Oil Sands, Refined Products, and Exports: Just the Facts

U.S. Crude Oil Stays in the United States. According to the U.S. Energy Information Administration (EIA), in 2011, 99.7 percent of the crude oil produced in (or imported into) the United States was also consumed here, which means less than one-half of one percent (0.3 percent) was exported. Simply put, the United States does not export crude oil in any significant way.

The United States Exports Very Little Gasoline. Of the total on-road fuel produced in the United States in 2011, 92 percent of it was refined and consumed in the United States; only eight percent was exported. And of all the petroleum products that the United States does export, finished motor gasoline only represents about 21 percent. The majority of exported products (79 percent) are things like propane, ethanol, heating oil, and kerosene, which are produced in amounts in excess of U.S. demand.

   

What the United States Is Exporting Is Going to Mexico, which Benefits the United States. Of the gasoline that is exported, 60 percent goes to Mexico, from which the United States imports crude oil. This exchange benefits the United States: Gasoline is worth more than oil, so we’re purchasing a good and then selling back a more expensive good, not only creating a net value-add for the U.S. economy, but also creating manufacturing jobs and generating tax revenue.

The Oil Sands Would Replace Declining Supplies. According to the EIA, increased imports from the Canadian oil sands would likely replace heavy crude imports from Mexico, Venezuela, and Ecuador. Heavy oil imports from those three countries are about 900,000 barrels per day less than what they were in 2005, and they are projected to decline by an additional 540,000 barrels per day by 2020 and 845,000 barrels per day by 2035.

No Reason to Export Heavy Oil. The U.S. Department of Energy (DOE), in reviewing the Keystone XL project, concluded that “there would be no economic incentive to ship Canadian oil sands [crude] to Asia via Port Arthur” without a surplus of heavy oil. And since heavy oil imports are declining (DOE noted that heavy oil imports “are likely to decrease by a significant amount within the next five years”), oil sands crude from Canada would be filling a gap, not creating excess supply.

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White House Fracking Group: Positive Step Forward

Credit where credit’s due: The White House issued an executive order Friday creating an interagency working group to coordinate the administration’s review of hydraulic fracturing. It’s a welcome step considering what was developing – a regulatory mishmash wrought by the 10 separate federal agencies that were looking at fracking rules and policies. API President and CEO Jack Gerard:

“We’re pleased that the White House recognizes the need to coordinate the efforts of the 10 federal agencies that are reviewing, studying or proposing new regulations on natural gas development and hydraulic fracturing. We have called on the White House to rein in these uncoordinated activities to avoid unnecessary and overlapping federal regulatory efforts and are pleased to see forward progress.”

The United States is enjoying an energy revolution thanks in large part to hydraulic fracturing – producing record amounts of oil from North Dakota and ample supplies of affordable natural gas from a handful of other states. Energy, energy-related jobs and associated economic growth are the result – as well as boosts to other sectors including manufacturing and the chemical industry.

Yet, the possibility loomed that fracking and its benefits could be smothered by a regulatory jungle from Washington, with needless delays and unnecessary costs discouraging investment and innovation. If the new working group prevents this, it will be a good thing.

We recognize the new group is less than 24 hours old, but some key points it should consider:

Hydraulic fracturing is the chief reason the U.S. is having an energy revolution. Without fracking, there’s no revolution.The states already have sound regulatory regimes in place, assisted by initiatives like STRONGER, which are tailored to the different geographies, geologies and other specific factors where fracking is under way.Industry has led the way in terms of technological innovation and the development of operating standards, as well as efforts to provide information and create transparency in fracking operations.

Gerard:

“We have one of the largest known reserves of natural gas in the world, and we need public policies based on sound science in order to develop this affordable source of energy.”

The new working group is a step in that direction.

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EPA Should Improve Emissions Rule Before Finalizing

Here’s something to keep in mind as we discuss the Environmental Protection Agency’s proposed rule on emissions from oil and natural gas development: A Rasmussen Reports poll this week showed 44 percent of likely voters believe, generally, that EPA’s regulations and actions hurt the economy. Just 17 percent disagree and say EPA’s policies help the economy.

EPA has a new policy on the way, the proposed New Source Performance Standards. As presently crafted, the standard would require hydraulic fracturing operators to use “green completion” equipment to control emissions of volatile organic compounds or VOCs.

But in a conference call with reporters, Howard Feldman, API director of regulatory and scientific affairs, said the proposed rule could needlessly impose significant costs – more than $780 million over four years – and troublesome delays on energy producers:

“First, the proposed rule would require more emissions equipment for sources that emit little to no regulated pollutants and should not be subject to these requirements. … Second, EPA recognized that there will be a significant increase in reduced emission completions but failed to analyze whether or not there is enough of the specific emissions reduction equipment available.”

Joined by Sara Banaszak of America’s Natural Gas Alliance, Feldman said industry has urged EPA to apply the new rule only to sources with significant VOCs emissions – and not to those whose vent streams contain less than 10 percent VOCs. Industry also believes more time is needed to develop and deploy the equipment needed to reduce emissions, as well as to train workers to use it. Feldman:

“The fact is that the industry is already leading efforts to reduce emissions. Our companies, after all, are in the business of selling methane, which is natural gas, so they don’t want it to escape into the atmosphere. The technology and equipment being used to reduce emissions were created by the industry itself – not by the EPA or by our critics in the environmental movement – and companies are already implementing it in many locations. … The (EPA) proposal took too much of a one-size-fits-all approach to regulating an industry that varies greatly in the type, size and complexity of operations.”

Critics say oil and natural gas companies are trying to avoid compliance with emissions-reducing efforts, which Feldman rejected:

“I want to be clear that we do not oppose these rules. … The whole concept of the VOCs threshold, let me emphasize, is to make sure that the rule is cost-effective for the regulated pollutant. It would be unprecedented to try to fit a standard that would have an extremely high [cost] approaching infinity. … You don’t force controls where there are no significant emissions. … Where there’s no emissions, to require control equipment doesn’t make any sense.”

Although environmentalists say the proposal as written would pay for itself or even produce revenue for industry, Feldman and Banaszak said EPA cost-effectiveness estimates are based on flawed data. Drillers say compliance costs and delays would be significantly greater. Feldman said if the choice is between the estimates of “lawyers in Washington” and operators, he would go with people doing the work on the ground.

EPA’s proposed rule is scheduled to be finalized next week. Earlier Thursday, API President and CEO Jack Gerard sent a letter to EPA Administrator Lisa Jackson, outlining industry’s concerns. Will EPA listen? Rasmussen’s results certainly suggest it should.

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Job Creation and the Effects of Regulation

A follow-up to our follow-up on a Washington Post article that dismissed the effects of increased U.S. oil production on global crude oil markets. The story also took shots at the oil and natural gas industry’s ability to create jobs, as well as industry assertions about the potential effect of a new gasoline standard on refineries.

Let’s start with jobs. A Wood Mackenzie study released last fall said that with the right policies the oil and natural gas industry could create 1.4 million new jobs by 2030. Here’s what the job-creation growth looks like in a chart from that study:

As it has done in previous articles, the Post suggested the projection isn’t valid because it includes direct, indirect and “induced” jobs – “everything from day-care workers to valets to rocket scientists.” We discussed that here and here. Kyle Isakower, API vice president for policy analysis:

“Estimates include induced economic benefits, as do the administration and its supporters’ estimates of green jobs created by the stimulus package. Including estimates of induced employment effects is a common practice in economic modeling. Increased economic activity in one sector provides more income to the economy that will have a ripple effect in other sectors.”

Isakower continues:

“Increased oil and gas exploration requires more steel for well casings. More steel means more steel foundry workers. As the steel mill expands and hires workers, those workers’ incomes increase and they spend more on other goods and services – housing, cars, food, etc. So when a new sandwich shop opens up across the street from the steel mill, those workers hold real jobs that would not exist without the increase in oil and gas development. I doubt any policymaker wants to tell any of these people that their jobs aren’t real, or that they don’t matter.”

This isn’t theory. It’s happening in states including North Dakota, Pennsylvania, Texas and Ohio, where oil and natural gas development is creating boom conditions in state and regional economies.

Now, as for the potential connection between increased regulation and refinery closures, the Post wrote:

“API has also said new EPA standards will mean high gas costs. An API study said standards for low-sulfur gasoline would add 12 to 25 cents a gallon to the price and force the shutdown of four to seven refineries. However, a new study by API’s consultants, Baker & O’Brien, says EPA’s new standards would add six to nine cents a gallon and that no refineries would have to close. George R. Schink, managing director at Navigant Economics, testified at a congressional hearing that the standards would add 2.1 cents a gallon.”

Isakower said the Baker & O’Brien findings changed because EPA, which originally was considering lower sulfur and gasoline volatility (or RVP) requirements – leading to the 12 to 15 cents per gallon estimate of increased production costs – later decided it would not include an RVP reduction:

“We asked Baker & O’Brien to revise their study to estimate increased costs for the lower sulfur requirement alone, which resulted in the 6 to 9 cents estimate. Given EPA’s lack of transparency in the early stages of this rulemaking, and their change in regulatory plans, the differences in Baker & O’Brien’s estimates are to be expected.”

And Schink? Isakower:

“(His) testimony that the costs for gasoline production would only increase 2.1 cents per gallon simply  averaged Baker & O’Brien’s cost estimate across all refineries. However, the Baker & O’Brien study estimates the marginal cost for those refineries that must upgrade to meet the new requirements, so his analysis is not directly comparable to the Baker & O’Brien marginal cost estimate. Refiners compete with one another – those that do not have to upgrade will not share in the cost of the upgrades for the facilities that do, as Schink’s testimony suggests.”

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‘The Laws of Supply and Demand Do Work’

Back in February we ran the chart below. Then, at a congressional hearing last month, API President and CEO Jack Gerard referred to it in testimony urging lawmakers to consider the effects of increased U.S. oil production on global crude oil markets. We’ve written about the effects of increasing domestic supply here, here and here.

Last weekend the Washington Post took issue with the notion that the basic laws of supply and demand apply to crude oil like they do other globally traded commodities. The article noted Gerard’s congressional statements about supply and market expectations and dismissed them:

"As Gerard told it, 'the price of crude oil over three days dropped $15 a barrel and continued to move down.' The lesson, he said, was that 'markets are driven on a global basis by expectation. If the market heard the president of the United States say ‘I’m serious about producing my vast energy resources,’ you will see an impact in the market.' The tale was an indictment of President Obama. But there’s one hitch, say oil experts. It doesn’t hold together."

The Post attributed the crude price plunge to other factors:

“The dizzyingly high (oil) price, and fears of an economic slowdown, triggered a wave of selling by oil investors or speculators, in part because of margin calls. The prices of equities as well as commodities such as corn and aluminum, unrelated to offshore drilling, also fell, reinforcing the argument that oil’s fall was a symptom of broader market conditions.”

Interesting, but we couldn’t help noticing the quote from one of the oil experts in the article’s very next paragraph:

“'There is no doubt that expectations are a part of price movements,'” says Ed Morse, head of commodities research at Citigroup.

Well, that looks like Morse basically just blew away the article’s argument that the supply/market expectations linkage “doesn’t hold together.” To be fair, Morse went on to say he thinks credit problems and the impending recession had more effect on crude prices than energy policy statements. But there’s no escaping the fact that the story’s own source acknowledged that market expectations – about supply changes, national policy shifts, political resolve – have something to do with crude oil “price movements.” API Vice President for Policy Analysis Kyle Isakower:

“We do not argue whether there was … an oil price bubble in July 2008. However, to claim that the signal sent to the market by lifting the presidential moratorium had nothing to do with the drop in prices that began the very next day stretches the limits of credibility. Given the concern many policymakers place on speculation in oil markets, here is a perfect example of a signal being sent to the market that changed traders’ thoughts about future prices.”

Supply and demand indeed applies to the crude oil markets. Increasing supply will exert downward pressure on the price of crude, which is critical since crude currently accounts for about 76 percent of the price we pay at the pump.  WTRG Economics’ James L. Williams:

“If we increase supply in the U.S., will there be an effect on crude markets? Absolutely. … If the U.S. increases domestic production, over time that’s going to bring prices lower. … The laws of supply and demand do work, even if it’s not as obvious as it should be. If we produce more, the price will be lower than it would have been otherwise. … I don’t care who increases oil production, it will decrease oil prices.”

Supply matters. Next.

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