U.S. House Natural Resources Subcommittee on Energy & Power Hearing on Government Policies to Encourage Oil Export

The U.S. House Subcommittee on Energy & Power held a hearing on H.R. 702, a bill “To adapt to changing crude oil market conditions,” on July 9. The bill would repeal and prohibit restrictions on the export of domestically-produced crude oil.

 

The panel of witnesses discussed the U.S. energy outlook and the effects of oil export policy on the U.S. economy, consumers, energy security, and geopolitics:

  • E. Petr Gandalovic, the Czech Republic’s Ambassador to the United States, testified that a larger number of stable democracies among the world’s oil exporters will lead to more energy security for the Czech Republic and the European Union (EU).
  • Mark Kreinbihl, Group President of the Gorman-Rupp Company, testified that lifting the ban on crude oil exports would increase markets for American-produced crude oil.
  • Commander Kirk Lippold, President of Lippold Strategies, testified in opposition to the bill to lift the crude oil export ban.
  • W. David Montgomery, Senior Vice President of NERA Economic Consulting, testified that restrictions on oil exports reduce the U.S. gross domestic product (GDP), restrict growth, slow economic recovery, and cause higher gasoline prices.

 

In his opening statement, Rep. Ed Whitfield (R-KY), the subcommittee chairman, said Americans enjoy the advantages of a global customer base, but restrictions implemented during the oil shortages of the 1970s prohibit the export of most American crude oil. He said lifting the export restrictions and allowing the market for American oil to extend beyond our borders could create nearly one million additional jobs, bringing about both an economic and foreign policy success story.

 

Amb. Gandalovic testified the Czech government knows that it cannot achieve true state sovereignty without energy sovereignty. His country’s energy security is seen as a business tool, not a political one. The Czech Republic and the EU would have more robust energy security if there were a greater number of stable democracies among world energy exporters. U.S. energy exports would send a strong signal to the world that democracies stick together, he concluded.

 

Lippold testified in opposition to the bill. Despite the recent increase in domestic crude oil production, the U.S. still remains overly dependent on foreign oil, he said, and domestic consumption will continue to outpace domestic production for the foreseeable future. The following are highlights from his testimony:

  • As U.S. oil supplies are exposed to growing demand in the international market, the price discount they’ve had for the past several years will likely dissipate.
  • Lifting the ban would not contribute to energy diplomacy over Russian actions in Ukraine. Studies have said that the vast majority of crude oil exports would be sold in Asia, not Europe.
  • European refineries are configured to process Russia’s medium sour crude and it would need to be reconfigured—an expensive, long-term proposition—to handle American light sweet crude. Nigeria, which also exports light sweet crude, is the country most likely to suffer economically from competition with American exports.
  • The U.S. does not need to export crude oil to influence international markets because increased domestic production results in reduced dependence on imports. Overseas crude is then available to be sold in other markets.
  • The U.S. may want to export crude oil at some point in the future, but only because of potential national security considerations.

 

Montgomery testified that restricting crude oil exports has many economic costs, including a reduced U.S. GDP, restricted job growth, slower economic recovery, and higher gasoline prices.

 

The price of light oil from Bakken and other tight formations continues to be depressed in relation to comparable world market crude. Furthermore, U.S. oil needs to be exported because the U.S. refineries are not capable of refining the light sweet variety, and it would have higher value on the world market.

 

Removing restrictions would also improve the U.S. balance of trade and reduce import dependence. Unless refined product consumption increases, he said, any increase in crude production reduces net imports. “Whether the U.S. increases its exports or reduces its imports, the reduction in net exports is all that matters for the balance between supply by non-U.S. producers and demand for their oil. An increase in exports or an equal decrease in imports will have exactly the same effect on the world price of oil.”

 

Kreinbihl testified that the U.S. shale energy revolution took off a few years ago and created a new and rapidly growing market for his company, Gorman-Rupp. He said his company goes to great lengths to avoid laying off employees, and current low orders and sales in its energy business has resulted in a substantial reduction in its work. Lifting the ban on crude oil exports, meanwhile, will increase overseas markets American crude.

 

The U.S. energy sector has been a leader in developing new technologies for energy exploration and extraction. Taking advantage of those technological advances before competitors do would continue to give the U.S. energy industry incentives to innovate and become even better at finding and extracting oil and natural gas in an efficient and safe manner, Kreinbihl said.

 

Rep. Frank Pallone (D-NJ) said there is no guarantee that this condition will last, and that energy sector factors could change in the future. A better understanding of where crude oil exports would go is needed. Other questions need to be answered, he added, such as the impact on oil and gasoline prices, and how exports would benefit consumers, and the environmental impacts. Lifting smaller restrictions on crude oil exports could be explored first, he added.

 

Rep. Whitfield asked, if more oil is produced, would prices go down? Lippold responded that with domestic sales the U.S. has ability to adjust and react, and the capability of sending product where it needs to go.

 

Rep. Whitifield asked how much oil the Czech Republic consumes. Amb. Gandalovic said about 195,000 barrels a day, 50 percent of which now comes from Russia and the rest from smaller suppliers.

 

Responding to a question about the primary benefits of increased production, Montgomery said reduced gasoline prices will result. Value added is a misconception that comes from mistaking costs for benefits, he said. More capital investment and more workers are needed to produce the same amount of hydrocarbons as crude oil. He added that the U.S. can compete more effectively as a crude oil producer than a crude oil refiner.

 

Asked about the Czech Republic’s oil history and refinery sector structure, Amb. Gandalovic said the pipelines are owned by the states, but refineries and distribution are in the private sector. The government has no influence over the private sector and cannot ensure the purchase of U.S. crude oil. Although, he predicted that a U.S. crude oil alternative would help make the world a safer place.

 

Lippold said the U.S. will still be dependent on foreign oil, and the more we can disconnect from foreign countries, the better off we will be.

 

Rep. Pete Olson (R-TX) said the ban on U.S. exports was inspired by a 1975 law that is way out of date.

 

Lippold responded that as the U.S. is importing oil that is controlled by the Organization of Petroleum Exporting Countries (OPEC) and other organizations, it gives them influence over U.S. actions. If this is not addressed, the U.S. could be subject to another oil embargo, similar to the one imposed on the U.S. in 1973. Once U.S. crude oil is in the world market, the U.S. will have no control over it, he added. It will be shipped to the highest bidder.

 

Rep. John Shimkus (R-IL) said the economy needs to be protected from state oil interests that negatively impacted the U.S. in the 1970s. He said the U.S. exports refined products, indicating we produce more than we consume. Eastern Europe’s national security situation means that they highly desire the U.S. to be involved in this market for the sake of their security.

 

Rep. Michael Doyle (D-PA) said the country first needs to become energy independent. He opposed exporting a product that the U.S. is still importing.

 

Rep. Fred Upton (R-MI), chairman of the House Energy & Commerce Committee, concluded that America’s energy picture has changed dramatically, and an export policy needs to be done right in order to ensure that it doesn’t have untended consequences that negate the benefits.