The People of America's Oil and Natural Gas Indusry

Pacific: Energy Policy Hits Home

Economic Growth Potential of Crude Exports

Pacific Port and Barge

Energy opportunities – both squandered and emerging – abound in Pacific Coast states. Oregon, with its LNG export facilities, and California, with its strong manufacturing base, are primed to reap the rewards of economic growth generated by LNG and crude oil exports.

Yet state and local policies often prevent the advantages of the American energy resurgence from reaching West Coast residents. Despite promising reserves offshore and in the Monterey shale formation, California oil production has dropped 27 percent since 2001. Due to the state’s failure to embrace and promote hydraulic fracturing, the Golden State is sacrificing the economic and employment growth enjoyed by other states.

Pacific states are largely missing out on plunging gasoline prices enjoyed elsewhere. While most states experienced Thanksgiving 2015 gas prices averaging $2.07 – the lowest level since 2008 – the top five most expensive gas markets were all Western states (Alaska, California, Nevada, Hawaii and Washington). State motor fuel taxes in Hawaii, Washington and California rank among the top 10 rates in the nation, but taxes alone are not responsible for driving up gas prices relative to those of other states. Stringent fuel regulations and burdensome refinery restrictions have helped drive California fuel prices to roughly $1.00 above the national average, and a carbon cap-and-trade program fully implemented in 2015 threatens to send retail gas prices soaring by an additional 16 cents to 76 cents a gallon, according to analysis by the Western States Petroleum Association. At great cost to family budgets and state economies, the Pacific region demonstrates the consequences of poor policy choices and underscores the outsized influence energy policy exerts on economic growth, job creation and household savings. Like the nation as a whole, Pacific states can welcome major economic benefits by harnessing energy development opportunities. Also like the nation as a whole, smart energy policy must come first.

Seizing the Moment on Exports

Although the United States leads the world in oil and natural gas production, federal policy poses obstacles to fully capitalizing on our position as a global energy superpower. Crude export restrictions enacted in the 1970s during a time of energy scarcity have no place in our new energy reality. Free trade for crude oil and timely approval of LNG export applications are essential to ensure the United States does not cede our advantage as a leading producer.

Crude Exports Promise Economic Growth

U.S. crude oil production increased 74 percent between 2008 and 2014, surging from 5 million barrels per day to an average 8.7 million barrels per day in 2014, with 2015 average production well over 9 million barrels per day. Numerous studies from a variety of sources across the ideological spectrum project significant benefits associated with lifting the decades-old ban on U.S. crude exports. A 2014 study by ICF International and EnSys Energy projects that lifting trade restrictions on crude oil could add up to 300,000 jobs to the U.S. economy, reduce the trade deficit by $22 billion in 2020, and save American consumers an average $5.8 billion per year in gasoline, heating oil and other fuel costs. Due to the industry’s extensive supply chain, states with significant manufacturing and consumer spending stand to gain thousands of jobs and billions in economic growth even if they are not major energy producers.

U.S. crude oil production increased 74 percent between 2008 and 2014, surging from 5 million to 8.7 million barrels per day.

Every major economic study agrees that crude exports will put downward pressure on U.S. gasoline prices by adding greater stability to the global supply. A U.S. Energy Information Administration (EIA) report released in September 2015 states, “Petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports.”

Consistent with the majority of studies, EIA projects increases in domestic crude oil production will follow if U.S. producers are allowed greater access to world markets. The ability to export crude oil will also address what a Rice University study calls a “binding constraint” whereby export restrictions lead to discounted prices for domestic light crude oil compared to global crude prices.

The bulk of U.S. production growth comes from lighter crudes while the majority of refining capacity is geared to process heavier crudes. Allowing an outlet for America’s bounty of light crude is essential to maintaining the nation’s competitive advantage and to sustaining economic growth. In a low-price environment, “the difference between world prices and U.S. prices can be the difference between the viability and non-viability of a great deal of investment,” according to IHS Vice Chairman Daniel Yergin.

As with LNG exports, the export of American crude oil can serve as a powerful geopolitical tool. U.S. allies continue to petition for access to U.S. crude resources, and numerous experts cite security benefits as an advantage of changing our export policy. According to Michèle Flournoy, former undersecretary for policy at the Department of Defense under President Obama: “The United States is stronger and more secure when our allies are energy secure and economically vital. We are also stronger when we have lucrative and mutually beneficial energy trade with allies.”

A study examining state-by-state benefits finds that California is one of nine states that could realize over $1 billion in state economic gains in 2020 and one of eight states that could add more than 10,000 jobs from crude exports. Not only is California a major oil producer, but its manufacturing sector’s contributions to the energy supply chain and the level of consumer savings it can expect from lower fuel prices combine to rank it among top beneficiaries of crude oil exports.

West Coast LNG Opportunities

With the right export policies, states need not be major energy producers to join the American energy resurgence. Thanks to two pending LNG export terminals, Oregon is poised to seize a substantial advantage in the global race to supply the Asian LNG market. In addition to creating hundreds of construction jobs and generating significant economic activity, the Jordan Cove facility at Coos Bay and the Oregon LNG terminal at Warrenton promise to spread economic benefits across multiple Western natural gas-producing states. In a letter to FERC, 14 U.S. House and Senate members from Colorado, Utah and Wyoming stated: “FERC has already given eastern and Gulf coast states the opportunity to access overseas markets. We believe it should give Rocky Mountain states and Indian tribes the same opportunity.” Although natural gas demand in Asia has fluctuated along with the continent’s economies, world competition to supply projected demand is fierce. Some projections indicate Asia will account for between 39 percent to half of incremental growth in global LNG demand through 2035. With more than 48 competing LNG export projects planned or under construction in other nations, timing is everything if the United States is to capitalize on our status as the world’s leading natural gas producer and claim our maximum potential share of that market. Despite missed opportunities at the local and state levels, with the right policy choices, Pacific states can still play a pivotal role in cementing America’s global energy leadership – and reap the economic benefits.

With more than 48 competing LNG export projects internationally, timing is everything if the United States is to capitalize on our status as the world’s leading natural gas producer.

The Wide-Ranging Impacts of Energy Policy: RFS

A variety of federal and state factors influence fuel options and prices, but federal ethanol policy stands out for the sheer scope of business and consumer interests it threatens. In addition to challenges for refiners and drivers detailed in the Gulf Coast chapter, the Renewable Fuel Standard (RFS) poses potential risks to consumers on multiple fronts. And unlike some of the costly policies enacted by Pacific states, federal ethanol mandates have nationwide impact that vividly illustrates the connection between energy policy and consumers’ daily lives.

In addition to the 90 percent of automobiles on the road today not manufacturer-approved to run on fuel with more than 10 percent ethanol (E10), other engines can also be damaged by higher ethanol blends, including those in boats, motorcycles, classic cars, lawnmowers and outdoor equipment such as chain saws, generators and utility vehicles. Groups including the National Marine Manufacturers Association, American Motorcyclist Association, Historic Vehicle Association and Outdoor Power Equipment Institute have all warned consumers about the dangers of using higher ethanol blends. Tellingly, the California Air Resources Board has not approved the sale of E15 in California, the nation’s largest fuel market, because of concerns about potential engine damage. Food and meat producers are also speaking out about damaging ethanol mandates. Ethanol production has diverted nearly 40 percent of the U.S. corn crop from food to fuel, leading to a 25 percent increase in the consumer price index for food since 2005. The National Chicken Council, American Meat Institute, National Council of Chain Restaurants (NCCR), and the Grocery Manufacturers Association have all protested RFS-driven higher costs for their businesses and customers. In a joint press conference calling for action, NCCR Executive Director Rob Green described the policy’s ripple effect: “The Renewable Fuel Standard has wrought havoc on food retailers, chain restaurants, franchisees and operators, as well as food producers and suppliers. However, the ultimate losers are consumers.”

As with many overreaching policies, the most vulnerable individuals suffer the greatest impact. Anti-hunger group ActionAid is a part of the coalition urging action, stating, “No one should go hungry to fill our gas tanks.” The organization is calling for reform to the “massive mandates backed by Congress” that their research indicates are “making food prices around the world much more volatile.”

Environmental groups are also taking action. Analysis of EPA data indicates corn-based ethanol yields 27 percent more greenhouse gases over its full lifecycle compared to regular gasoline. A University of Michigan study concluded corn ethanol generates net greenhouse gas emissions nearly 70 percent higher. The Environmental Working Group warned, “Implementation of the RFS has significantly increased greenhouse gas emissions when compared to emissions from gasoline, it has increased water pollution, increased the emission of criteria air pollutants and it has destroyed valuable habitat for wildlife.” Significant reform or repeal is necessary to prevent the widespread damage threatened by unrealistic ethanol mandates.