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ICYMI: CRS memo asks wrong questions on crude exports and Eastern Europe

CRS has published a memo (May 29, 2015) on oil exports demonstrating the principle that if you ask the wrong question, you may not get the most helpful answer.  The CRS memo looks at ability of Eastern Europe to absorb US crude oil, if policy did not prohibit this.  But the real question is how might Eastern Europe be impacted if US oil exports are allowed – after all, there is a global market for oil so it may not matter WHERE the US oil is actually consumed.  Instead, the impacts for Europe could be transmitted through the global market for oil.

While the CRS memo acknowledges that lifting the ban on U.S. crude oil exports would tend to reduce the global price of oil, it seems to overlook the potential beneficial impact on Eastern European countries and refiners. CRS notes that there are various reasons why lifting the U.S. crude oil ban may not result in sales to Eastern European refiners including the fact that their refineries may not be well suited to process U.S. light sweet crude and lack of infrastructure to get it to them. However, CRS seems unclear about the fact that if U.S. crude oil is exported anywhere in the world it would tend to put downward pressure on the Brent price and also the discounted price that Russia gets for its oil. A lower global crude oil price would benefit Eastern European countries as well as those in Western Europe; this point could have been given more emphasis in the CRS report. In addition, our recent experience with   potential LNG exports from the U.S. has impacted Russian-European contract prices for LNG. There have been quite a few news items about European firms getting favorable deals even though we are not yet exporting much. The current trend in U.S. crude production is already putting downward pressure on global prices (for examples see the first reason mentioned for lower prices on page 156 here).

Once we start exporting crude, that will also mean more production .It does not matter whose market share we are taking away. All importers should benefit. From a geopolitical perspective, it seems that U.S. policy makers would think that decreased Russian oil revenues would be a useful outcome.

The CRS memo also notes that ´If U.S. crude oil export restrictions were removed, there is no way to accurately predict the actual level of exports that would occur”.   Is this a criticism of lifting the ban?   CRS goes on to say, “ If the level of U.S. exports is small relative to the market, it might be difficult to isolate these price effects amid the normal volatility of oil prices.”  Again, what is CRS’s point?  Are they suggesting that it’s critical to understand exactly what the price impact of lifting the ban would be? That seems unrealistic and unnecessary. The important thing is to embrace the principle of free trade and let markets sort out the price impacts. Lifting the ban would provide substantial economic benefits to the U.S. A study released last month by the ACCF summarizes several analyses of the economic impacts on the U.S. of lifting the ban; all show positive impacts on GDP and U.S. job growth.

 

Don’t Let Environmentalists Set Trade Policy Agenda

See my response to this week’s question for National Journal’s Energy Insiders:

Energy Insiders Weekly Question:

Environmentalists are fuming over Obama’s trade deal.

A slate of green groups say that the pact known as the Trans-Pacific Partnership could undermine key environmental safeguards, lead to increased natural gas exports, and boost fracking and coal.

The White House counters, saying the deal contains extensive conservation protections that would curb illegal fishing, logging, and wildlife-trafficking and defending the deal as good for the economy overall.

How would Obama’s trade deal impact energy and the environment? What are the potential risks and rewards of the deal, and what is the chance that it could reshape energy and environmental policy at home and abroad?

Margo Thorning response: 

It is unfortunate that environmentalists are shooting their own agenda in the foot through opposition to the Trans-Pacific Partnership deal.

International trade is a critical ingredient to economic growth. See more in ACCF’s recent op-ed in The Hill (http://accf.org/we-need-trade-…. Research also shows that in the long run, as countries prosper, their environment improves as they look forward to cleaner, more efficient forms of technology and energy.

One example of this is the broadened global use of liquefied natural gas (LNG). Through expanded trade and expediting the U.S. permitting process, LNG can be exported to non-FTA countries. This would help many developing nations, like China and India, that are leading the world in carbon emissions substitute natural gas for coal and reduce the growth of global GHGs. See ACCF Special Report report on environmental impacts of U.S. LNG exports at http://actonlng.org/wp-content…

The breakthrough on trade policy between the White House and congressional Republicans is a rare, but welcome, example of bipartisanship. The economic and environmental benefits shouldn’t be sidelined by the green agenda.

Radio America: My interview on crude exports

U.S. INDC to United Nations Raises Many Questions; U.S. CO2 Reductions Should Be Based on Cost/Benefit Analysis

Washington, DC – The U.S. Intended Nationally Determined Contribution (INDC) to the United Nations Framework Convention on Climate Change (UNFCCC) raises many questions related to international commitments and concerns over the impact on the U.S. economy. Cost/benefit analysis should guide any policy related to climate change., according to American Council for American Council for Capital Formation Senior Vice President and Chief Economist Margo Thorning. Thorning offered her views today at a hearing of the U.S. House Committee on Science, Space and Technology.

Thorning questioned the likelihood of reduced fossil fuel generation in exchange for more expensive renewable energy sources in many developing nations at the same time that global energy demand is projected to grow by 37 percent by 2040. She also pointed to the challenge for the U.S. to reach previously announced emission targets by 2020 that were even lower than those proposed in the INDC. Last, how will implementation of regulations to achieve those targets impact the U.S. economy?

“Policymakers need to balance environmental goals with the need to promote strong economic growth. They must consider the potential impact of regulations implementing the INDC since the U.S. economic recovery remains weak. Real GDP growth has averaged only 1.1 percent since 2008 and the number of discouraged workers who have dropped out of the work force is large. Wage growth has also fallen behind that of previous recoveries,” Thorning said.

Thorning underscored several alternative policies that could help strengthen the U.S. economy as well as slowing global CO2 emission growth. Federal tax reform, which allows expensing for all new investment, would stimulate economic growth and pull through cleaner less emitting technology. Encouraging the export of U.S. LNG and clean coal technology to developing countries would strengthen the economy and slow the growth of global emissions. The consistent use of cost/benefit analysis to review existing regulations and analyze proposed regulations would also strengthen the economy.

“The prudent path for U.S. policymakers to reduce CO2 emissions is to focus on strengthening the U.S. economy through tax and regulatory reforms. The consistent use of cost/benefit analysis to review existing regulations and analyze proposed regulations would also strengthen the economy,” Thorning concluded. “A stronger U.S. can adapt to a changing climate if necessary. In addition, the U.S. should encourage LNG exports and the transfer of clean coal technology to help other countries develop while emitting fewer GHGs.

Read Dr. Margo Thorning’s Full Testimony: http://accf.org/wp-content/uploads/2015/04/ACCF-testimony-April-15-2015-FINAL.pdf

Founded in 1973, The American Council for Capital Formation (www.accf.org) is a nonprofit, nonpartisan economic policy organization dedicated to the advocacy of pro-growth tax, energy, environmental, trade and economic policies that encourage saving and investment.

Newsmax TV: My Interview on LNG Exports

New Study Says Oil Exports Would Be a ‘Win, Win’ for U.S. Economy and National Security

Lifting the restrictions on U.S. crude oil exports would lead to further increases in domestic oil production, result in lower gasoline prices and support millions of additional jobs, according to a comprehensive new study commissioned by the Energy Security Initiative (ESI) at Brookings in coordination with a macroeconomic study contracted from National Economic Research Associates (NERA) Economic Consulting.

The production boom from shale plays across the country, such as North Dakota and Texas, have sparked serious debate on what we should do with our new energy reality of abundant crude oil supply. To shed light on how our Administration should move forward with this new abundant energy source, the ESI partnered with the National Economic Research Associates (NERA) to examine the economic and national security impacts of lifting the ban on crude oil exports. And their findings were clear: it is time to match our policies to our current energy landscape.

Economically, the study found that lifting the ban on crude oil exports from the United States will boost economic growth, wages, employment, trade and overall welfare. Each scenario used in the study model – delaying lifting the ban until 2015, lifting the ban only on condensates or lifting the ban entirely – showed that our GDP was positively affected. Specifically, cumulative GDP increases through 2039 ranged between $600 billion and $1.8 trillion, depending on how soon and how completely the ban is lifted. Additionally, employment impacts – economy wide – are estimated to be positive as well. The study found that lifting the ban entirely by 2015 reduces unemployment at an average annual reduction of 200,000 from 2015 – 2020.

For consumers, the study also found that lifting the ban would actually lower gasoline prices. In the reference case, the decrease in gasoline price is estimated to be $0.09 per gallon in 2015. If oil supplies are more abundant than currently expected, the decline in gasoline prices will be larger ($0.07 to $0.12 per gallon) and will continue throughout the model horizon (2015 – 2035).

Finally, ESI found that not only would lifting the ban help the U.S. economy and consumers, but also strengthen U.S. foreign policy and energy security. According to the ESI reports authors, Charles K. Ebinger and Heather Greenley, “allowing crude oil exports will increase revenues to domestic producers helping to maximize the scope of the production boom, boosting American economic power that undergirds U.S. national power and global influence.”

Furthermore, during a report rollout held yesterday at Brookings, Dr. Larry Summers, former director of the National Economic Council for the Obama Administration, encouraged President Obama to use his executive authority to lift the ban on crude oil exports stating that the export ban “goes against U.S. principles of free trade” and lifting the ban, “is the right thing to do.”

National Journal: How Should Climate Change Be Taught?

This weeks’ topic on National Journal’s Energy Insiders: How Should Climate Change Be Taught?

The battle over climate science in schools is heating up.

Earlier this month, a coalition of national science-education advocates released a students bill of rights asserting that students across the country should be taught the scientific consensus on climate change. The consensus view held by 97 percent of scientists, according to reviews of the academic literature, holds that the planet is heating up and human activity is the primary cause.

Currently, however, a patchwork of state science standards exist that do not mandate the consensus view is taught, leaving the door open for controversy over climate change to get equal airtime in many classrooms.

My response:

States should decide how best to teach issues like climate change and climate change policies.

Like any important issue–evolution vs creationism, national defense and health care policy–it is critical that students understand all sides of the debate. It was an honor for me to help present an economic perspective on the climate change debate to a group of middle school students in Atlanta, Georgia. See more about this athttp://www.thorningforum.com….

For instance, it’s important for students to understand that climate change is a global problem and that developing counties like China are responsible for most of the growth in GHG emissions. Without their participation, nothing the developed countries do to reduce their own GHGs will make much difference, see Figure 3 inhttp://accf.org/wp-content/u…

Students also need to understand that cost/benefit analysis should be used to evaluate government policies to reduce GHGs emission growth in the U.S. For example, the regulation of GHGs by the U.S. Environmental Protection Agency should be subject to peer review. EPA’s analysis of the costs and benefits of the 1990 Clean Air Act Amendments was seriously flawed. See http://accf.org/wp-content/upl…

Last, renewable energy costs substantially more than that produced by conventional fossil fuel or by nuclear power and states with renewable portfolio standards have significantly higher electricity costs than other states, see Table 3 and Figure 2 in
http://accf.org/wp-content/upl…

Today’s students are tomorrow’s leaders, so it is imperative that they understand the full picture of issues like climate change and the solutions to address it. When armed with the facts, rather than one-sided rhetoric, our youth of today are smart enough to make their own conclusions.

Act On LNG Video Release

Today, ACCF is releasing a new video – narrated by the Honorable Harold Ford, Jr. (D-TN) – telling the story of the Main Street benefits available to the United States through the export of liquefied natural gas.

The U.S. energy reality has changed drastically of late, driven by game-changing advances in the production of natural gas from shale. Annual production ofnatural gas and oil from shale has grown by more than 50 percent since 2007, helping the United States to assert itself as a global energy superpower. The U.S. is now the world’s leading producer of natural gas, and the domestic and geopolitical implications of this feat are tremendous.

LNG01The U.S. is now producing more natural gas than any other nation – recently overtaking the former global leader, Russia. And global production dynamics demonstrate that this is not an isolated or temporary condition. In 2014, conservative estimates from the Energy Information Administration (EIA) project that the U.S. will produce approximately 24 trillion cubic feet of natural gas and that Russia is on a downward slope at closer to 21 trillion cubic feet of natural gas.

The United States has the capability and ingenuity to produce at even greater levels and to reap even greater economic benefit. But until energy and trade policies in Washington are revised to reflect the new energy reality and our new role as a global leader, we risk leaving much on the table.

Legislation supported by both Republicans and Democrats – H.R.6 and S.2083 – would increase the benefits Americans receive from our vast resources, encouraging greater production at home and better enabling us to capitalize on the geopolitical power of our ample domestic energy. Given extensive debate and a clear and growing body of favorable research on the topic of LNG exports, both of these bills deserve urgent, strong, and bipartisan support.

LNG02Reserves: According to the EIA, in 2012 the U.S. consumed approximately 25 trillion cubic feet of natural gas while our proven reserves are estimated at at 334 trillion cubic feet.

We have sufficient capacity to export LNG while satisfying our domestic needs – and the more our businesses invest in this burgeoning sector, the more reserves are uncovered and greater production is achieved. What’s more, exporting our excess supply of natural gas would enable us to bolster our international allies by delivering needed energy and diversifying their sources – yielding direct benefits to American national security.

The 50% annual increase in U.S. shale oil and gas production noted by McKinsey Global Institute’s report, “Game Changers,” is evidence of what is possible in a new American energy reality. And the economic benefits of this boom are unmistakable.

LNG03Economic Development: This shale gas revolution is revitalizing the heart of small town America, already supporting 1.7 million jobs, according to a study by IHS Global Insight. Those numbers grow to 3.5 million in the next twenty years.

These jobs reach far beyond traditional “oil states,” and far beyond the wellhead. A recent McClatchy piece titled “Energy boom feeds other business, too,” published in the Kansas City Star, examines the way that the boom has energized Main Street. The piece notes: “A rust-bucket town near Buffalo is a perfect example of the transformation that fracking has brought to American business, where new life has been breathed into manufacturing and the nation’s railroads, even as much the economy bumps along at a subpar pace.” The article goes on to note how Kansas businesses are finding economic benefits from natural gas production in other states. States like Ohio, Arkansas, Pennsylvania, and countless others are at the heart of the boom.

Economic Benefits: According to study commissioned by the Department of Energy and conducted by NERA Consulting, the U.S. would experience net economic benefits from increased LNG exports. In fact, the report notes, “for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased.” The academic and economic case for exports is abundantly clear.

Organizations like the National Association of Waterfront Employers and Associated General Contractors of America are coming out in favor of H.R.6 and S.2083 because the thousands of members they represent throughout the United States benefit from increased energy production here at home.

Conclusion: The U.S. economic recovery – built on a rebirth of industries, job creation, leveling the trade balance, and regaining our global standing – is at our fingertips. As former Representative Harold Ford Jr. says in our newly released video: “Shale oil and gas development is a game changer. The U.S. is an energy power player, and we have to work hard to make sure it stays that way, because there is a lot at stake.”

If we are unable to move beyond the current status quo characterized by years-long delay and failure to act, the progress and benefits available through our vast energy resources will be stifled. It is important that our energy infrastructure is improved now in order to continue development and keep global prices competitive.

U.S. ingenuity is flourishing and unlocking new economic realities; we need bipartisan policy decisions to allow us to work hard to keep it that way. We need to Act on LNG.

 

New Video: Energy Exports Benefit “Main Street USA”

The American Council for Capital Formation’s (ACCF) ActOnLNG campaign has launched a new video highlighting how important liquefied natural gas (LNG) exports are to revitalizing Main Street, powering key industries, and strengthening U.S. manufacturing.  The short video, narrated by former Congressman Harold Ford, Jr. (D-Tenn), also urges the Obama administration to speed up LNG export approvals.  The video complements efforts in Congress to boost LNG exports to America’s allies through legislation, including the Domestic Prosperity and Global Freedom Act (H.R. 6).

“This video captures the sense of urgency that use needed to ensure that the United States continues to lead the world in the development of energy resources–particularly natural gas,” explained Dr. Margo Thorning, ACCF Chief Economist and Senior Vice President.  ”Exporting LNG would be a real game changer for the nation’s economy and would help America sustain its natural gas boom.  We hope this video will spark further conversation around natural gas exports–especially the need to cut through the bureaucratic red tape holding back development.”

CAP Critique Ignores Facts, Obscures Reality on Energy and Taxes

It’s becoming a quarterly tradition as reliable as the seasons: the oil sector releases its earnings, and the Center for American Progress contorts itself into a misleading critique of the industry, its tax treatment, and its outsized role in the American economy.

Unfortunately, repetition has not made CAP’s argument any more factual, any more persuasive, or any more founded in the common sense tenets that make for sound energy and tax policy.

The crux of CAP’s argument is, as ever, that the oil and gas industry’s earnings are too high. And because of these high earnings, the oil and gas industry should be taxed more heavily. They assert that the oil sector fails to carry its share of the burden, that it is a drain on the economy, and that policymakers should act in a manner that artificially shifts the American energy portfolio away from traditional fossil energy and toward preferred, “green” energy projects.

Not a single aspect of this line of reasoning holds water.

Earnings, Expenses, and Returns

Let’s start with the earnings. Earnings in 2013 for the “Big Five” oil companies clocked in at $93 billion – an objectively large number, but around thirty percent lower than last year. How does that figure stack up against the level of investment required? And how profitable is the sector?

Among the most capital intensive enterprises in the modern economy, oil and gas production occurs on a global scale and requires immense investment. And the cost of conducting this business is growing even more imposing as recoverable reserves grow more difficult to reach, and supply becomes more difficult to replace. A recent Wall Street Journal analysis found that three of the largest oil and gas companies – ExxonMobil, Shell, and Chevron – spent more than $120 billion in 2013 in their efforts to boost output. More, the Journal notes, than it cost to put a man on the moon – and around a half trillion dollars in capital investment in the last five years.

Indeed, as the oil and gas industry endeavors to keep providing the low-cost energy that our economy and every economy worldwide relies upon, cost recovery measures such as those bemoaned by CAP are more important than ever. Calling for the repeal of provisions like the Section 199 manufacturing deduction or protections for dual capacity taxpayers intentionally ignores the realities of today’s energy sector.

The topline earnings numbers reported by the industry, moreover, are not a reflection of excessive profit margins or inflated returns. Rather, as we recently chronicled, return on investment in integrated petroleum companies is 11.7 percent, and 12.8 percent for producing companies. For all industrials, returns average 12.5 percent. The oil industry, then, is in line with all other sectors.

“Special” Tax Treatment: Section 199 and Dual Capacity

CAP’s line of attack – much like its allies in Congress and the White House – points to provisions like the Section 199 deduction and dual capacity protections as evidence of special tax treatment for the oil and gas industry. Ironically, their selection of these two provisions serves as evidence of quite the opposite: a proclivity on the part of a misinformed Beltway contingent to seek to single out this industry with punitive tax treatment.

Section 199 is not a taxpayer handout, and CAP’s assertion that the industry and its refiners don’t deserve the deduction is a rhetorical stretch. The deduction is freely applied to nearly 1/3 of all corporate activity in the United States. Film producers, software companies, renewable energy producers: they all take Section 199. But CAP rarely labels these groups as tax scofflaws, despite the fact that they take the deduction at a rate of 9 percent, while oil and gas companies are limited to a 6 percent deduction.

Far from an example of the industry’s preferential treatment, the domestic manufacturing deduction is an example of a tax policy that has already punitively singled out the oil sector in a negative and costly manner.

Proposals to alter dual capacity rules, meanwhile, are similarly and terminally flawed. CAP – along with the President – would seek to disallow oil and gas companies from taking a credit for taxes paid to a foreign government. Without this credit, American oil companies producing overseas would face a tremendous financial disadvantage, and a drastically higher tax rate.

Until the United States reforms its outdated “worldwide” system of international taxation, protections for dual capacity taxpayers are essential to American competitiveness. Dual capacity protections do not amount to a subsidy for American producers operating overseas. They serve to even the playing field for American companies seeking to keep pace with  foreign – often state-owned – competitors that do not face the same onerous international taxation regime as American companies.

The rules as written have helped American producers grow and create jobs – but they are far from a subsidy. Repealing or modifying them, however, would simply make it easier   for  foreign competitors to gain access to the resources at the expense of U.S. companies.

An Attack on Exports

Also buried in the CAP piece is an attack on energy exports – an attack that is rooted in the claim that exports “could raise gasoline prices.” Exports and taxes are two very different policy debates, but CAP’s line of reasoning concerning this issue is no less misguided. Consensus is growing – on both sides of the aisle – regarding the prospect of American crude oil and LNG exports. From the Department of Energy to leaders on Capitol Hill, there is a recognition of the benefits that global exports can provide to our economy – from stabilized domestic production to job creation. As for the impact on gas prices? On the very same day that CAP posted their piece, Resources for the Future released a study indicating that lifting the export ban may in fact reduce prices at the pump.

CAP references data from Barclays in asserting that exports would press consumer prices upward. But their data is outdated and not reflective of the opinion of Barclays at large. Analysts from elsewhere within Barclays released a new assessment just yesterday indicating that, in fact, they expect that the consumer will benefit from lifting of export bans thanks to enhanced refinery efficiencies.

Conclusion

The latest CAP attack is, regrettably, more of the same politically charged venom that we have come to expect in recent years. But while the CAP message has stagnated, the energy debate has evolved. The oil and gas industry sports the highest average effective tax rate on the S&P index. The sector supports 10 million jobs, and continues to create new jobs at a breakneck pace.

It’s time to move past talking points and start dealing in facts.