Reversing Energy Export Boom Is Economic Dead End For Biden

Oil prices are back on the rise, and the Biden administration is correct to be concerned about volatile energy markets heading into the tightly contested midterm elections.

But once again, the administration is considering counterproductive policies like restricting exports of U.S. energy while blaming the domestic oil and gas industry for its problems.

Scapegoating, however, won’t fix a building supply crisis in global energy markets, and curbing exports of American crude oil, refined products, and liquefied natural gas (LNG) will only exacerbate this crisis.

Biden is worried about a reversion of the decline in gasoline prices that America has experienced since June, which would hurt Democrats’ chances in the Nov. 7 midterm elections.

American Automobile Association (AAA) data show a $1.34 per gallon (27%) decline in national average regular gasoline prices over the 99 days from Jun. 13 through Sep. 19. But recently, gasoline prices have been edging higher – up about 13¢ through Sep. 30.

That appears to have prompted Energy Secretary Jennifer Granholm to meet with top U.S. oil executives recently to blame them for critically low inventories of crude, gasoline, and natural gas and to scold them for making profits.

In meetings with CEOs, including ExxonMobil’sXOM
Darren Woods, Granholm cited the “failure of companies to maintain sufficient regional inventories to buffer demand when refineries go offline, while those same companies export gasoline and diesel at record levels.”

Make no mistake, this is a veiled threat of putting federal limits on U.S. energy exports, particularly refined products like gasoline, diesel, jet fuel, and heating oil. Demand for these fuels will pick up as winter approaches, and the White House knows it as a potentially big problem on its hands.

The administration has toyed with export restrictions, but with the election nearing and inflation still soaring, the prospects now look stronger. News that the OPEC-plus cartel will likely announce a significant production cut this week to support oil prices – a major blow to the White House – will also factor in.

But keeping more energy at home and off the global market won’t make these commodities, which are priced in international markets, any cheaper. Indeed, such measures could backfire and send fuel prices higher.

That requires some understanding of how America fits into global energy markets.

The U.S. exports crude because our refineries can only handle so much of the light, sweet oil that comes from America’s shale fields. Many U.S. refineries run on the heavy, sour crudes that predate the shale boom, so these crude grades must be imported, mainly from Canada and Latin America. So, while America is a net oil exporter, it still must import significant volumes of crude to get the right feedstock match for its refineries.

Restricting exports of U.S. crude would simply take barrels off the international market, which is facing supply challenges already due to Western sanctions on Russian oil, likely new OPEC-plus supply cuts, and the imminent end of releases from America’s Strategic Petroleum Reserve (SPR).

The effect would be to tank the price of U.S. benchmark West Texas Intermediate (WTI) crude since there would be an oversupply of shale crude that U.S. refineries could not use. That would ultimately prompt shale producers to shut in production, taking feedstock away from refiners abroad–amid a major fuel supply crunch in Europe. Meanwhile, America would still need to import heavy, sour crude to keep manufacturing products like gasoline and diesel.

Like with crude, there is a mismatch in U.S. supply and demand for refined products. Due to the specific yields of its refineries, America generates surplus diesel that it exports abroad. But the U.S. still imports significant volumes of gasoline to meet its world-leading demand for transportation fuel.

These refinery configurations and product yields can’t be changed overnight with a federal magic wand.

Regardless of low inventory levels, the idea of America – currently the world’s largest producer of both oil and natural gas and one of the handfuls of largest exporting nations – cutting exports of these critical fuels heading into this particular winter is entirely irrational.

Given the desperate situation related to these fuels in Europe, a sudden reduction in U.S. supply would equate to an act of cruelty.

Has the Biden administration forgotten about Europe?

Because in the past, it has prioritized facilitating more shipments of LNG and other hydrocarbons to European allies who are ailing from high prices and throttled supply from Russia. LNG exports were up by 12% for the period covering January-June, averaging 11.2 billion cubic feet per day. And the White House has authorized new export capacity.

What sort of mixed messaging is this? Well, it’s the sort that U.S. energy companies are used to now with this White House, which can’t determine if today’s energy crisis or climate change should be its priority.

Do we want to help our allies in Europe with promised supplies of much-needed petroleum and LNG or not? Because the EU’s shortages will only worsen once it officially embargoes Russian crude imports on Dec. 5 and refined products on Feb. 5, 2023. Recent explosions on the Nord Stream gas pipelines also show that Europe’s energy infrastructure is in danger, exacerbating supply risks.

Someone must remind this administration that energy markets are global and that slashing exports from the world’s largest oil and gas producer would be pure madness.

There are indeed few policy options for Biden after he pulled the SPR card and OPEC-plus rebuffed his pleas for higher supplies.

But there is one measure that could provide some relief. Biden could suspend the Civil War-era Jones Act. This law prohibits foreign-flagged ships staffed by non-U.S. crews from carrying products from one U.S. port to another. Suspending it could help move American energy from one part of this country with ample supplies to other parts with deficiencies.

Most oil and LNG tankers are not U.S.-flagged ships. As a result, the New England states cannot bring in LNG from domestic ports along the U.S. Gulf Coast and bear lower domestic prices for the gas. Instead, they must pay high international market prices for LNG brought into Boston Harbor from other exporting countries.

Waiving the Jones act could similarly help move refined products like gasoline around this country from areas that are better supplied to ones that are deficient.

There is precedent here. The Biden administration suspended the terms of the Jones Act recently to help facilitate relief efforts to Puerto Rico as it tries to recover from the impacts of Hurricane Fiona – another real emergency.

But organized labor, a critical Democratic support group, opposes the move. That helps explain why the Biden administration has (again) resorted to scapegoating the U.S. oil industry while failing to address the real problem.