Drilling for Export

Part and parcel in the offshore/ANWR drilling debates are several under-discussed and unchallenged assumptions. Some were addressed in last week’s discussion of the oil crisis. Let me add to them.

Faulty assumption: Oil produced here stays here.

That is, American oil will be used by Americans, helping reduce foreign imports. Despite President Bush's claim that "We can help alleviate shortages by drilling for oil and gas in our own country," Reuters reported this month that U.S. exports of refined petroleum products (gasoline and diesel fuel) have, in fact, risen sharply since last year.

A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.

The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore waters and Alaska's Arctic National Wildlife Refuge to drilling.

Delivery contracts for these products may predate the current surge in domestic gasoline and diesel prices, yet highlight how global the petroleum market is. And how increasing domestic supply does not guarantee fewer oil imports or lower prices.

Regarding oil from ANWR, the U.S. prohibited export of Alaskan oil from the 1970's until President Clinton lifted the ban in 1995. Sen. Ted Stevens (R-Alaska) argued at that time: "This ban is unconstitutional and unjust. Lifting the ban would mean Alaska could sell its oil on the world market, which would increase state revenues by as much as $700 million." That's because prices for Alaskan oil sold on the world market rose, the Seattle Times reported. Since 2000, partly due to dwindling production, exports from Alaska have been virtually nonexistent. Yet presently, there is no regulatory barrier to exporting new oil coming from ANWR.
Arguing against the Alaskan oil export ban in 1995, the Cato Institute described the operation of the West Coast oil market. It is, of course, more complex than described by talking heads who point fingers:

Briefly, this is what goes on. Crude oil from Alaska is shipped to California refiners. Although it is of higher quality than most local crude oils, it is not light enough to offset the impact of California's heavy crude oils on refinery processing--a classic case of "bringing coal to Newcastle." Overall, about one-quarter of refinery production is residual oil. Local regulations effectively prevent the heavy fuel oil from being used in the Los Angeles Basin or the San Francisco Bay area. It is sold as heavy oil for ship fuel (known as "bunkers"), sold at a discount in the Pacific Northwest, shipped to the Gulf Coast, or exported to the Far East.

[ . . .]

Were the market allowed to function unmolested, however, Alaskan crude oil would in all likelihood flow to northeast Asia, where there is a demand for heavy fuel oil. In turn, light imported crude oil from the Middle East and Southeast Asia would move into California, where it could be manufactured into gasoline and diesel. That would reduce the need to import gasoline additives and dramatically reduce the need to export heavy fuel oils. The crazy system of cross-transportation would be eliminated. Not only would unnecessary transportation be reduced, but refiners would be willing to pay more for local supplies of West Coast crude oil.

Yes, oil is somewhat fungible. But anything there about bringing down domestic prices or American national security? Nope. Not their job. As free-marketeers, not their ideology either.

Compounding the conundrum and increasing the pressure to export, there may not be refinery capacity on the West Coast to handle a glut of new crude from ANWR. As the Seattle Times reported (again, in 1995),

A glut of Alaskan oil could be more than West Coast refineries can use, said Verleger, a senior fellow for the Institute for International Economics in Washington, D.C.

At their 1991 peak, West Coast refineries used 1.44 million barrels of Alaskan oil a day. While refineries have increased overall production since then, at this point it's not enough to process the potential increase in Alaskan crude if ANWR is opened.

"It is possible if they were to find a lot of oil in ANWR — and once they start drilling there they may move outside that little area — that the oil couldn't go to any place in the United States," Verleger said.

A minor detail the Bush administration seems to have omitted from its sales pitch.

Any lack of refining capacity will be blamed on liberals, of course - the "no new refineries" talking point. Through new technology, debottlenecking and expansion at existing facilities, the oil industry has added the equivalent of one new U.S. refinery per year for the last decade, but never mind. Capacity still lags demand. Yet at a time when a White House run by oil executives calls on Americans to cut their gasoline usage by 20% over the next decade, no oil industry CEO in his right mind wants to tie up $2 billion in a ten-year refinery project that might take another ten to pay back, if ever.

The oil age is surely not over, but it is waning. Old addictions die hard. We need to create more supply, we keep hearing. But another factoid that gets missed is this. We don't create oil supply, we only tap it. And as the supply dwindles and worldwide competition for that dwindling resource rapidly increases, so inevitably will the price, as we have seen, including the price of whatever new oil we drill for (and drill we will). Hence the bum's rush to open more fields in Alaska and offshore to oil companies on favorable terms before their patrons leave office. Any new oil produced in America will be sold by oil traders on the same global market the rest of the oil is sold in. They'll sell it to the highest bidders for the best prices they can get, wherever they can get them. Unless, of course, we nationalize the oil and keep it to ourselves until it runs out - not gonna happen, as Poppy Bush would say.

What's really needed is to start weaning ourselves from oil and get serious about a mix of newer, cleaner energy sources - including nuclear - as some liberals I know argued recently. But let's have no illusions, nor perpetuate them to protect oil industry profits. As The Nation's Chris Hayes said, drilling in ANWR is like digging in your couch for change after you're already six months behind on your mortgage. I have a closer analogy. Drilling oil wells to solve the energy crisis is like drilling water wells to end a drought.