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COLUMN-Obama could lift U.S. oil-export ban without Congress: Kemp

John Kemp
Wednesday, 18 Dec 2013 | 9:39 AM ET

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Dec 18 (Reuters) - President Barack Obama has sufficient authority to lift the ban on U.S. oil exports on his own and does not need approval from Congress.

The various statutes on which the ban is based have either expired or give the president broad discretion.

Behind the scenes, U.S. oil producers, especially the small independents that dominate shale plays such as the Bakken and Eagle Ford, have already begun a lobbying campaign to get the restrictions lifted.

The influential opinion pages of the Wall Street Journal and the Financial Times have both carried pro-export editorials recently: "Time to end the U.S. oil embargo" in the Financial Times on October 15, and "Exporting American Oil" in the Wall Street Journal on December 18.

The International Energy Agency has also lent its support. "Either U.S. crude is shipped abroad or it stays in the ground," the agency's chief wrote in an article earlier this year ("U.S. must avoid shale boom turning to bust" Feb 6).

Now the Obama Administration appears to be preparing for a rethink. "Restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, on oil disruptions," Energy Secretary Ernest Moniz told a conference last week.

"There are lots of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that is no longer like the 1970s" he concluded, in remarks reported in the Wall Street Journal on Wednesday ("Moniz breaks the taboo against selling U.S. crude overseas" Dec 18).

Even the hint that the ban might be relaxed has drawn a strong response from refiners and politicians who want it maintained.

Senator Robert Menendez, a Democrat from the refining state of New Jersey, who is also chairman of the powerful Foreign Relations Committee, wrote to the president on Monday "to express my deep concerns over the recent comments of Energy Secretary Ernest Moniz stating that your administration is considering easing the ban on exporting domestically produced crude oil.

"Easing this ban might be a win for Big Oil, but it would hurt American consumers," Menendez complained.

"We must continue to keep domestically-produced crude here to lower prices for consumers ... Allowing for expanded crude exports would serve only to enhance the profits of Big Oil, and could force U.S. consumers to pay even more at the pump," he added.

Most observers assume lifting the export ban would require action by Congress, subjecting it to all the usual complexity and delays of the legislative process. "Moniz is right to raise the issue, and we hope his comments will spur Congress into action," the Wall Street Journal wrote.

In fact, the ban could be lifted by the president acting alone. Easing the restrictions or even lifting them altogether is legally straightforward, though the politics may be harder, and it is not clear whether it is a priority for the White House.

CRUDE PROTECTIONISM

For most of the last 150 years, since oil was discovered in Pennsylvania in 1859, U.S. politicians have been more preoccupied about limiting imports of cheap crude from the giant oil fields in Mexico, Venezuela and the Middle East to protect small independent producers in Texas, Oklahoma and Kansas.

Starting in the Great Depression, the U.S. government and oil producers began to experiment with quotas, with varying degrees of voluntariness and effectiveness, in a bid to hold up domestic oil prices and keep the small independent producers in business.

In 1959, the voluntary approach was replaced by the Mandatory Oil Import Program, which imposed legally binding quotas on the amount of crude and various refined products that could be brought into the United States.

The Mandatory Oil Import Program lasted until 1973. But as domestic production failed to keep pace with demand, the quotas became more generous, and more and more exemptions and exceptions were created for specific products, refiners and trading partners.

With domestic crude producers and refiners no longer able to keep pace with demand, the quotas were replaced with a license-fee system, which limped on until the early 1980s, when it finally petered out.

The full story was superbly told by Robert Bradley in "Oil, gas and government: the U.S. experience" published by the free-market Cato Institute in 1996.

U.S. politicians have been far less concerned about exports. Crude exports were briefly restricted during both World Wars as part of the mobilisation effort, which included broad-ranging controls on production, refining and consumption.

Exports to the Far East were also banned during the Korean War to prevent oil from reaching North Korea's allies.

But the peacetime ban on crude exports dates only from 1973, when it was imposed as part of the Nixon administration's comprehensive price-control programme designed to counter inflation.

Domestic sales of crude and refined products were subject to price controls. To prevent producers and refiners from circumventing the price caps by shipping oil abroad, both crude and products were placed on the Commerce Control List established under the Export Administration Act of 1969 as items in "short supply".

PATCHWORK OF LAWS

Today, crude oil and heavier natural-gas liquids like pentane produced from gas fields are still on the Commerce Control List as items in short supply. The restrictions are enforced by the powerful but low-profile Bureau of Industry and Security (BIS) within the Department of Commerce.

Through the Commerce Control List, BIS, which works closely with the intelligence agencies and the State Department, also enforces restrictions on the export of dual-use items as well as equipment that could be used for the proliferation of nuclear, chemical and biological weapons, and items that could be used for torture.

The short supply controls on crude ultimately derive their legal authority from a tangled thicket of legislation, including the Mineral Leasing Act of 1920, the Naval Petroleum Reserves Production Act of 1976 and the Outer Continental Shelf Lands Act Amendments of 1978.

The full list of statutes is set out in a document on the "Legal Authority for the Export Administration Regulations", periodically updated by the Office of the Chief Counsel for Industry and Security.

But the principal authority for the ban derives from just three statutes: the Energy Policy and Conservation Act of 1975 (EPCA), the Export Administration Act of 1979, and the International Emergency Economic Powers Act of 1977, as amended.

EPCA is essentially a permissive statute. It says only that "the president may, by rule, under such terms and conditions as her determines to be appropriate and necessary ... restrict exports of coal, petroleum products, natural gas or petrochemical feedstocks" (Section 103(a)).

EPCA goes on: "the president shall ... promulgate a rule prohibiting the export of crude oil and natural gas produced in the United States, except that the president may ... exempt from the prohibition such crude oil or natural gas exports which he determines to be consistent with the national interest" (Section 103(b)).

EPCA leaves it to the president to decide whether to restrict oil or gas exports "in the national interest". In the case of natural gas, the Administration has clearly decided that restrictions are not necessary in the national interest, granting permission for five LNG export projects, with more expected in the coming months.

By far the most important law is the Export Administration Act of 1979, which replaced an earlier act dating from 1969. It gives the president the authority to "prohibit or curtail the export of any goods" (Section 7(a)(1)) where "necessary to protect the domestic economy from the excessive drain of scarce materials and to reduce the inflationary impact of foreign demand" (Section 3(2)(C)).

Ironically, the Export Administration Act expired in August 2001, after a temporary extension, and has not been renewed. Instead, the president has issued an executive order in August each year extending the provisions of the act and the regulations derived from it for another 12 months. The most recent renewal was contained in a one-paragraph notice issued by the White House on Aug 8.

In issuing these executive orders, the president has invoked his power under the International Emergency Economic Powers Act to block imports or exports of any item during a "national emergency" which presents "an unusual or extraordinary threat ... to the national security, foreign policy or economy of the United States" (Section 202(a)).

As a result, the United States has been living under an almost permanent state of emergency since 1994, when the Export Administration Act first ran out, and presidents started to extend export controls by executive order.

PRESIDENTIAL POWER

To summarise: EPCA obliges the president to impose controls on the export of crude but only if he determines they are appropriate and necessary and in the national interest. The Export Administration Act, which has expired, allows the president to control oil exports on the basis they are in short supply and scarcity is threatening domestic inflation.

In addition, the International Emergency Economic Powers Act allows the president to continue applying the lapsed export regulations during an unusual or extraordinary threat amounting to a national emergency.

Despite the legal tangle, it is reasonably clear that the president, acting alone, could lift the export ban, simply by directing the Bureau of Industry and Security to remove crude oil from the short supply section of the Commerce Control List.

The president is unlikely to declare the seemingly unending national emergency is over since that would invalidate all the other export restrictions, including those on counter-proliferation. But it would be a simple matter to insert a paragraph in the next presidential notice, due by August 2014, stripping out the oil export ban from the general renewal of the export regulations.

The president would simply need to conclude that the ban is no longer appropriate and necessary, and no longer in the national interest of the United States. No fresh legislation is required to lift the ban, though involving both houses of Congress in the decision would provide more political cover.

NO RATIONAL BASIS

Controls on the export of crude were enacted in the 1970s amid concerns about the OPEC embargoes, soaring energy prices, gasoline lines and the impact on domestic inflation. Those concerns provide the entire legal basis for the relevant restrictions under the Export Administration Act.

In fact, the act states explicitly that it is the policy of the United States "to encourage trade" (Section 3(1)) and not to restrict exports except where "necessary to further fundamental national security, foreign policy or short supply concerns" (Section 3(10)(A)) or "to restrict export of goods where necessary to protect the domestic economy from the excessive drain of scarce materials and to reduce the serious inflationary impact of foreign demand" (Section 3(2)(C)).

The act makes clear exports can only be restricted to carry out the policies set out in Section 3, of which the relevant ones are set out above.

With U.S. crude and condensates output expected to hit record levels within the next two years, it is hard to argue that they are still in short supply or the United States faces an excessive drain of scarce materials or serious inflationary impact.

It is no longer clear the Export Administration Act is applicable to crude.

That leaves the president's powers to impose export restrictions under the Energy Policy and Conservation Act, but even there it is hard to maintain conditions remain the same as in 1975.

Energy Secretary Moniz was simply stating the obvious when he noted that circumstances have changed and the controls and might deserve a review.

DISTRIBUTIONAL EFFECT

Ultimately, the export ban results in a financial transfer from domestic oil producers to refiners rather than consumers.

The ban ensures domestic crude oil prices remain below world levels because producers cannot arbitrage the difference.

But no such restrictions apply to refined products, so the price paid by U.S. consumers for gasoline, heating oil and diesel is linked to world levels.

In consequence, domestic refineries pocket the difference, buying cheap domestic crude below global prices while selling their output at international levels.

New Jersey Senator Menendez is probably wrong to argue that ending the export ban would result in higher prices for U.S. consumers at the pump; it is unlikely to make much difference.

It would, however, result in a large shift in profits, away from refiners and to domestic oil producers.

It is not clear how the export ban would fare if challenged in court. Several avenues for challenging the ban and its extension by executive order could be tested (including that it no longer serves a reasonable and rational purpose). But the courts have proved reluctant to interfere with the president's power to conduct foreign policy and national security.

In the final analysis, the decision whether to lift the export ban is political and distributional. Domestic oil producers, who stand to benefit most from lifting the restrictions, will lobby hard to have them removed, while refiners, who benefit most from them will lobby intensively to maintain the status quo.

(Editing by Jason Neely)