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COLUMN-Would-be U.S. oil exporters face tough politics: Kemp

John Kemp
Thursday, 19 Dec 2013 | 7:49 AM ET

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

LONDON, Dec 19 (Reuters) - President Barack Obama could probably lift the prohibition on domestic oil exports on his own, but the White House has little reason to favour U.S. oil producers and it would be safer politically to involve Congress in any eventual decision.

The principal effect of the export ban is to transfer revenues from domestic oil producers to U.S. refiners because it ensures producers are forced to sell their output at a discount rather than exporting at world market prices.

North Dakota's Bakken crude <BAK-> for delivery in January currently sells for around $86 a barrel, compared with $110 for North Sea marker crudes like Brent <BRT-> and Forties <FOT->.

Some of the discount reflects the high cost of transporting Bakken oil via pipeline or rail to refineries on the East Coast and Gulf of Mexico.

But if the ban were lifted it is likely the price of Bakken and other inland crudes would converge towards international prices, rising by perhaps $5 or $10 per barrel.

The result would be a rise in profit per barrel for domestic oil producers and a corresponding reduction in gross margins for U.S. oil refiners processing American oil.

The big winners would likely be domestic oil producers such as Continental Resources <CLR->, the largest operator in the Williston Basin.

The main losers would be independent oil refiners that do not process their own equity oil but currently buy U.S. crudes at a discount.

If exports are eventually liberalised, consumers are unlikely to see much difference in prices for products such as gasoline, heating oil and road diesel.

Unlike crude oil, there are no restrictions on the import and export of refined products, so their prices are tied to international markets.

The pump price of gasoline across the United States is already tied to North Sea benchmarks such as Brent rather than domestic crudes like West Texas Intermediate or Bakken.

CRUDE PROTECTIONISM

With billions of dollars of revenue at stake, it is not surprising the question of whether to permit exports has become the focus of a quiet but determined lobbying campaign in Washington, DC.

Lobbying is usually framed in terms of high-minded concepts such as national security, energy independence, pump prices and protecting American consumers, but the underlying issue is about money.

"It was an open secret in the oil patch that national security was the public-relations side of government intervention desired and designed to protect investments," Robert Bradley wrote in his magnificent history of "Oil, gas and government: the U.S. experience" in 1996.

Bradley was writing about the system of domestic production controls (known as proration) and import quotas that prevailed before 1973, intended to protect the owners of marginal oil wells and fields in Texas and a number of other states. But the same arguments apply to the current debate over exports.

"As oilmen found a subterfuge for domestic proration in conservation, so they found 'national security' a rationale for protectionism," according to Bradley.

"The argument emphasised that peacetime domestic output had to be maintained in case it was suddenly needed in a wartime or emergency situation in which the United States was isolated from foreign supply sources."

For all the country's stated commitment to free trade and free enterprise, the U.S. oil industry has always seen fierce disputes pitting small producers against large ones, domestic producers against importers, and producers against refiners, all pushing for different forms of government intervention.

The oil industry has always been entwined with federal and state governments, as different sections press for measures favouring their own interests.

POLITICAL ALLIANCES

With U.S. oil output projected to hit a record by 2016, the stage is set for a battle between domestic oil producers and refiners over whether to lift the oil export ban. The question is who can mobilise more powerful allies in Washington.

The White House has few reasons to favour domestic producers. For the most part, the oil industry fought hard to prevent Obama being re-elected and supported his Republican opponents for the presidency and Congress in the 2012 election cycle.

Harold Hamm, Continental's founder and chief executive, was principal adviser on energy issues to Obama's Republican rival Mitt Romney.

The American Petroleum Institute (API) organised the Vote4Energy campaign in swing states, which was officially not aligned with any party, but clearly pushed pro-drilling messages favouring Republican candidates.

All the oil- and gas-producing states at the centre of the American energy revolution voted for Romney in 2012.

Elections have consequences, and the U.S. oil industry backed the loser in 2012. Not only that but oil and gas producers allowed themselves to be painted as an arm of the Republican Party.

By contrast, environmental groups and clean-energy companies were among the president's most important supporters in terms of fundraising and mobilisation on the ground.

Environmental campaigners have therefore wielded immense influence over the White House throughout the president's first and second terms.

They are unlikely to be sympathetic to permitting oil exports if it means more domestic oil production and more fracking.

While many environmentalists, and the White House itself, have grudgingly embraced natural gas as a cleaner-burning alternative to coal, that enthusiasm is unlikely to extend to crude oil.

Earlier this year, the International Energy Agency (IEA) argued "either U.S. crude is shipped abroad or it stays in the ground" ("U.S. must avoid shale boom turning to bust", Feb. 6).

But that is exactly what many environmental groups want. The IEA itself has endorsed the idea of a global "carbon budget", arguing that two-thirds of the world's known fossil fuel reserves (oil, gas and coal) must remain unused through 2050 to limit global warming to no more than 2 degrees Celsius.

Environmental groups oppose the Keystone XL pipeline because they hope it will force Canada to leave its oil sands in the ground. For the same reason, campaigners are pushing a divestment campaign focused on coal companies.

The president and other environmentally minded members of his Democratic Party therefore have little reason to support exports if it means even more domestic oil production and more fracking (unless they can somehow be persuaded that it will avoid even more polluting production somewhere abroad).

Export restrictions harm job growth in the oil industry, but they support thousands of jobs in the refining and petrochemical industries, many of which are unionised, and some of which are based in Democratic districts.

So while the White House probably has the legal authority to lift the export ban, acting on its own if necessary, it is not a political priority for the president.

Lifting the ban is not impossible. The administration has permitted large-scale exports of liquefied natural gas, despite strong opposition from consumer groups and energy-intensive industries like petrochemicals and steel.

Energy Secretary Ernest Moniz has appeared to hint the administration is open to rethinking the ban, given the huge rise in domestic oil output.

But it will require careful coalition-building. Oil producers need to lay the groundwork in Congress and perhaps by exploring the possibility of a legal challenge (the prohibition rests on a rather rickety structure of outdated and expired statutes).

The ban is much more likely to be lifted if Congress and not just the president is involved, and if they can be persuaded the alternative to modifying the ban is a potential challenge in the courts.

In the meantime, the lobbying by both crude producers and consumers is set to intensify; the battle, so far waged mostly away from public view, is about to burst into the open.

(Editing by Dale Hudson)