oil exports from Alaska. In that report they state
despite higher crude oil prices for some refiners no observed
increases occurred in the prices of 3 important petroleum
products used by consumers on the West Coast, gasoline, diesel
and jet fuel. This wasn't cited in the essay. I'd also like to
submit for the record a report** from CRS back in 2006 which
was also cited in this essay.
---------------------------------------------------------------------------
* Study has been retained in committee files.
** Report has been retained in committee files.
---------------------------------------------------------------------------
The Chairman. Without objection, that's ordered.
Senator Murkowski. It's important that we make sure that
we've got the full quotes in context there. So I wanted to make
sure that we included that.
Ms. Jaffe, you mentioned the Tyranny of Geography. I was
just reading an article reported yesterday where because of the
glut of the oil coming from the North, in North Dakota, into
the Gulf refineries that Texas is actually looking to move
their crude through the Panama Canal up to the refineries in
California. It speaks to the issue of alignment that Senator
Landrieu mentioned that we get to a point where we're going to
have a mismatch between what we are producing domestically and
our ability to meet the needs, the capacity, within our
refineries.
So just understanding and appreciating that it's getting to
the point now where we've reconfigured as many refineries as we
can. Maybe there's a little more room there. We're looking to
some pretty significant decisions when you're moving crude from
Texas through the Panama Canal to come up to the West Coast
refineries and still hoping to make a profit there. We're
looking for some solutions.
But this issue of timeliness is one that I have been trying
to track. In EIA's latest oil market report they say the
growing volumes of light, tight oil that cannot leave North
America are increasingly posing a challenge to industry,
putting the spotlight, of course, on where we are today which
is the oil export ban. So this timeline comes up a lot in
discussion.
I'm not asking Mr. Hamm or Ms. Jaffe for a date certain.
But really what is your general sense on when these initiatives
collide, if you will, with production? When do we hit that
misalignment or that mismatch that could then cause some real
disruption? Again, something, I think, we all tried to avoid.
I'll start with you, Mr. Hamm and then Ms. Jaffe.
Mr. Hamm. OK. Thank you, Senator.
I think the mismatch is beginning to happen already. You
know, so many refineries were outbidded and they're refitted,
you know, for heavier crude when it didn't look like supplies
would be here domestically. That most of what they'd be
refining would be the tar sand, the bitumen oil.
So without those retrofits the sweet crude doesn't fit very
well with some of them. So, but you need to move that then to
the more efficient ones that could handle this light, sweet,
low sulfur, premium crude oil that we're producing in North
Dakota and other places in the U.S. now.
So the mismatch is beginning to occur. A lot of people
expected it to occur almost as quickly as the oversupply of
natural gas. But there, supply and demand was equal. Price had
been elevated a little bit with projections of shortage in the
future, but with oil we've come from a 60 percent deficit with
the oil in the U.S. or imports being 60 percent and reduced
that half way to about 32 percent in 9 years. That's a really
good move and a historic first.
Senator Murkowski. Let's go to Ms. Jaffe. Mr. Hamm says
it's coming soon. When are we going to see a mismatch?
Ms. Jaffe. When you look at the sort of specialized models
for the trading of products and crude oil people anticipate
that by 2016 our condensate flows will be so high that mixing
them into the crude stream exports to Canada, use in
petrochemicals, use in refining, will max out for our physical
facilities unless there's some giant upsurge in investment for
specialized equipment which is not on the horizon right now. In
2016 we would face a situation where companies like Continental
Resources might actually have to stop drilling because there
would be a containment problem. We would not be able to find a
place to store all of this condensate if we can't produce it
and export it.
Senator Murkowski. We haven't seen a new refinery since in
25 years?
Ms. Jaffe. We have seen two companies that I know of,
Marathon and Valero. Valero has put in--expanded a distillation
tower in such a way to use more condensate. Marathon has made
an investment in Ohio.
But, you know, these kinds of investments take time. So,
you know, if we don't have a giant amount of investments
announced in the next year or so then I think that it will be
very difficult to absorb the condensate flows.
Senator Murkowski. I am well over my time. I know that Mr.
Weiss is sitting----
The Chairman. Without prejudicing any Senator's time, if
you could quickly offer your view?
Mr. Weiss. Yes, thanks.
The Energy Information Administration has documented that
the refining capacity in the last dozen years, since the year
2000, has increased by about two and a half million barrels per
day even though we haven't opened a new refinery. That
utilization rate is at about 87 percent. So, and third, there
are numerous refineries that are going to be expanding over the
coming years in North Dakota and Texas.
The Chairman. Senator Manchin is next and then Senator
Hoeven.
Senator Manchin. Thank you very much, Mr. Chairman.
This will be a simple yes or no. Then if the answer would
be no, if you could briefly explain why you would be no on this
question.
Do you all believe that the XL pipeline, Keystone pipeline,
would be a strategic advantage to the United States of America?
Mr. Hamm.
Mr. Hamm. Yes, I have certainly been in that camp, remain
in that camp. You know, the thing that really hurt everybody up
there is this delay that's going on with it.
Senator Manchin. So you're in favor of it? You're a yes on
that?
Mr. Burnett.
Yes on that, Mr. Burnett.
Ms. Jaffe.
Ms. Jaffe. Yes, I think the only way to keep the Canadian
oil sands in the ground is to lower demand.
Senator Manchin. But you're in favor of the pipeline?
Ms. Jaffe. I think if we have the demand for the oil we
need to transport the oil by pipeline and not in other ways.
Senator Manchin. Gotcha.
Mr. Weiss.
Mr. Weiss. No, I'm not because of the huge increase in
carbon pollution that would occur and because most of the oil
would be refined into other products and exported overseas. So
we get to keep the pollution. Other countries will get the
petroleum products.
Senator Manchin. Gotcha.
My next question would be for those of us who do and in
especially, you know, all of our states, but in West Virginia
we don't understand. We keep talking about energy independence.
We're having so much more and actually we're still paying high
prices at the pump.
Can you explain, Mrs. Jaffe, but briefly, the OPEC's
position? Are they always going to maintain that, the cartel,
maintain that, the oil cartel and be able to control the
pricing, world pricing, since we have such a large find, if you
will? It looks like we're going to be in this position for
quite some time.
Can that ever change to where we, in America, can benefit
from the price?
Ms. Jaffe. So the past literature shows that the higher
OPEC's market share, the more monopoly power they have to
control the price. So as the United States becomes a bigger
producer and let me say that the EIA projections are just based
on current knowledge. We're having a total paradigm shift in
the way we look for and produce oil, not only in the United
States, but probably eventually around the world.
So these temporary projections about the peak, in my
opinion, will turn out to be incorrect.
Senator Manchin. The difference of price.
Ms. Jaffe. Will be incorrect.
Senator Manchin. The difference, yes.
Ms. Jaffe. So the point is----
Senator Manchin. Yes.
Ms. Jaffe. As the United States and North America and
Mexico and other countries produce more oil from unconventional
resources. OPEC will have a smaller and smaller share of the
market and therefore their producer power will be reduced over
time to the extent that the United States exports LNG and
exports crude oil at free market prices and countries that are
in Europe and countries in Asia are able to buy spot market,
incentive oil and gas at market competitive prices where we
control anti-trust laws for the companies that sell and buy it.
Right?
Then OPEC's power will be reduced dramatically over time.
Mr. Weiss. Senator Manchin, can I just?
Senator Manchin. The other person I wanted to ask you, but
I'm going to ask Mr. Weiss to just comment.
Mr. Weiss. Just quickly. Three years ago the Saudi Oil
Minister said that they wanted to have oil at $100 a barrel,
the world price. That's about what it's been with some
exceptions, went up to $125.
Senator Manchin. Sure.
Mr. Weiss. They are a cartel. They control about 40 percent
of the oil that's produced. It's very easy for them, as Mr.
Burnett was saying, to turn the spigot one way or another to
get the price they want. That's how cartels work.
It's hard to see the United States increase in production
at a million barrels a year, two, here/there, being able to
really challenge that power.
Senator Manchin. The other thing would be the pricing, the
way the pricing on crude or oil verses the pricing on natural
gas. Why is there such a difference there? I mean we're not on
the world market with gas and we have a lot more flexibility on
gas, Mr. Weiss?
Mr. Weiss. There is not a worldwide market in natural gas
in the way there is in oil. Gas, that's $5 a million BTU here,
is $15 or so in Japan. It's because it's transportation is
harder and because the supply is much more----
Senator Manchin. Finally, very quickly, for either Mr. Hamm
or Mr. Burnett.
Do you all see feasibility for us bringing the price of
gasoline at the pump down for the people, especially in West
Virginia and all over the country? Are they ever going to see
any relief at all?
Mr. Hamm. We've seen a decrease of about 20 percent with
both diesel and gasoline over the past 18 months. I think
everybody has realized that from California.
Senator Manchin. They haven't seen a 20 percent decrease in
the price at the pump. I mean, we're still at $3.30, $3.50,
$3.60 in that neighborhood there.
Mr. Hamm. In some you'll see that. In Oklahoma City we're
about $2.85, $2.90. It's down about 60 cents a gallon.
With diesel we run it close to $5.00.
Senator Manchin. If someone would help me explain why West
Virginia is still paying such high prices.
Mr. Burnett, very quickly and my time is up.
Mr. Burnett. Seventy-two percent of the price of gasoline
in the pump is due to crude oil price. When you lower crude oil
price the gasoline will come down.
Senator Manchin. I'm sorry, Mr. Chairman.
The Chairman. To our guests we're going to have to call a
little bit of an audible here because we've been told that
there are going to be 4 votes on the Senate Floor at 11:15. So
by my calculation each of the remaining Senators can have their
5 minutes. That will be good.
Senator Hoeven.
Senator Hoeven. Thank you, Mr. Chairman.
First, Mr. Burnett, I want to commend Delta for buying a
refinery in Pennsylvania and operating it. I think that's very
good and particularly for using Bakken crude from North Dakota
in that refinery. We appreciate that.
Also, Andi Newman, who is here with you today, is an
outstanding individual and does a great job in government
relations. I want to commend you on her as well. Thank you very
much.
Mr. Burnett. Thank you very much.
Senator Hoeven. My questions are for Mr. Hamm.
I think the No. 1 priority for Americans when you talk
energy is they want what they call energy independence. I know
you would refer to it as energy security because it's a global
market, but essentially producing more energy than we consume.
I can't think of anybody that's done more to help us
achieve that. We're not there yet. But I can't think of anybody
that's done more to help us move in that direction than
yourself.
So my first question for you is what can the Federal
Government do to help us produce more energy in this country,
but specifically more crude because that's what you do? What
can the Federal Government do to help us continue to increase
our crude production?
I look at this graph and that doesn't show us producing
more than we consume. So how do we get there? What can we do?
Mr. Hamm. First of all we need to change some rules that
are totally archaic like the FCC rule today that limit what we
can put on the books to 5 years. A lot of these resource plays,
your Bakken for instance, it's going to take the next 15, 20
years to develop it. Yet I can't put those on my books. EIA
doesn't get the numbers. So those numbers are totally
distorted.
We had to teach them how to count. At one time they was
only taking the crude oil numbers and not putting any of the
natural gas to liquids in. Once they did that they finally
realized that we're up about 12.6 million barrels a day
production in this country.
So that's the first thing. We've got to get the numbers
right. Those numbers are totally pessimistic.
The next thing, do no harm. You know, we're going down the
right path. If we don't have a lot of tax changes and things
like that. If we can get this export ban lifted where people
can go ahead with their business, we can get there.
I don't know who you got it from. I'm jaundiced so I look
at the rocks. But really what we produced in the past in this
country for the past 160 years is basically what leaped off of
these source rock beds. Now we can produce those source rocks
effectively with horizontal drilling.
We're on our way to get there both with gas and with oil.
All we need to do is basically do no harm.
Senator Hoeven. My second question goes to transportation.
Recently they had accidents with rail moving crude. Of
course, we need to address that and you know that. Tell me what
we can do, what we should do, what you're doing, so that we can
make transportation of crude by rail safer?
Mr. Hamm. Rail has come a long ways, you know, since
basically it was deregulated. The regulations that put it out
of business, as we all know, is deregulated. It's come back.
It's doing a good job. We're seeing a lot of rail companies
that are doing tremendous.
I think there's 3 things.
First of all in the oil field, safety is ultimate. So
prevention of accidents, preparation, everybody is working on
that.
So rerouting trains effectively, they're doing that. Twice
the rail inspections, they're going to two a month at least on
everything. Anything that's congested they're trying to handle
it as quickly as they can.
So this is a new thing. It's come out there since
standardization needs to be done. The rails are into it.
They're working on it. Safety is of utmost importance to them.
They're certainly doing their job.
Senator Hoeven. As we develop more energy we need
infrastructure. That means both pipelines and rail. Would you
agree with that?
Mr. Hamm. I do and certainly pipelines, you know, rail
costs more. It will put the oil to the places you need it, like
his refinery and do it quickly. But pipelines eventually will
take the place of it.
Senator Hoeven. Just concluding question.
How do we both expand and develop more refineries? We're
building a refinery in North Dakota. I think the first one in
25 years or something, Greenfield. But how do we get more
refinery expansion and development in this country?
Mr. Hamm. The gentleman is right. There have been some
capacity added to existing refineries over the years because
you couldn't start one from scratch. There's so much Federal
regulation you just couldn't start one. So basically expansion
and add new tires and stuff has been done by the refining
industry.
You know, I think that overall, you know, looking at the
regulations that hinder them from building new ones that are
more efficient and better certainly needs to be looked at as we
go forward.
Senator Hoeven. Yes, Mr. Burnett? It's got to be quick. I'm
tight on time here.
Mr. Burnett. My position is that there is sufficient
capacity in the United States today in refining to be able to
absorb all of the title that's being produced. The issue is
infrastructure in getting the oil to the refineries.
We at Trainer Refinery started taking some Bakken. We would
certainly like to take more, but the infrastructure isn't there
yet. But these projects are all in progress. So it's just a lag
effect from the fact the oil is there. It's being produced.
There's a lag in the infrastructure, but it will come.
Senator Hoeven. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
We have 15 minutes for 3 Senators.
Senator Heinrich.
Senator Heinrich. Thank you, Chairman.
I want to go back to Ms. Jaffe on something that you
touched on and then would like to get everyone's thoughts on
it. It's one of my concerns here is just the potential lost
opportunity cost in terms of are we exporting crude or are we
exporting those refined petroleum products. It seems to me that
we create more jobs by exporting refined petroleum products
than by exporting crude.
Can you expand on that and then if any of you disagrees
with that position, explain to me how we create more jobs by
exporting crude oil than exporting refined petroleum products
because when I was a kid, you know, my mom sewed Levis. We had
a textile industry here. Now we just export wool and we export
cotton. We don't make it into products here and those jobs have
gone away.
Give me your thoughts on that.
Ms. Jaffe. I have an opinion on that. You know, when you're
doing complex trading it's kind of hard to say. But what I
would say generally speaking is that the experience in the
industry is that companies like Continental Resources when they
have better cash-flows they invest more of those cash-flows
into drilling. Therefore we have even more oil in this country.
Right? That drilling creates a lot of jobs.
When a refinery raises its through put rate to 90 percent
versus 80 percent that probably doesn't create very many jobs
at all. Refining is a very job--not a very job intensive
industry. That's part of the reason why Saudi Arabia has so
much trouble creating jobs inside the country because refining
and petrochemical is not a labor intensive industry the way
textiles is. So I would say on balance if your goal was just
100 percent jobs you would create more jobs having more cash-
flow through the upstream side of the oil industry than the
downstream side.
Senator Heinrich. Mr. Weiss.
Mr. Weiss. Very quickly. Sorry.
The University of Massachusetts did a study several years
ago that found that investments in oil production create one
third the number of jobs compared to investments in wind, solar
and other forms of clean energy. So if jobs in energy is what
you're interested in, than investments in renewables has a much
bigger payoff than investment in petroleum. In any aspect
petroleum is very capital intensive, not as labor intensive.
Senator Heinrich. Mr. Hamm and then we'll get to you, Mr.
Burnett too.
Mr. Hamm. Yeah, I agree with Ms. Jaffe. Escort it where you
want those jobs. There have been more jobs created in the
upstream sector than anywhere else over the last 10 years.
So refineries, I used to work in one. It's not very
intensive from a man power standpoint whether you're running 80
or 95 percent capacity it's about the same. So, but in our
business we've created a lot of jobs.
Senator Heinrich. Mr. Burnett?
Mr. Burnett. One thing I want to emphasize is that the
export of products is into a free and competitive market.
Exported crude is not into a free market. It's controlled by
OPEC.
I believe it's better for the United States to keep the
added value in country. If you look at the producing countries
around the world they are all building refineries, mega
refineries, because they want the added value to stay in
country too.
Thank you.
Senator Heinrich. Great.
In the interest of getting to Senator Baldwin I'll--and
Senator Scott, I'll yield back the last of my time.
The Chairman. Thank you. Gracious, as always.
Senator Scott.
Senator Scott. Thank you, sir.
Dr. Jaffe, I believe that our trade deficit is one of the
biggest threats to our national security. In your testimony you
touched on how lifting the export ban on crude oil could help
improve our trade deficit.
Could you expand a little bit on how exactly lifting the
ban will improve our trade balance, particularly in regards to
China?
Ms. Jaffe. Yes. So we're going to be, hopefully, in the
unique position where our imports of crude oil which are a huge
part of our trade deficit are going to go down over time. We're
already seeing that.
We're going to have a situation where China is going in the
opposite direction. They're going to have a higher and higher,
rising amount of their trade is going to be for importing crude
oil.
So as we move forward they will be increasing in their debt
and their vulnerability to the international oil market. We
will be able to strengthen our economy through these
improvements in our trade balance.
I think that one of the things that China does from my
travels there and discussions with them over geopolitics is
they have us in a great cycle. They support Iran. They support
other players in the Middle East that cause disruptions and
instability. We have to spend our tax dollars sending our
military out there and our young men to try to help with those
troubles. That makes us more indebted to China because they're
buying our treasury bills and bonds and so forth.
So, you know, when we can get out of that pattern we are
not having this constant burden of rising prices and it's a
burden on our trade balance. China is the one that feels the
pain of all the instability in the Middle East. I think we'll
find it easier to bring China to the table to negotiate with us
about stability internationally.
Senator Scott. Thank you.
Before I hear Mr. Weiss, I wanted to get one more question
in and then give you the balance of my time.
Mr. Hamm, you've been one of the best guys at this
unconventional business, so to speak. When I read through your
testimony you said that by 2025 we could see another million
jobs or so coming out of the oil and gas industry. When you
think about not lifting the export, the crude oil export cap,
what does that do to our economy?
I know in North Texas we've seen the tremendous surge,
North Dakota as well. Would this have a major impact on the
jobs that could be created if we don't lift our ban?
Mr. Hamm. It could, particularly as Ms. Jaffe talked, you
know, with some of the transitional plays such as in Texas with
Alford. It produced a lot of condensate, per se, you don't have
anywhere to go with them. It can certainly put a cap and
stagnate what we're doing in the future.
So it's not a good thing if we're going to keep this
industry going and get to where we're energy independent and
cause OPEC to have a severe step back, then we need to follow
through with this.
Senator Scott. Thank you, sir.
Mr. Weiss, do you want to comment on?
Mr. Weiss. Thank you, Senator Scott.
As long as we have the difference between consumption and
supply here we're going to have a trade deficit on oil whether
we export or not because if we export more oil the light, sweet
crude we're going to have to import more import to make up for
that gap. If one is concerned about reducing our oil trade
deficit the No. 1 thing we could do is dramatically reduce
consumption. We have new fuel economy standards that will get
us to 54.5 miles per gallon by 2025 for the average car.
We could go beyond that after 2025. That's how we would
reduce our trade deficit by dramatically reducing our
consumption.
Senator Scott. Two things. I saw you shaking your head,
Ma'am, Dr. Jaffe. Before you comment I would say that we could
very quickly solve the problem of our deficit by allowing us to
get on our Federal lands where we have hundreds of years of
resources.
But, Dr. Jaffe.
Ms. Jaffe. Yes, I just want to point out every refinery in
this country has a different configuration of what kind of
crude oil it can or can't refine. Whether we export or don't
export we're not going to physically change that except over a
10-year period, maybe over time. Right?
Because of the Tyranny of Distance refiners will invest
regardless of whether we're exporting or not. If we have an
imbalance in quality, right, we're either going to leave it in
the ground or we're going to export it. If we're having an
imbalance on what kind of quality of crude we can refine in
this country and what kind of quality of crude we can't.
There may be a time when we could produce as much light
crude in this country as could be physically, you know, by
barrels that we need. But we're still going to need heavy crude
because there's just going to be some refineries that already
exist in the Gulf Coast that have certain configurations.
There's just only so much light crude they can put through the
system.
Senator Scott. Right.
Ms. Jaffe. We're always going to have to import heavy
crude.
Senator Scott. Thank you.
I yield back the balance of my time.
The Chairman. Thank you.
Senator Scott. Which is a negative 16 seconds.
[Laughter.]
The Chairman. Thank you, Senator Scott.
Senator Baldwin.
Senator Baldwin. Thank you, Mr. Chairman.
As I mentioned earlier Wisconsin is experiencing a propane
crisis right now, very short supplies, increasing prices. So
I'm very interested in the subject matter of this hearing from
a perspective of how it will affect propane.
I have two questions for you, Mr. Burnett.
I mentioned earlier that one of the major components of our
propane shortage in the Midwest has been the result of
significant infrastructure changes. Pipelines that have served
the region for decades are being repurposed to serve new oil
fields. We understand that one pipeline, Cochin, in April will
be repurposed, but has traditionally supplied propane to our
area.
As oil production increases I think these infrastructure
pressures will only increase. If more American infrastructure
is dedicated to oil that's heading overseas is there adequate
remaining infrastructure in the United States to ensure that
other essential fuels like propane continue to flow to
Americans?
Mr. Burnett. Whether the crude oil is refined domestically
or exported the logistics problems will remain the same.
Historically in the United States crude oil arrived in the Gulf
Coast and all of the movement was from south to north. Since
the advent of shale oil the movement has reversed and is moving
from north to south and repurposing pipelines to get more and
more shale oil to where it needs to go into the refineries.
So I don't know if that answers your question, but I think
that it's going to continue.
Senator Baldwin. No.
Mr. Burnett. But I think it's also a very good argument for
Keystone XL as well.
Senator Baldwin. Do we know what impact the export of crude
oil will have on the prices and the availability of propane and
other critical fuels that are used in everyday life to heat
homes and power tractors and do all sorts of other things?
Mr. Burnett. I'm afraid I don't know the answer to that
question on that.
Mr. Weiss. Senator? Oh, sorry.
Senator Baldwin. Mr. Hamm and then we'll work down.
Mr. Hamm. OK. The export of crude oil won't affect propane
in your State. You know, basically that's from the liquids out
of natural gas production and so whether we export crude oil or
not is not going to matter.
These infrastructure problems, hopefully, we can get to
where we can build new pipelines in this country, quickly and,
you know, so people have to realize that this is going to go
forward as far as the energy renaissance. It will put money
back into infrastructure that's necessary.
Senator Baldwin. I've been trying to school myself on the
production of propane because of the crisis that Wisconsin is
facing. Crude oil has historically been a component of
production. It is also producible from natural gas.
Mr. Hamm. It is primarily from natural gas.
Ms. Jaffe. Can I?
Senator Baldwin. Anyways.
Ms. Jaffe. Also, yes, elaborate?
So I talked about the condensate export. So when you
produce both natural gas in some fields and also crude oil
natural gas liquids can be a byproduct. Propane is one of the
things that gets stripped out of natural gas liquids.
So the export of crude oil to the extent that it stimulates
more production in the United States or the export of natural
gas to the extent that it stimulates more production in the
United States, it will produce more and more propane over time.
So people are expecting actually a giant surplus of propane
over time.
But when you have this extreme weather event, no matter how
much natural gas we're going to produce in this country, no
matter how many refineries we have and how much surplus of oil
there is in the global market, you know, Tyranny of Distance.
If you have a particular unique market that uses a particular
fuel, you're always going to have weather related bottlenecks.
Senator Baldwin. There were a number of other contributing
factors, a harvest that used an exceptional amount of propane
preceding it, so the supplies were low going into the extreme
weather events that our State has been experiencing, pipeline
disruption for maintenance. So, you know, complicating factors.
The weather event alone didn't cause the shortages, but----
Ms. Jaffe. The solution to that is regulated inventory
requirement.
Senator Baldwin. I'm hoping to get back to you if I can
give Mr. Weiss the chance to answer the question. I do want to
follow up on that, if not at this hearing, afterwards.
Mr. Weiss. Thank you, Senator Baldwin. I'll be very brief.
There has not been an independent analysis to try and
predict the impact of lifting the crude oil ban on the price of
gasoline and other refined products. One thing this committee
could do would be to ask the Energy Information Administration
to conduct such an analysis.
Unfortunately due to sequestration and other budget cuts,
EIA is having to scale back the amount of work it does. But I
think that's probably for another hearing.
Senator Baldwin. I have run out of time. But I did want to
follow up with you, Ms. Jaffe, about that. I certainly heard
that in your testimony at the end. It's something that we
certainly need to be looking at, not only in Wisconsin, but
other states impacted by the propane shortage.
The Chairman. You all may be experiencing another first
here in the Senate because you're about to get what amounts to
a joint question from myself and Senator Murkowski because we
were both wrestling with the definition of energy independence.
I probably frame it as how you go about defining energy
security and then I'm going to yield to Senator Murkowski, who
would also like to be part of the discussion.
So when I contemplate energy security I ask myself, does
this mean no more imports, or does it mean the capacity for no
more imports, or does it mean more exports than imports? I
think this whole question of what constitutes energy security,
you may want to characterize it as energy independence. I want
to let my colleague weigh in on this because you are seeing our
bipartisan efforts perhaps in one of our--we always try to find
new ways to demonstrate it. We've never asked a joint question
to my knowledge.
[Laughter.]
The Chairman. But there's always a first time here. Let me
let Senator Murkowski be part of this. This will be the last
question for the morning then we have the vote.
Senator Murkowski.
Senator Murkowski. It's such an easy question here. But I'm
just joking. I said we're starting to act like an old married
couple. We're thinking the same way. Pretty soon we're going to
be finishing one another's thoughts.
[Laughter.]
Senator Murkowski. So I hope you'll let me finish the
thoughts on oil exports.
The Chairman. You're on.
Senator Murkowski. But I too have been thinking about how
we define energy independence. We've got a couple ends of the
spectrum here. We can either be very insular as a Nation and
try to do it all ourselves and basically thumb our nose at the
rest of the world, kind of difficult in most areas or we can do
as Senator Wyden has suggested in one of his alternatives where
we allow for greater flow of exports and opportunities across
our borders and insulate ourselves from the shocks of world
prices.
When I think about energy independence, energy security, it
goes to things like economic security. How do we ensure that as
we deal with our energy needs we have also helped our economy
become stronger? We have also worked to create greater jobs and
opportunities. But I don't view energy security to be a
situation where we kind of close in on ourselves but rather
that we are--we open up to a greater extent, but by doing so we
become less vulnerable to the impacts of other, of actions of
others.
So I do appreciate my colleague letting me join in on this.
I said, no, you can't ask that question. I'm going to ask it.
I think it's important as the Ranking and the Chair on this
committee to kind of wrap up this very important hearing, to
take us back up to 30,000 feet. What are we really talking
about here because I think it truly does go to the whole issue
of, not only oil export, but export of our energy that we're
successfully able to produce in this country?
So, I thank the Chairman.
The Chairman. The vote is on. So if each of you take about
a minute we can still make the vote.
Mr. Hamm.
Mr. Hamm. Yes, I think it's plural instead of singular. You
never get rid of it. I heard here earlier that the upstream
producers were foreign owned. I would assure you that if more
foreign owned refineries, Motiva, at least owned 50 percent by
the Saudis. Venezuela owns their own refineries. So you never
stop them from being able to ship their oil in.
I take it that we're energy independent when we're
exporting less or more than they're bringing in.
So that's what you have to look at, the balance of the two.
So I would suggest that we look at it overall, not being
inclusive of just who we are and what our needs are.
The Chairman. Mr. Burnett.
Mr. Burnett. First well let me define what I mean by energy
independence. That includes crude condensates, gas, coal and
alternative energies. It's all energies. I think you also need
to define it as energy independence for North America, not the
United States. It has to include Canada.
If you include Canada it's feasible for North America to be
energy independent by a mile before 2030. What that means is
that there will still be crude imports. There's a quality
arbitrage, as was mentioned earlier.
But it would mean an increase in product exports and
probably exports of coal and other energies as well.
The Chairman. Ms. Jaffe.
Ms. Jaffe. So I would say I agree with that given my slogan
the Tyranny of Geography. There will always be balancing for
quality and other reasons between different kinds of energy
sources in and outside our borders. We have a free trade
agreement with Mexico and Canada.
But I do want to end with the following two points.
No. 1, supply of bottlenecks, no matter how they're created
are the things that make volatility intense as we heard about
propane.
The second thing is that Senator Murkowski is correct. A
secure global market is what's going to bring American
consumers the lowest price and the most consistent stability in
fuel prices. That is what the U.S. should seek to do to be a
responsible participant in making sure we have a secure global
market.
The Chairman. Mr. Weiss.
Mr. Weiss. Thank you. I appreciate the joint question. I'm
sorry we we're not able to give you a joint answer.
I think all discussion about energy independence or almost
all of it is focused on supply. That is something we control
some of and some we don't. My view is we need to focus on
reducing our demand because that is something we do have
control over. It will help save consumers money. It will help
reduce the carbon pollution that will cause extreme weather,
that will disrupt our energy production and transportation
system.
So I think we need to really focus on reducing demand.
Particularly when it comes to transportation which is fueled
over 90 percent by oil, we need to invest in alternatives to
oil whether it's electric vehicles, whether it is natural gas
fueled trucks, whether it is public transportation, advanced
biofuels. All of those things will give consumer choices so we
are not solely dependent on this one fuel to run, essentially
run, our economy because as long as we are we'll still be here
having discussions about energy security and energy
independence.
Thank you for having me.
The Chairman. Mr. Weiss, thank you.
Suffice it to say, this is the first hearing apparently on
this topic. It will not be the last.
I knew it would be a piece of cake to find common ground on
this question. This is going to be in the ``to be continued''
department.
So we thank you all. We thank you for your patience. The
committee is adjourned.
[Whereupon, at 11:23 a.m. the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Response of Harold Hamm to Question From Senator Wyden
Question 1. I know from your testimony and your background that you
are a tireless advocate for domestic energy and domestic energy
producers. You were predicting American energy independence when few
others thought it could happen. Some may find that difficult to square
with your passionate advocacy for opening up crude oil exports. My
question to you is: how do you define energy independence? Does it mean
no more imports or imports only from allies or friendly nations? Or
does it mean having the ability to be self-sufficient, even if we
decide it's not necessary to do so?
Answer. Energy independence means energy security. It means
maximizing American oil and natural gas production and reducing the
leverage of hostile or unstable foreign oil suppliers. In other words,
it means America is no longer held hostage and neither are our friends.
Responses of Harold Hamm to Questions From Senator Murkowski
Question 1. Much attention has been paid in recent years to the oil
production increases in North Dakota and Texas. Is this the full extent
of the tight oil renaissance or do other regions hold particular
promise?
Answer. Other regions hold promise on a significant but smaller
scale, but there is not likely another Bakken.
Question 2. Generally speaking, where are the potential export
markets for U.S. crude oil and condensate?
Answer. While we already have the ability to export condensate,
potential markets for U.S. crude oil are Asia, Europe, Latin America
and any other place with light oil refining capacity.
Response of Harold Hamm to Question From Senator Landrieu
Question 1. Mr. Hamm, you make the argument in your testimony that
a failure to lift the ban on crude export will result in a contraction
of the growth we have seen and expect to see continue in the
unconventional oil and gas industry. You reference an IHS global
insight study that predicts 3.3 million jobs and $468 billion in
economic activity will be supported by the unconventional oil and gas
industry by 2020, and argue that a failure to allow export would stifle
this growth. It would seem that you are not alone, as just today,
preliminary data from an ICF International study was announced that
indicates exports could result in $70 billion in new U.S. upstream
investment by 2020.
a. With EIA currently predicting increased oil production
until 2019, followed by a flattening of production, do you
believe that additional investment driven by export would
create enough additional production to drive further increases
beyond the point at with EIA predicts increases will flatten?
Answer. Yes, EIA estimates are based on current technology that is
light years ahead of where it was just a decade ago. When you consider
that technology continues to advance and that today we are only
recovering 5 to 10 percent of oil in place in these resource plays, the
future looks incredibly bright if investment is encouraged.
b. Do you view export as essential to your future business
strategy for the U.S.-that is, do you predict that you will
enter into new investment if ban on crude export continues?
Answer. Free markets are essential to fully developing any
opportunity. The question is, do we want to maximize all the benefits
of America's oil and natural gas renaissance (jobs, GDP, national
security) or only partially realize them?
Response of Harold Hamm to Question From Senator Barrasso
Question 1. In your testimony, you say that ``America's oil and gas
renaissance is in jeopardy.'' You state that the ban on crude oil
exports has: ``prevented domestic oil exploration and production from
achieving its full potential.'' Last week, the Wall Street Journal
published an article entitled: ``IEA Warns U.S. Oil Output Growth Could
Hit a Wall.'' The first line of the article reads that: ``Surging U.S.
oil production could hit a wall in the coming years if the country
maintains its ban on crude exports, the International Energy Agency
(IEA) said.'' As you know, the IEA works on behalf of its 28 member
countries, including the United States. Do you agree with the IEA that
U.S. crude oil production could hit a wall due to the ban on crude oil
exports? Would you say that the growth in U.S. crude oil production has
already begun to hit that wall?
Answer. Again, free markets are essential to fully developing any
opportunity. Indeed, crude oil is no different than any other commodity
demanded by consumers. When governments attempt to control supply or
demand, no matter how well-meaning the laws may be, market distortions
and unintended consequences inevitably result; supply and competition
falls short of potential, and the consumer ends up paying higher
prices.
______
Responses of Amy Myers Jaffe to Questions From Senator Wyden
Question 1. In your testimony you say, ``it is important for the
United States to conduct a thoughtful debate and re-evaluation of
current export policy to avoid creating market distortions that, while
temporarily benefiting some consumers in particular U.S. regions, may
create more questionable medium to long-term trends that would be more
damaging than helpful.'' Keeping this in mind can you tell what if any
comprehensive studies have been done on the effect of the repealing the
crude export ban on American consumers?
Answer. I am not aware of a comprehensive study that has been done
to date on the subject of the effect on American consumers of repealing
the crude oil export ban under today's market conditions. Past studies
about limited exports from Alaska or pipeline shipments to Canada are
outdated and do not take into account the new conditions of global
markets and the changed U. S. profile as a rising producer of oil and
gas with extensive unconventional resources. In addition, any such
study would have to compare the differences in effects between
exporting oil in the form of refined products such as gasoline and
diesel and the effects of exporting crude oil. I am not aware of any
adequate studies that have been undertaken on this comparison. Limited
statistical correlations that have been published by investment banks
do not provide the proper intellectual framework to have predictive
power and can be misleading by providing comparisons of regional prices
that are subject to differing interpretations on cause and effect. Any
comprehensive study would have to take into account not only global
trade flows of oil and refined products and the impact of changes in
those flows on oil prices but also the reaction of the Organization of
Petroleum Exporting Countries (OPEC) or other major oil producers to
the addition of extra crude oil from the United States to global
markets. Changes in the price differential between light sweet crude
oil and heavy sour crude oil would also have to be assessed as part of
the exercise since U.S. exports are most likely to be of the former
quality while many U.S. refiners seek feedstocks of the latter quality.
It may be that light sweet crude oil of certain qualities and
quantities would have to be shut-in if they could not be exported
because there would be no market for them inside the U.S. refining
system.
Question 2. Given the size and scope of the global crude market and
the multitude of factors that can affect price, do you believe a
comprehensive study could ever be done? If we can't be certain, what do
we need to know in order to feel comfortable about lifting this ban?
Answer. Creating an accurate economic trade flow model that would
be able to take into account refined product in flows and out flows and
crude oil exports from the United States and their impact on global
prices and localized US gasoline prices would be highly difficult. To
be comprehensive, such a model would have to specify future quality of
crude oil streams coming into production in the United States and
abroad as well as detailed refinery configurations in major refining
centers, making the simulation solution harder to program than
successful models that have been made of the global natural gas market.
Also, global crude oil markets are highly influenced by market
psychology and temporary geopolitical factors that are hard to separate
from fundamental supply and demand.
However, there are concrete lessons from modern American history
that are instructive about the distortionary effects of US restrictions
on market clearing for crude oil. In 1958, President Dwight Eisenhower
a system of mandatory crude oil import controls to protect domestic
production from cheap foreign imports which were limited to 9% of
domestic demand. As a result, a distortionary market for oil import
tickets developed. The system did hold up U.S. domestic prices and
stimulate more drilling for a while but eventually, the U.S. depleted
its easy to produce oil and foreign import rates rose anyway. The
import control system also led to the development of a refining
industry in Puerto Rico and the Virgin Islands where the cheap foreign
oil was allowed to be refined without the import restrictions and then
the refined products shipped back into the United States. The program
also encouraged American oil companies to invest in refining and
marketing in foreign countries instead of inside the United States so
that they would have a market into which to sell their foreign oil
production that could not be brought back to facilities in the United
States. The Nixon era oil price controls were similarly distortionary
and created secondary markets in entitlements to oil that cost the tax
payer billions of dollars to administrate and transferred revenues to
parties able to game the system.
The United States has many goals in its policies towards energy
markets and all of these considerations need to be given weight. As I
stated in my testimony, we know concretely from detailed economic
studies and practical knowledge that resource nationalism and
artificial barriers to the free flow of oil and investment capital
created by the Organization of Petroleum Exporting Countries (OPEC) and
Russia have hurt global economic growth and been a root cause to
financial crises in the past. The United States cannot be effective in
eliminating this threat to the US economy, US consumers and our
national security if we promote artificial barriers to open trade and
investment in our oil industry.
We also know that many factors influence US gasoline price trends.
The price of crude oil feedstock is the major long term variable in
determining the level of US gasoline prices. Additionally, the level of
regional inventories is also a critical input into gasoline price
volatility. Thus, we know that if concerns exist about gasoline price
volatility, those concerns could be better addressed by having a more
effective policy regulating minimum gasoline inventory standards in
light of the trend towards US exports of either refined products or
crude oil.
Response of Amy Myers Jaffe to Question From Senator Murkowski
Question 1. Canada and Norway are major hydrocarbon producers and
exporters. Can the U.S. learn from their experience as it relates to
our own debates over hydrocarbon export?
Answer. In times of past oil supply crises, neither Canada nor
Norway were forced to suspend their crude oil exports to ameliorate
fuel shortages in their own countries, nor did national surpluses in
crude oil production (as compared to domestic demand) spur those
countries to use trade policy to artificially shield themselves from
global price trends. Rather, Canadian supplies in times of disruption
continued to flow to the United States as usual and American consumers
benefited from this policy. The Canadian and Norwegian economy saw
financial gains from their hydrocarbon exports and these benefits were
passed along to consumers in the form of 1) a more stable currency
(Canada), 2) relatively smaller national budgetary problems, 3) a
greater ability to fund social services such as health care and
education, and 4) the creation of a sovereign wealth fund (Norway) to
smooth out government revenues for future generations, among other
benefits such as employment and technology innovation and knowledge
that could be applied in non-oil sectors.
Responses of Amy Myers Jaffe to Questions From Senator Landrieu
Question 1. Ms. Myers Jaffe, would you expand on your note at the
end of your testimony arguing that wholesale gas prices for areas in
the U.S. with direct access to low cost light sweet crude production do
not differ greatly from areas more dependent on the world price-
specifically, how does gasoline and diesel's status as freely traded
international commodities drive their wholesale price, and how would
the export of U.S. crude affect this wholesale price-both here and
abroad?
Answer. Since petroleum products such as gasoline and diesel fuel,
including U.S. produced gasoline and diesel fuel, are freely traded in
a global market, U.S. petroleum product prices reflect international
crude prices, not necessarily U.S. domestic crude prices. If European
or Asian or Latin American gasoline or diesel prices are higher than
those in the United States, U.S. refiners will sell their gasoline and
diesel in these more lucrative foreign markets until the price of
gasoline and diesel rises sufficiently to equilibrate and eliminate the
profitability of continuing to ship product overseas (ie closing the
arbitrage window for exporting). Through this process of exporting
refined products, U.S. prices will rise to international levels even if
a surplus of domestic crude oil continues to weigh on domestic crude
oil prices. Refiners will either make their profits made by refining
U.S. domestic crude oil into products to be sold abroad or to be sold
in the United States at prices equivalent to international levels
(adjusted for differences in transportation costs). Eventually, if
investors find that they can make more money by shifting exploration
dollars to foreign countries instead of investing in oil and gas fields
in the United States, the U.S. will lose the benefits of rising oil
production and become more dependent on foreign imports again.
Question 2. On that line of questioning, could you expand on your
concern that the Barclays study cited today does not accurately reflect
the interplay of U.S. and global gas prices?
Answer. The often cited figures in Barclay's assessment of the
financial savings resulting from the export ban oversimplifies the
mechanisms and correlations of the interactions of U.S. and global
gasoline pricing. There are many variables that influence U.S. gasoline
prices to vary from global levels. For example, differences in
elasticity of gasoline demand in the United States and Europe over
different time periods can influence the relative price changes in each
respective market. American consumer responsiveness to price changes
tend to differ from that of Europeans, leading to variations in price
trends on either side of the Atlantic. Differing refinery
configurations and costs can also account for price disparities between
U.S. and European fuel markets as can weather trends and differences in
economic growth patterns. Finally, local inventory levels influenced
the differences between gasoline prices in the U.S. and Europe in 2008-
2010 vs today, not just changes in the price of U.S. midcontinent crude
oil relative to UK benchmark Brent crude.
Question 3. You make a case for crude oil export as tool of
geopolitics, similar to the way that a growing global LNG market has
lessened the stranglehold that Russian gas suppliers have kept on
Eastern Europe. What specific benefit do you see in allowing the export
of U.S. crude?
Answer. By allowing the exports of U.S. crude oil, the United
States can weaken the ability of foreign oil exporters to create
artificial barriers to global oil trade that drive up prices and give
oil producers political leverage over countries that are its major
customers. While the U.S. government itself will not be an oil seller
(except in the unusual circumstances of a strategic stocks release),
the availability of U.S. crude oil to international markets creates a
more competitive market that is harder to manipulate for geopolitical
ends, limiting the power of Russia and other major oil producing states
who might use energy to blackmail allies and other major economies to
accept geopolitical actions or to support military or other actions
inimical to U.S. interests. Energy trade strengthens our trade ties to
important allies and trading partners and thereby enhance American
power and influence. It would also improve our balance of trade with
countries such as China, reducing imbalances in financial flows and
thereby strengthening the U.S. economic power relative to Chinese
economic power. Our ability to serve as a source for critical swing
energy supplies enhances our importance to our energy trading partners
in other geopolitical and economic spheres.
Responses of Amy Myers Jaffe to Questions From Senator Barrasso
Question 1. In your testimony, you explain that the United States:
``participates in international trade and thus, blocking exports of. .
.commodities. . .cannot `protect' U.S. consumers from international
prices.'' You specifically address crude oil exports and explain that:
``it is not correct to say that the United States, by continuing to ban
U.S. crude oil exports, can isolate American consumers from global
prices.'' You note that any benefits from keeping the export ban in
place would be: ``artificial[ ],'' ``short term,'' and ``temporar[y].''
Finally, you explain that policies, such as the export ban, can become:
``very costly. . .over time'' and ``create. . .medium to longer-term
trends that could. . .be more damaging than helpful.'' Would you
elaborate on how the ban on crude oil exports, will not result, over
time, in lower prices for American consumers, and that the ban may
actually hurt American consumers in the long run? In the alternative,
do you believe there is any downside to American consumers if the ban
is lifted?
Answer. Since petroleum products such as gasoline and diesel fuel,
including U.S. produced gasoline and diesel fuel, are freely traded in
a global market, U.S. petroleum product prices reflect international
crude prices, not necessarily U.S. domestic crude prices. If European
or Asian or Latin American gasoline or diesel prices are higher than
those in the United States, U.S. refiners will sell their gasoline and
diesel in these more lucrative foreign markets until the price of
gasoline and diesel rises sufficiently to equilibrate and eliminate the
profitability of continuing to ship product overseas (ie closing the
arbitrage window for exporting). Through this process of exporting
refined products, U.S. prices will rise to international levels even if
a surplus of domestic crude oil continues to weigh on domestic crude
oil prices. Refiners will either make their profits made by refining
U.S. domestic crude oil into products to be sold abroad or to be sold
in the United States at prices equivalent to international levels
(adjusted for differences in transportation costs). Eventually, if
investors find that they can make more money by shifting exploration
dollars to foreign countries instead of investing in oil and gas fields
in the United States, the U.S. will lose the benefits of rising oil
production and become more dependent on foreign imports again.
Over time, allowing U.S. exports may facilitate a slightly higher
U.S. oil production rate and this could mean that depletion of U.S.
resources will take place faster than it might otherwise have
transpired. Moreover, there are negative environmental impacts that are
associated with the production and use of oil and thus, to the extent
that U.S. exports entail higher oil production and use, there will be a
downside to the lifting of the U.S. export ban. However, the best way
to reduce the environmental impacts of producing and using oil are to
enact measures that lower the demand for oil, such as energy efficiency
standards, placing a cost on greenhouse gas emissions, and funding for
public transportation. These would be more effective ways to reduce the
negative environmental impacts of oil production and use than banning
U.S. exports since if demand for oil exists in the U.S. or globally, it
will be met by one supply source or another regardless if the U.S.
exports its oil in the form of refined products or the form of crude
oil.
Question 2. In your testimony, you state that ``[o]ur history of
energy policy is replete'' with examples where the Federal government
did more harm than good. You cite ``President Nixon's. . .price
controls on natural gas which ultimately caused a long lasting shortage
of natural gas supply.'' You also cite the ``two-tiered system of oil
pricing that ultimately. . .incentivized imports of foreign oil.''
Would you expand upon the lessons to be learned from the Federal
government's past mistakes in setting energy policy?
Answer. One of the things that differentiates the United States
from China and Russia is our reliance on free markets to set prices
based on supply and demand. Market related pricing ensures that capital
is deployed efficiently, ultimately lowering costs of goods and
promoting productivity and economic benefit. In our history, the United
States has experimented with price and market controls in energy, often
resulting in creation of shortages and the stifling of optimum levels
of investment.
However, there are concrete lessons from modern American history
that are instructive about the distortionary effects of US restrictions
on market clearing for crude oil. In 1958, President Dwight Eisenhower
a system of mandatory crude oil import controls to protect domestic
production from cheap foreign imports which were limited to 9% of
domestic demand. As a result, a distortionary market for oil import
tickets developed. The system did hold up U.S. domestic prices and
stimulate more drilling for a while but eventually, the U.S. depleted
its easy to produce oil and foreign import rates rose anyway. The
import control system also led to the development of a refining
industry in Puerto Rico and the Virgin Islands where the cheap foreign
oil was allowed to be refined without the import restrictions and then
the refined products shipped back into the United States. The program
also encouraged American oil companies to invest in refining and
marketing in foreign countries instead of inside the United States so
that they would have a market into which to sell their foreign oil
production that could not be brought back to facilities in the United
States. The Nixon era oil price controls were similarly distortionary
and created secondary markets in entitlements to oil that cost the tax
payer billions of dollars to administrate and transferred revenues to
parties able to game the system.
Question 3. In your testimony, you encourage Congress to consider
America's ``global priorities'' as we debate the crude oil export ban.
Specifically, you state that: ``Long term geopolitical considerations
are. . .more important to our nation than the. . .short term commercial
gain to. . .vested industry interests.'' You explain that energy
exports would: ``strengthen our ties to important allies and trading
partners and thereby enhance American power and influence.''
You also say that energy exports: ``will weaken. . .our adversaries
such as Iran and Russia,'' ``give us an upper hand with China''; and
``improve our balance of trade.'' Would you expand upon the
geopolitical benefits that America will experience if we lift the ban
on crude oil exports?
Answer. By allowing the exports of U.S. crude oil, the United
States can weaken the ability of foreign oil exporters to create
artificial barriers to global oil trade that drive up prices and give
oil producers political leverage over countries that are its major
customers. While the U.S. government itself will not be an oil seller
(except in the unusual circumstances of a strategic stocks release),
the availability of U.S. crude oil to international markets creates a
more competitive market that is harder to manipulate for geopolitical
ends, limiting the power of Russia and other major oil producing states
who might use energy to blackmail allies and other major economies to
accept geopolitical actions or to support military or other actions
inimical to U.S. interests. Energy trade strengthens our trade ties to
important allies and trading partners and thereby enhance American
power and influence. It would also improve our balance of trade with
countries such as China, reducing imbalances in financial flows and
thereby strengthening the U.S. economic power relative to Chinese
economic power. Our ability to serve as a source for critical swing
energy supplies enhances our importance to our energy trading partners
in other geopolitical and economic spheres.
Question 4. In your testimony, you explain that: ``The United
States has for many decades been the leading nation in championing open
markets and free trade in energy.'' You also state that: ``the United
States should continue to actively support open markets and free trade
in energy and to do so, it cannot restrict its own energy exports.''
Would you say that our own restrictions on crude oil exports and
liquefied natural gas exports undermine our nation's credibility when
advocating for open markets and free trade in energy?
Answer. There can be no question that the United States loses its
credibility when advocating for open markets and free trade in energy
when we ban free trade in our own crude oil and natural gas production.
We cannot simultaneously call on other countries to freely export their
oil and gas and vote to restrict our own energy trade. Removing
bottlenecks and trade barriers can smooth the functioning of markets,
allowing arbitrage to promote flows to and from the most efficient
geographic supply sources, eliminating localized volatility and easing
sharp localized price movements during times of disruptions or
unexpected events.
The United States needs to consider the usefulness of past
experiences when we counted on our European allies to provide us with
badly needed gasoline from Europe's strategic stocks during our
difficulties with the U.S. fuel manufacturing and distribution systems
during Hurricane Rita and Katrina. And we need to think carefully about
what our global economic and security obligations might be, should an
oil supply crisis of major proportions emanate sooner rather than later
out of the Middle East--both before, and even after, the U.S. gets
closer to being energy self-sufficient. The mindset of husbanding
resources out of fear of shortages has never served major producing
countries like the United States well. In the crisis years of the
1970s, such hoarding behavior worsened the dislocations, not eased
them. By contrast, in more recent years, we have fashioned an
international emergency oil supply response system that protected the
global economy in the aftermath of Saddam Hussein's invasion of Kuwait,
and would be important should a similar or even worse kind of conflict
were to arise again in an important oil producing area of the Middle
East or Russia.
Question 5. In your testimony, you discuss the ``tyranny of
distance.'' You explain that the costs to ship crude oil, natural gas,
and refined products overseas: ``will in most circumstances guarantee
U.S. users a continuing energy cost advantage over foreign competitors
even if export bans are lifted.'' You explain that this cost advantage:
``is, in many cases, of significant size and will ensure that U.S.
energy prices are lower than those of countries that would buy U.S. oil
and gas.'' Would you elaborate on this cost advantage as it relates to
(1) crude oil and (2) liquefied natural gas exports?
Answer. The costs for shipping oil and refined products to Europe,
Asia and Latin America vary with the level of market rates for
chartering a tanker and the exact distance for the journey. In the case
of crude oil, these costs can range roughly from 50 cents a barrel to
several dollars, depending on demand for tankers and distance. For
liquefied natural gas, the costs for regasification and shipment to
Asia will be roughly $4.50 per mcf to Asia and $3.50 to $4.00 to
Europe. Generally speaking, these transportation costs must be covered
by higher landed oil or natural gas prices in Europe or Asia to have
the arbitrage window encourage exports from the United States. In other
words, U.S. prices have to be lower by the amount related to shipping
costs than the international price to stimulate the international
trade.
Responses of Amy Myers Jaffe to Questions From Senator Cantwell
Question 1. Ms. Jaffe, I am interested in your suggestion that
keeping a strategic cushion of refined products could help protect
consumers from sudden supply and/or price shocks. You might be aware
that this Committee attempted to address this concern by passing out of
Committee S. 967, the Strategic Petroleum Reserve Modernization Act of
2009. Considering that this bill was passed on a party line vote, with
heavy criticism from Republican Committee Members and the oil industry,
it strikes me as unlikely that such an idea could be put into practice
in the near future. Does your opinion regarding the desirability of
U.S. crude oil exports change, assuming that the U.S. Government will
take no additional action to safeguard consumers from supply shocks?
Answer. US consumers will be subject to supply shocks from global
markets irrespective of whether we export oil in the form of refined
products or in the form of crude oil because the international price is
transmitted into our markets via whatever exports and imports we
participate in. The American public should be outraged that elected
officials are entertaining accommodations to the US refining industry
without regard to the low historical inventory levels carried by that
industry and the impact of those low inventories on exposing gasoline
prices to upward volatility. US refining companies are presently
exporting gasoline to foreign markets without ensuring that adequate
inventory levels are present to protect their local American customers.
Inventories are a critical tool to smooth out the supply dislocations
that come about from localized refinery accidents, severe weather, and
international disruptions. Since the US refining industry and their
supporters in Congress are not calling for a ban on US gasoline
exports, I don't see how the ban on US crude oil exports is in any way
useful to protect US consumers from the effects of global prices.
Moreover, the point needs to be made that US exports of any oil
commodity, whether it is gasoline or crude oil, eventually contributes
to lower global oil prices overall. The global oil market is like a
bathtub and the more water one puts in the tub in any location, the
more water is available in all locations. By analogy, it doesn't matter
if that water comes directly from the bathtub tap or is heated first on
the stove and then put in the tub (refinery processing). Adding a cup
of water--whether from the tap or from the tea kettle--in any location
raises the level of water in the tub. The more fluid is put in the tub
(ie global marketplace) the lower the prices will be for all users of
the water (oil). Additionally, if water is taken out of the right side
of the tub, it affects the water level on the left side of the tub
equally. There is no way to protect the water level in one particular
location of the tub from the sudden removal of water from a different
location.
Question 2. In your testimony and comments, you focused largely on
the national and global implications of the export ban. Could you
comment on what likely regional impacts would result from lifting the
ban? It strikes me that Washington State is a natural export point for
railed crude bound for Asian markets, and that my constituents would
face increased rail traffic, with associated safety risks and
congestion. However, I do not see how they get any benefit from this
increased traffic, in terms of relief in the prices that they pay at
the pump. Could lifting the ban directly benefit Washington State
consumers in any way?
Answer. Washington consumers would benefit like all Americans from
the benefits from U.S. crude oil exports. But there are associated
risks that would accompany rail traffic of volatile materials and
Washington state will have to assess those risks and whether it wants
to continue to participate in the transport and shipping of good
overseas including goods that pose greater safety risks than others. It
will be important to mitigate such risks if condensate and very light
crude oil is going to be transported through Washington state by
ensuring proper equipment and safety procedures are in place.
Responses of Amy Myers Jaffe to Questions From Senator Flake
Question 1. This hearing produced much discussion about the
existence of a global price for crude oil and refined petroleum
products such as gasoline. To that point, the Energy Information
Administration (EIA) has suggested that the price for these products is
``driven by the international market'' subject to short term
fluctuations in the supply chain, including regional price adjustments.
Do you believe that the price for crude oil and refined products such
as gasoline is set by the global markets? Please include an explanation
of the support for your position.
Answer. The notion that the price of crude oil and refined products
such as gasoline is set by the global market is well established in the
scholarly energy economics literature and has been statistically
verified by studying the co-movements of prices of different kinds of
crude oils. I refer the committee to the writings of Maurice Adelman
(``Is the World Oil Market One Great Pool'' The Energy Journal, 13(1);
Bentzen, J. ``Does OPEC influence crude oil prices? Testing for co-
movements and causality between regional crude oil prices, Applied
Economics 29: 1375-1385)
Question 2. If you believe, those prices are set by global markets,
does that mean that the ``domestic'' crude oil discount (i.e., the
lower input cost for refiners using domestic crude) that some have
suggested has been retained by the refiners, as opposed to being passed
along to consumers? Or, do you believe that the purported domestic
crude oil discount is reflected in current domestic gasoline prices?
Answer. As I mentioned in my testimony, there is little statistical
evidence that consumers are receiving benefit from the lower feedstock
costs for refiners in the US Midcontinent where U.S. domestic crude oil
is plentiful. The crude oil feedstock discounts enjoyed by refiners
with access to mid-continent landlocked U.S. production have not
lowered the wholesale price of Midwest petroleum products compared to
prices linked more closely to international markets, nor did they lower
the retail prices of gasoline or diesel fuel prices in the Midwest
markets served by PADD II refiners relative to the markets served by
coastal refiners that do not enjoy these discounts. Since petroleum
products are freely traded in a global market, U.S. petroleum product
prices reflect international crude prices, not lower-priced domestic
crude.
Question 3. There has been some discussion about the use of crude
oil swaps to alleviate some of the anticipated excess production of
domestic light sweet crude. Do you see that as a viable option? What
role, if any, would you foresee Congress playing in facilitating crude
oil swaps?
Answer. Swaps take place in the marketplace from time to time and
could be an alternative to outright crude oil exports but one has to
ask why the Congress would require a refiner to buy unneeded U.S. light
crude oil as a means to purchase the heavy sour crude it requires from
abroad to fill adequately its refinery processing slate. Since the
crude oil market is a global one and the United States cannot cut
itself off from global market pricing trends, it is unclear what
benefit is derived from requiring swaps instead of outright exports.
Swaps is a second best option.
Question 4. During the hearing, you mentioned that one way to
protect ourselves from domestic energy emergencies is through minimum
inventory standards. Can you elaborate on that more? Do you, for
example, envision something in addition to the strategic petroleum
reserve, such as minimum commercial reserve requirements, as you
briefly discussed in your testimony?
Answer. There is no question given the high level of refined
product exports departing the United States and the sensitivity of
wholesale gasoline prices to market disruptions and sudden changes in
supply or demand that minimum commercial inventory standards for U.S.
refiners would help reduce temporary price spikes in gasoline prices.
As I discussed during my testimony, such policies exist in Europe and
Asia. The best way to protect U.S. consumers from sudden price
movements in gasoline, heating oil or natural gas from unexpected
supply disruptions or weather related events is to ensure that adequate
inventories are on hand in regional markets. To protect U.S. consumers
against volatility in fuel pricing due to shifting levels of global
demand for refined petroleum product and/or natural gas exports, the
United States should require U.S. producers and refiners to hold
reasonable minimum inventories to guard against temporary domestic
shortfalls of supply or seasonal volatility. Such minimum product
inventory standards are already used successfully in Europe and Japan
to enhance energy security and protect domestic markets in the event of
an unusual event such as the Fukushima nuclear accident. In fact, the
United States was able to weather Hurricane Rita and Katrina partly by
borrowing gasoline from these mandated European minimum inventory
stockpiles. As the United States shifts to a lower percentage of crude
oil imports, it may want to consider holding a higher proportion of
strategic stocks in the form of mandated commercially held stocks of
refined products, rather than publicly held crude oil stores. I refer
the committee to my article ``The Role of Inventories in Oil Market
Stability'' published in The Quarterly Review of Economics and Finance
42 (2002) 401-415.
______
Response of Daniel J. Weiss to Question From Senator Wyden
Question 1. In your testimony you speak about the volatility of
energy markets, particularly oil, as it relates to energy security you
said, ``OPEC oil is very vulnerable to supply disruptions.'' Do you
believe this volatility will continue, and if so, do you believe the US
will be more dependent on OPEC oil if we allow exports?
Answer. The Energy Information Administration (EIA) recently found
that Organization of the Petroleum Exporting Countries (OPEC) supply
disruptions in 2013 reduced the anticipated growth in world global
fuels supply. EIA reported this finding in the just published ``Short-
Term Energy Outlook Supplement: Uncertainties in the Short-Term Global
Petroleum and Other Liquids Supply Forecast.''\1\ EIA determined that
---------------------------------------------------------------------------
\1\ Energy Information Administration, Short-Term Energy Outlook
Supplement: Uncertainties in the Short-Term Global Petroleum and Other
Liquids Supply Forecast (U.S. Department of Energy, 2014), available at
http://www.eia.gov/forecasts/steo/special/pdf/2014_sp_01.pdf.
In January 2013, EIA's Short-Term Energy Outlook (STEO)
projected that global liquid fuels supply growth would average
1.0 million bbl/d in 2013, but EIA's latest estimate shows that
global supply grew by about 0.6 million bbl/d in 2013. The
difference mainly reflects higher-than-expected unplanned
supply disruptions among OPEC producers.\2\
---------------------------------------------------------------------------
\2\ Ibid
---------------------------------------------------------------------------
This same analysis found that
OPEC disruptions increased in the second half of 2013,
reaching 2.6 million bbl/d by the end of the year because of
increased disruptions in Libya. The issues underpinning the
outages in these countries are unresolved, resulting in
uncertain oil production outlooks for these countries.\3\
(Emphasis added)
---------------------------------------------------------------------------
\3\ Ibid
As the production of U.S. oil has grown, the importation of foreign
oil has declined from 57 percent in 2008 to 40 percent in 2013.\4\ This
includes a 35 percent reduction in crude oil imports from OPEC since
2008, which was the second largest amount of imports since 1973.\5\ As
U.S. domestic production continues to grow, EIA projects OPEC crude oil
imports will decline by 47 percent between 2013 and 2020.\6\
---------------------------------------------------------------------------
\4\ Energy Information Administration, AEO2014 Early Release
Overview (U.S. Department of Energy, 2013), available at http://
www.eia.gov/forecasts/aeo/er/pdf/0383er%282014%29.pdf.
\5\ Energy Information Administration, ``U.S. Imports from OPEC
Countries of Crude Oil,'' available at http://www.eia.gov/dnav/pet/
hist/LeafHandler.ashx?n=pet&s=mcrimxx2&f=a (last accessed February
2014).
\6\ Energy Information Administration, ``Imported Liquids by
Source, Reference case,'' available at http://www.eia.gov/oiaf/aeo/
tablebrowser/#release=AEO2014ER&subject=8-AEO2014ER&table=101-
AEO2014ER®ion=0-0&cases=ref2014er-d102413a (last accessed February
2014).
---------------------------------------------------------------------------
Despite the important growth in domestic oil production, the U.S.
will consume over 5 million barrels of oil and liquids per day in 2014
compared to the amount it produces.\7\ Unless there are large
reductions in demand, the demand-supply gap will grow if the U.S.
exports crude oil and liquids. This gap could be filled by oil from
both OPEC and non-OPEC nations. If the U.S. begins to export
significantly more oil than it did in 2013, it would have to import oil
to offset the exports.
---------------------------------------------------------------------------
\7\ Energy Information Administration, AEO2014 Early Release
Overview (U.S. Department of Energy, 2014), Figure 12, available at
http://www.eia.gov/forecasts/aeo/er/early_production.cfm?src=Petroleum-
b2.
---------------------------------------------------------------------------
Oil companies would like to export ``lighter'' crude oil because
there has been a slight increase in light oil production in the U.S.
over the past few years.\8\ \9\ In 2013, EIA reported that domestic
crude oil was light, with an average API gravity of 35.3. Imported oil
was intermediate, with an average API gravity of 28.\10\
---------------------------------------------------------------------------
\8\ Energy Information Administration, Annual Energy Outlook 2013
(U.S. Department of Energy, 2013), Figure 98, available at http://
www.eia.gov/forecasts/aeo/MT_liquidfuels.cfm.
\9\ Crude oil with an API gravity greater than 35.0 is ``light,''
while oil with an API gravity less than 25.0 is ``heavy.'' In 2013, EIA
reported that domestic crude oil was light, with an API of 35.3.
Imported oil was intermediate, with an API of 28.
\10\ Energy Information Administration, Annual Energy Outlook 2013,
Figure 98.
---------------------------------------------------------------------------
EIA projects that the increase in domestic production will
``replace imports of medium and heavy crude.''\11\ If exports were
allowed, refiners could import slightly heavier oil as they were before
the domestic production increase began in 2009. The three largest
importers of heavy oil are Canada, Mexico, and Venezuela, with average
imports of 2.6 million barrels per day (mbd), 1.0 mbd, and .8 mbd,
respectively, during the first 11 months of 2013.\12\ Presumably, some
of the increase in heavier crude oil to offset any domestic exports
will come from Venezuela, which is a member of OPEC. I am not aware of
any projections of changes in future oil imports from these three
nations if the crude oil export ban is lifted.
---------------------------------------------------------------------------
\11\ Energy Information Administration, ``WTI-Brent Spread
Projected to Average $11 per barrel in 2014,'' This Week in Petroleum,
February 12, 2014, available at http://www.eia.gov/oog/info/twip/
twip.asp.
\12\ Energy Information Administration, ``U.S. Imports by Country
of Origin,'' available at http://www.eia.gov/dnav/pet/
pet_move_impcus_a2_nus_epc0_im0_mbblpd_m.htm (last accessed February
2014).
---------------------------------------------------------------------------
Responses of Daniel J. Weiss to Questions From Senator Murkowski
Question 1. The International Energy Agency states in its January
2014 Oil Market Report: ``The growing volumes of light tight oil that
cannot leave North America are increasingly posing a challenge to
industry, putting the spotlight on the US crude oil export ban.'' Last
year, the head of the IEA--Maria van der Hoeven--warned that the ban
threatens production. Where, in as much detail as possible, do you
believe the IEA's analysis is incorrect?
Answer. The International Energy Agency (IEA) ``Oil Market Report''
is not incorrect, but it is incomplete. It is simply a snapshot of U.S.
crude oil production in 2013 and 2014, and not a projection of future
production. The EIA reference case projects that U.S. crude oil
production will peak in 2019, and then began a slow but inexorable
decline through 2040, when production will be less than it was in
2013.\13\ (See graph below)*
---------------------------------------------------------------------------
\13\ Energy Information Administration, ``Petroleum and Other
Liquids Supply and Disposition, Reference case,'' available at http://
www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2014ER&subject=8-
AEO2014ER&table=11-AEO2014ER®ion=0-0&cases=ref2014er-d102413a (last
accessed February 2014).
* Graph has been retained in committee files.
---------------------------------------------------------------------------
The IEA notes that the U.S. oil industry has adjusted well to the
significant increase in domestic production. It has
Demonstrated the capacity of the US oil industry and markets
to seize new opportunities and adjust on their own to changing
realities.
Although US production growth in 2013 far surpassed our
projections, the industry met the challenge of extra supply in
its stride. The accommodation of the additional production was
possible because of refinery, pipeline and crude rail capacity
expansions, allowing the Midwestern crudes to reach the Gulf
Coast and East and West Coast refineries.\14\
---------------------------------------------------------------------------
\14\ International Energy Agency, Oil Market Report, (International
Energy Agency, 2014) available at http://omrpublic.iea.org/
currentissues/fullpub.pdf.
This seems to obviate the need to allow crude oil exports at this
time.
Question 2. Do you believe American consumers (e.g., motorists)
have benefited from the record increases in oil production
domestically?
Answer. The IEA ``Oil Market Report'' noted that U.S. drivers have
not appreciably benefited from the increase in U.S. production.
Remarkably, surging US supply and runs have not markedly
lowered product prices for consumers. Rising global demand and
supply shortfalls elsewhere--with twice as much annual growth
in global demand as in world supply last year--have kept OECD
[Organization of Economic Co-operation and Development] stocks
tight and oil prices generally high.\15\
---------------------------------------------------------------------------
\15\ Ibid
In 2013, inflation adjusted gasoline prices were the sixth highest
in the past 37 years, at $3.54 per gallon, according to EIA.\16\ This
occurred even though the U.S. had its highest domestic oil production
since 1988.\17\
---------------------------------------------------------------------------
\16\ Energy Information Administration, ``Regular Gasoline Retail
Prices,'' available at http://www.eia.gov/forecasts/steo/realprices/
(last accessed February 2014).
\17\ International Energy Agency, Oil Market Report.
---------------------------------------------------------------------------
In 2012, the Associated Press conducted an analysis of the
relationship between domestic oil production and gasoline prices, but
found no correlation between the two.
A statistical analysis of 36 years of monthly, inflation-
adjusted gasoline prices and U.S. domestic oil production by
The Associated Press shows no statistical correlation between
how much oil comes out of U.S. wells and the price at the
pump.\18\
---------------------------------------------------------------------------
\18\ Seth Borenstein and Jack Gillum, ``Fact Check: More US
drilling didn't drop gas prices,'' Bloomberg Businessweek, March 21,
2012, available at http://www.businessweek.com/ap/2012-03/
D9TL1BO00.htm.
EIA reports that the price of crude oil is responsible for 71
percent of the price of a gallon of gasoline.\19\ As long as the price
of oil is set on the world market controlled by the OPEC cartel, then
it will be very difficult for U.S. production to significantly affect
the price of gasoline.
---------------------------------------------------------------------------
\19\ Energy Information Administration, ``What do I pay for in a
gallon of regular gasoline?'' available at http://www.eia.gov/tools/
faqs/faq.cfm?id=22&t=10 (last accessed February 2014).
---------------------------------------------------------------------------
The most effective way to help consumers is to produce cars that
use significantly less gasoline. For instance, the 2025 fuel economy
standard for passenger and light duty vehicles will save drivers an
estimated average fuel savings of $8,000 over the life of a new
car.\20\ This is equivalent to lowering the price of gasoline by $1 per
gallon.\21\
---------------------------------------------------------------------------
\20\ The White House, ``Obama Administration Finalizes Historic
54.5 MPG Fuel Efficiency Standards,'' Office of the Press Secretary,
August 28, 2012, available at http://www.whitehouse.gov/the-press-
office/2012/08/28/obama-administration-finalizes-historic-545-mpg-fuel-
efficiency-standard.
\21\ Ibid
---------------------------------------------------------------------------
Investments in alternatives to gasoline would also help drivers
spend less on transportation. This could include the construction of
public recharging infrastructure for electric vehicles, the commercial
production of cellulosic (non-crop) advanced biofuels, and investments
in public transportation. All of these could provide cleaner, cost
effective alternatives to gasoline.
Response of Daniel J. Weiss to Question From Senator Landrieu
Question 1. Mr. Weiss, you use a very specific example to prove the
link between U.S. crude export and increased price. You cite a CRS
report on the period of 1995-2000, when exports of crude produced in
Alaska and refined on the West Coast were accompanied by shifts in
price. You contend that the increase from West Coast prices being 5
cents above the national average in 1995 to being 12 cents in 2000, the
year exports stopped. However, this same CRS report makes the point
that West Coast gasoline prices, as evidenced by their starting point
above the national average, are subject to influences beyond price
increases-additional environmental regulations and constricted refining
capacity are cited specifically. The CRS report goes on to state that
these factors could also explain the price differences seen in the West
Coast market-the CRS report states that in fact they would have had
``significant bearing, even during the years of crude exports.''
a. Do you contend that the price differences seen in this
instance are still related directly to exports, or do you agree
with the CRS report that external factors could also have
driven this price difference?
Answer. I noted in my testimony that
``The only real-world experience of lifting an oil export
prohibition occurred following the 1996 removal of a ban on
Alaska oil exports. During the ban, much Alaskan oil was
shipped to the West Coast. A Congressional Research Service
analysis found that lifting the oil ban exacerbated the
existing price differential between West Coast and national
gasoline.
In 1995 . . . West Coast pump prices [were] only 5
cents per gallon above the national average. But by
1999 West Coast gasoline was 15 cents per gallon
higher. When crude exports stopped in 2000, the average
[difference] . . . was 12 cents; it [later] narrowed
further to 7 cents. . . . When Alaskan oil exports
ceased, the gasoline price differential between the
West Coast and the national average did decline.
``This experience suggests that lifting the nationwide crude
oil export ban could similarly raise gasoline prices. Barclays
Plc. predicts that lifting the export ban could increase total
spending on motor vehicle fuel by $10 billion per year. Sandy
Fielden, director of energy analytics at RBN Energy, told
Bloomberg that if there are more oil exports, `The most obvious
thing that's going to happen is that crude prices will go up
and so will gasoline.'''\22\
---------------------------------------------------------------------------
\22\ Daniel J. Weiss, Testimony before the U.S. Senate Committee on
Energy and Natural Resources, ``U.S. Crude Oil Exports: Opportunities
and Challenges,'' January 30, 2014, available at http://
www.americanprogress.org/issues/green/report/2014/02/05/83559/u-s-
crude-oil-exports-opportunities-and-challenges/.
The CRS report strongly suggests, but does not prove, that the
elimination of the Alaska oil exports contributed to the increase in
West Coast gasoline prices between 1996 and 2000. I noted in a response
to a question that there has not been an independent assessment of the
impact of lifting the crude oil export ban on domestic gasoline prices.
In response to a question during the hearing, I urged the Senate Energy
Committee to seek such an analysis from the Energy Information
Administration. As you know, Senators Ron Wyden and Maria Cantwell
recently sent a letter to EIA requesting such an analysis.\23\
---------------------------------------------------------------------------
\23\ Letter from Sen. Wyden and Sen. Cantwell to Administrator
Sieminski, February 3, 2014, available at http://www.energy.senate.gov/
public/index.cfm/democratic-news?ID=4dd7893d-d472-425a-81f0-
197e5fdf46b7.
b. You also quote the Commission on Energy Security as saying
that ``volatility in the global oil market will remain a
serious concern.'' What is your opinion of Ms. Myers Jaffe's
argument that U.S. crude exports, used as a tool of
geopolitics, may have the effect of reducing volatility in the
global oil market, much of which is driven by geopolitical
---------------------------------------------------------------------------
conflicts?
Answer. As you note, much of the price volatility in the global oil
market ``is driven by geopolitical conflicts.'' I am not an expert in
the regional conflicts in the Middle East, Africa, or other oil
producing regions. However, even from my lay person's perspective it
seems that ancient sectarian disagreements, government repression,
joblessness, and vast disparities of wealth in these nations are a
major part of many of these conflicts. It is difficult to imagine, for
instance, that the export of one million barrels of oil per day from
the U.S. would have much impact on these factors.
Responses of Daniel J. Weiss to Questions From Senator Flake
Question 1. This hearing produced much discussion about the
existence of a global price for crude oil and refined petroleum
products such as gasoline. To that point, the Energy Information
Administration (EIA) has suggested that the price for these products is
``driven by the international market'' subject to short term
fluctuations in the supply chain, including regional price adjustments.
Do you believe that the price for crude oil and refined products such
as gasoline is set by the global markets? Please include an explanation
of the support for your position.
Answer. There is ample analysis that reinforces the idea that there
is a global market price for oil, set by the OPEC cartel that produces
40 percent of the world's oil.\24\ For instance, EIA explains that
---------------------------------------------------------------------------
\24\ Energy Information Administration, Short-Term Energy Outlook,
(U.S. Department of Energy, 2014), available at http://www.eia.gov/
forecasts/steo/report/global_oil.cfm.
Crude oil prices are determined by worldwide supply and
demand.
One of the major factors on the supply side is the
Organization of the Petroleum Exporting Countries (OPEC), which
can have significant influence on prices by setting production
limits on its members, who together produce more than 40% of
the world's crude oil. OPEC countries have essentially all of
the world's spare oil production capacity, and possess about
two-thirds of the world's estimated crude oil reserves.\25\
---------------------------------------------------------------------------
\25\ Energy Information Administration, ``Oil Crude and Petroleum
Products Explained,'' available at http://www.eia.gov/energyexplained/
index.cfm?page=oil_prices (last accessed February 2014).
OPEC meets regularly to assess the benchmark price for crude oil.
---------------------------------------------------------------------------
At its meeting in December 2013, it was reported that
Saudi Arabia and other OPEC members argue that benchmark
crude oil prices, currently averaging $100 per barrel, provide
acceptable income for producers without weighing too heavily on
consumers.\26\
---------------------------------------------------------------------------
\26\ ``Opec keeps production ceiling,'' AFP, December 5, 2013,
available at http://thepeninsulaqatar.com/business/qatar-business/
263469/opec-keeps-production-ceiling.
An analysis of oil prices by the Associated Press noted that ``oil
is a global commodity and U.S. production has only a tiny influence on
supply. Factors far beyond the control of a nation or a president
dictate the price of gasoline.''\27\
---------------------------------------------------------------------------
\27\ Borenstein and Gillum, ``Fact Check: More US drilling didn't
drop gas prices''.
---------------------------------------------------------------------------
While there is a world market price for oil, gasoline prices
mostly, but not solely, depend on the world oil price, and can vary
widely by country, and by region within the U.S. This is due to
different capacity and efficiency levels at refineries, transportation
costs, taxes, and other factors. In February, a gallon of gasoline
ranged from 40 cents per gallon in Iran to $3.32 per gallon in the U.S.
to $10.74 per gallon in Norway.\28\
---------------------------------------------------------------------------
\28\ ``Petrol prices around the world, February 2014,''
MyTravelCost.com, available at http://www.mytravelcost.com/petrol-
prices/ (last accessed February 2014).
---------------------------------------------------------------------------
There was much less variation in the U.S., but there were still
regional differences in gasoline prices. EIA reports that for February
10, 2014, gasoline prices ranged from $3.09 per gallon in the Gulf
Coast to $3.52 in the West Coast--14 percent higher.\29\
---------------------------------------------------------------------------
\29\ Energy Information Administration, ``Gasoline and Diesel Fuel
Update,'' available at http://www.eia.gov/petroleum/gasdiesel/
gas_geographies.cfm#pricesbyregion (last accessed February 2014).
---------------------------------------------------------------------------
Question 2. If you believe, those prices are set by global markets,
does that mean that the ``domestic'' crude oil discount (i.e., the
lower input cost for refiners using domestic crude) that some have
suggested has been retained by the refiners, as opposed to being passed
along to consumers? Or, do you believe that the purported domestic
crude oil discount is reflected in current domestic gasoline prices?
Answer. The impact on consumers from the recent increase in some
domestic crude oils is unclear. Nationwide, the average refiner crude
oil acquisition cost increased in 2013 to $102.90 per barrel from
$100.71 and $100.72 in 2011 and 2012, respectively.\30\ This higher
price could limit the benefit of higher production to drivers. EIA
speculates that
---------------------------------------------------------------------------
\30\ Energy Information Administration, ``U.S. Crude Oil Domestic
Acquisition Cost by Refiners,'' available at http://www.eia.gov/dnav/
pet/hist/LeafHandler.ashx?n=pet&s=r1200__3&f=m (last accessed February
2014).
Larger price discounts for U.S. crude oil production versus
alternate world crudes, such as greater WTI and LLS discounts
to Brent, may be needed to encourage Gulf Coast refiners to
process the increased supplies.\31\
---------------------------------------------------------------------------
\31\ Energy Information Administration, ``WTI-Brent Spread
Projected to Average $11 per barrel in 2014,''
In other words, the price discount is not yet sufficient to
increase gasoline production enough to affect prices.
On the other hand, there may be regional impacts that benefit some
drivers. On February 6th, 24/7 Wall St., a website for investors,
reported that ``AAA also expects regional variation in gasoline prices,
largely the result of access to cheaper North American crude oil.''\32\
24/7 Wall St. reported in January that
---------------------------------------------------------------------------
\32\ Paul Ausick, ``Price of Gasoline Will Rise: AAA'' 24/7 Wall
St., February 6, 2014, available at http://247wallst.com/energy-
economy/2014/02/06/price-of-gasoline-will-rise-aaa/#ixzz2tdFMyWQr.
Refining companies with the majority of their operations on
the Gulf Coast of the United States have been in the driver's
seat for profits during the past several months of 2013. Access
to cheaper U.S. crudes has lifted some refiners' margins.\33\
---------------------------------------------------------------------------
\33\ Paul Ausick, ``Oil Refiners: Is There a Value Play?'' 24/7
Wall St, January 2, 2014, available at http://247wallst.com/energy-
business/2014/01/02/oil-refiners-is-there-a-value-play/
Question 3. There has been some discussion about the use of crude
oil swaps to alleviate some of the anticipated excess production of
domestic light sweet crude. Do you see that as a viable option? What
role, if any, would you foresee Congress playing in facilitating crude
oil swaps?
Answer. Crude oil swaps could address some of the excess production
of domestic light sweet crude, but several potential impacts should be
evaluated to before allowing such swaps. What impact will swaps have on
domestic gasoline and diesel prices? Will the swaps increase our
dependence on oil from allies or other nations? Will the swaps
encourage the production of oil with more well-to-tank carbon
pollution? Until EIA or some other independent bodies analyze these and
related questions, swaps should not go forward beyond what can occur
under existing law.
If such an analysis demonstrates that swaps would not harm drivers,
increase dependence on oil from non-allies, boost the production of tar
sands or other dirty oils, then the Commerce Department has the
authority to approve export applications to facilitate the swaps. There
is no need for Congressional involvement.
Question 4. During the hearing, you mentioned that one way to
protect ourselves from domestic energy emergencies is through minimum
inventory standards. Can you elaborate on that more? Do you, for
example, envision something in addition to the strategic petroleum
reserve, such as minimum commercial reserve requirements, as you
briefly discussed in your testimony?
Answer. In October, New York became the first state to establish a
``strategic gasoline reserve'' to prevent serious supply disruptions
during extreme weather events or other emergencies.\34\ New York plans
to store up to 3 million gallons of gasoline for first responders and
other motorists. Establishment of additional reserves could supply
gasoline in other states in the event of future supply disruptions.
Because of technical limitations on storing significant amounts of
gasoline for long periods of time, there would probably have to be
multiple smaller reserves rather than several large reserves, as with
the Strategic Petroleum Reserve. The Senate Energy Committee should
explore the need for such gasoline reserves, as well as the technical
and economic feasibility of building and maintaining them.
---------------------------------------------------------------------------
\34\ Andrew M. Cuomo, ``Governor Cuomo Launches First-Ever
Strategic Reserve to Prevent Supply Gaps During Emergencies,''
Governor's Press Office, October 26, 2013, available at http://
www.governor.ny.gov/press/10262013Strategic-Gasoline-Reserve.
---------------------------------------------------------------------------
Amy Myers Jaffe, another witness at the January 30th hearing,
recently promoted a mandate to ensure a certain amount of refined
product inventories. She wrote:
Regulators [should] mandate a minimum level of mandatory
refined product inventories in the United States. Such a system
exists in Europe and Japan and allowed Europe the flexibility
to provide gasoline to the United States during the production
shortfalls that occurred following Katrina and Rita, preventing
worse dislocations. The system helped Japan in the aftermath of
the Fukushima crisis.
A US government program reserving the right to use for
strategic national emergency releases a portion of this
mandated minimum supplementary industry refined product stocks
of 5% or 10% of each refining company's average customer demand
would ensure that needed supplies of gasoline or heating oil in
inventory to ease the impact of sudden weather related demand
surges or accidental disruption of consumer supplies.\35\
---------------------------------------------------------------------------
\35\ Amy Myers Jaffe, ``Washington Needs to Embrace the New
American Century: More Thoughts on US Exports,'' The Energy Collective,
February 17, 2014, available at http://theenergycollective.com/amjaffe/
341836/washington-needs-embrace-new-american-century-more-thoughts-us-
exports?utm_source=hootsuite&utm_medium=twitter&utm_campaign=hootsuite_t
weets.
I believe that this proposal would help address future extreme
weather or other unforeseen events that cause gasoline supply
disruptions.
______
Response of Graeme Burnett to Question From Senator Wyden
Question 1. I understand that Delta is concerned about exports
increasing domestic fuel prices and those higher fuel prices hurting
Delta's bottom line.
Can you quantify the impact that exports could have on your
costs?
Answer. As outlined in our prepared testimony, we believe that
lifting the export ban would harm refineries in the U.S. and benefit
refineries in Europe, where there is currently excess refining
capacity. In particular, if we export crude oil, we believe many of our
refineries, particularly in the Northeast, will close. This will reduce
our domestic supply of jet fuel and have a similar impact on prices as
have recent, temporary supply interruptions in New York Harbor. Those
interruptions impacted the jet crack, sometimes by 2 cpg ($0.84/bbl) of
jet fuel. Assuming the same level of supply interruption, Delta's
Trainer facility would be subject to an additional cost of $61 million
per year. Other data, such as the data included in the Barclays study
on crude exports, indicates the impact of a more permanent supply
disruption to be closer to 7 cpg ($3/bbl), which would increase the
negative impact on Delta to over $200 million per year.
Is Delta at all concerned that domestic oil production will
exceed US demand and that producers will cut production if they
do not have access to all possible markets for their product?
Answer. If the transportation infrastructure is in place, crude can
get to the right refiner and there should be sufficient capacity within
the US to absorb domestic oil production. To date, all the oil
production coming out of Bakken and elsewhere has not been able to get
to the appropriate refining centers, hence a dislocation in price. This
is the result of an infrastructure problem, not a demand problem. In
any case, multiple infrastructure projects are currently in progress
and are due to come on line over the next two years, allowing the free
flow of crude to the centers that can process it. Crude quality has
been raised as an issue, but provided the economic driver (i.e. price)
is there, the refineries can quickly adapt to handle this crude oil,
and in fact many such projects are already in progress. Data shows
there is an additional 425kbpd refining capacity being added, as well
as more than 350 kbpd of condensate splitting capacity.
Furthermore, production capacity will not be reduced while crude
oil remains above $80/bbl. This is supported by a range of estimates
available in the public domain for the break-even economics on US shale
oil production. For instance:
--$45-70/bbl--A Myers Jaffe, UC Davis, Jan 15, 2014
--$60-80/bbl--T Kartevold, Statoil, Feb 2013
It would seem that much like we have seen in the natural gas
sector, at some point, prices could drop to a level where it is
not in the producer's interest to continue drilling new wells.
Does Delta foresee such a scenario in its long term projections
or do you see oil prices remaining high enough to make it
profitable for producers to continue producing?
Answer. The long term outlook for Brent crude oil price appears to
be stable in the $100-$110/bbl range, with WTI some $8--$12/bbl below
that. These ranges are in line with EIA's Energy Outlook forecasts. As
stated above, domestic oil production will continue while WTI crude
prices remain above $80/bbl. Moreover, the crude oil situation cannot
be compared to the natural gas market, as we can produce more gas than
we can consume domestically, whereas we are still a major importer of
crude oil.
Until exports were permitted, gas production simply matched
consumption. Exporting natural gas was determined to be in the public
interest as it was foreseen that exports would raise the cost of gas
closer to levels sufficient to justify renewed production from ``dry''
gas wells (i.e. those that do not have associated NGL's) that were
closed down due to the very low market price (at the time, around $3per
mmBTU).
This logic in fact supports our contention that crude exports will
increase prices domestically, not reduce them. Unlike gas, US crude
oil:
--Is insufficient to meet total US demand
--Can displace imports of foreign waterborne crude
--Is an unfinished product which can be upgraded to high-value
exportable finished products by US refineries, supporting
high paying jobs.
Response of Graeme Burnett to Question From Senator Murkowski
Question 1. The International Energy Agency states in its January
2014 Oil Market Report: ``The growing volumes of light tight oil that
cannot leave North America are increasingly posing a challenge to
industry, putting the spotlight on the US crude oil export ban.'' Last
year, the head of the IEA--Maria van der Hoeven--warned that the ban
threatens production. Where, in as much detail as possible, do you
believe the IEA's analysis is incorrect?
Answer. The IEA report states that the ``Crude Wall'' can be
avoided by, among other items, ``expansion of pipeline capacity,
continued increases in refinery throughput and a change of refinery
crude slates.'' While we believe their estimates of new refinery
capacity are too low, we are in agreement with their overall logic. In
addition, we believe that refinery feedstock conversion can happen
relatively quickly with the right price driver, and that exports will
be unnecessary to alleviate the Crude Wall. The following tables*
indicate that capacity is being added, and more will follow.
---------------------------------------------------------------------------
* Tables have been retained in committee files.
---------------------------------------------------------------------------
Response of Graeme Burnett to Question From Senator Landrieu
Question 1. Mr. Burnett, your company is in the unique position of
being not only a purchaser and refiner of crude, but also a consumer-in
essence; you represent the entirety of the lifecycle of crude past the
upstream. In your testimony, you make the case that the current low
price of U.S. produced light sweet crude allows your refinery, one of
the roughly half in the country configured for that type of crude, to
operate at a cost that allows Delta to procure jet fuel at a discount
when compared to its competitors. You go on to argue that U.S.
consumers benefit similarly, and point to a Barclays study that
indicates lifting the ban could cost the U.S. billions. You also argue
that this low cost light sweet crude is essential to keeping some
refineries open, which I am sensitive to as it is also a major concern
for Alon, an independent refinery in my state.
a. Do you foresee a way in which U.S. refiners such as
yourself could remain competitive if crude exports are allowed?
Answer. Merchant refiners that are not part of an integrated supply
chain such as Trainer/Delta will not be sustainable if the ban is
lifted and domestic crude prices approach international crude prices. A
narrowing of the WTI-Brent spread by $4/bbl will threaten approximately
1 million barrels of US refining capacity with closure, with the
resulting loss of jobs and economic fallout for the neighborhoods in
which they are located.
b. Is there a divide between smaller and larger refiners that
determines who is able to remain competitive in a market with
U.S. export by virtue of either greater volume or more
efficient production?
Answer. There are two factors for viability--one is economy of
scale (size), the other is location (proximity to the feedstock). As
you can see from the net cash margin curve above, most of PADD I (East
Coast) refineries are less competitive due to both location and
complexity. Some PADD III (Gulf Coast) refineries are also threatened;
assuming these Gulf Coast refineries are well located for supply, the
threat comes from lack of economy of scale/complexity.
c. While it does not directly apply to your refinery in the
Northeast, Ms. Myers Jaffe points out in her testimony that
wholesale gas prices in the Midwest, an area with refineries
with direct access to U.S. light sweet crude, did not vary
greatly from wholesale gas prices in the Gulf Coast, an area
that is much more closely tied to global oil prices. This seems
to indicate that because gasoline and refined products are
freely traded on the global market, unlike U.S. crude, they are
much more closely related to global oil prices. Do you see this
same interplay at your Monroe facility-that is; do you sell
refined products into the open market at wholesale rates close
to the world average, or at a reduced rate?
Answer. There are indeed links between product prices in the US and
global oil prices, but there is further complexity. Refined product
price drivers include:
1. Crude oil prices
2. Crude oil transportation infrastructure and cost
3. Product specifications
4. Product transportation infrastructure and cost
5. Balance between product supply and demand, impacted by
a. Global refinery utilization
b. Product inventory levels
Product prices in the New York Harbor market (where Trainer sells
its products) follow the price drivers listed above, and are linked to
the international market, either by import parity or export parity,
depending on the arbitrage at any point in time. Marine logistics
costs, duties and taxes also have to be taken into account of course,
when comparing product prices from one region to another.
d. Additionally, you contend that U.S. refineries depend on
this price spread to remain open-and again, I am certainly
sensitive to that. However, with such a large amount of light
sweet crude being produced, it would seem unlikely that a
shortage is your concern; rather, your concern is that prices
could increase to match the world market, undoing an important
advantage. Do you believe that the ``tyranny of distance'' that
Ms. Myers Jaffe references-simply, the cost benefit to being
close to the production you draw from-could provide these
refineries with the competitive edge they require to remain
profitable?
Answer. If exports are allowed, crude oil prices will rise to
international levels. Domestic barrels would be priced at export parity
rather than import parity, so there will still be a differential
between domestic and imported barrels due to geography, but greatly
reduced from current levels. Refineries operate on slim margins, and if
the crude price differential were to narrow from $11/bbl (stated in my
testimony) to say $5/bbl, approximately 1 to 1.5 million barrels of
refining capacity would close in the US. Typically, those most
threatened would be the smaller, less complex refineries, predominantly
in the Northeast where logistics costs are higher.
Response of Graeme Burnett to Question From Senator Barrasso
Question 1. In your testimony, you state that Delta Air Lines:
``believe[s] strongly that the ban on U.S. crude oil exports is good
policy.'' However, I also understand that Delta supports continued
growth in U.S. crude oil production. Last week, the International
Energy Agency (IEA) warned that the ban on crude oil exports could slow
the growth in U.S. crude oil production. As you know, the IEA is an
independent organization that works on behalf of 28 oil-consuming
nations, including the United States.
A. Do you agree with the IEA's assessment made in the January
2014 Oil Market Report?
Answer. The IEA assessment correctly identified certain elements
that need to be in place in order not to hinder oil production, the
most important being infrastructure. The lack of infrastructure has
caused a price dislocation that wouldn't change with or without
exports, as the crude cannot get to market. However, this situation is
being rapidly addressed, and bottlenecks will be eliminated within two
years. Once the infrastructure is fully in place, there is sufficient
refining capacity within the US to handle the crude, although some
investment may be needed in heavy crude refineries to maximize light
crude capability. These modifications are also in progress, as the
price driver is sufficient to encourage US refiners to process domestic
crude.
B. Would Delta support lifting the ban on crude oil exports
if the ban slows the growth in U.S. crude oil production?
Answer. Delta does not believe that the ban will slow production at
current crude pricing levels.
Responses of Graeme Burnett to Questions From Senator Flake
Question 1. This hearing produced much discussion about the
existence of a global price for crude oil and refined petroleum
products such as gasoline. To that point, the Energy Information
Administration (EIA) has suggested that the price for these products is
``driven by the international market'' subject to short term
fluctuations in the supply chain, including regional price adjustments.
Do you believe that the price for crude oil and refined products such
as gasoline is set by the global markets? Please include an explanation
of the support for your position.
Answer. The price for crude oil is not set by global markets. OPEC
has the ability to modify the supply side of the equation to raise
prices. See the chart below.* It is a cartel, and its sole raison
d'etre is to control crude oil prices and preserve their own domestic
economies.
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* Graphic has been retained in committee files.
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OPEC controls 40% of the market. Most Middle East producing
countries require a crude price of $100/bbl or higher to balance their
fiscal and current account budgets, as shown in the IMF table below.*
Question 2. If you believe, those prices are set by global markets,
does that mean that the ``domestic'' crude oil discount (i.e., the
lower input cost for refiners using domestic crude) that you suggested
during the hearing has been retained by the refiners, as opposed to
being passed along to consumers? Or, do you believe that the purported
domestic crude oil discount, which you estimated as an $11 cost
advantage to U.S. consumers, is reflected in current domestic gasoline
prices?
Answer. The price differential, estimated at $11/bbl, is absorbed
by different players in the value chain. The lions share $6-7/bbl
currently goes to the mid stream companies and railroads that have the
logistics to transport the crude. Approximately $1-2/bbl goes to the US
domestic refining industry, and the remainder is passed on to the
consumer. Barclays estimated the consumer discount at $3/bbl ( 7 cpg)
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