Iran and U.S. Energy Exports

A new chapter in the energy security discussion

Congress long has been interested in ending the ban on the export of U.S. crude oil (see July 2014 Policy Watch) – and their interest in oil exports has increased with the recent international agreement to lift the nuclear-related sanctions on Iran.

At the same time, however, some legislators continue to oppose exports because they could raise prices to consumers and increase the environmental impacts of oil production.

Republican Sen. John Cornyn of Texas, speaking at a Center for Strategic and International Studies (CSIS) forum in July, described an energy security argument for ending the U.S. export ban, noting that oil exports are an international security weapon as shown by the convergence of European dependence on Russian oil and gas and their hesitancy to confront Russia regarding Ukraine.

Making U.S. oil and gas available to our European allies, he continued, could be an important foreign policy mechanism to assure a unified front in dealing with an increasingly aggressive Russia.

The senator also proposed another potential strategic benefit: Increasing U.S. oil exports would blunt Iran’s attempts to benefit from increased oil sales that could boost its military influence in the region.

A recent report by the Atlantic Council adds to these arguments, observing that if it becomes necessary to reinstitute oil export sanctions on Iran, the European community will be more accommodating if the United States is contributing to global oil supplies.

The report also notes the benefit of allowing crude exports to Mexico, which would help its refining industry gain access to light oil; currently, oil exports to Canada are allowed while exports to Mexico are banned.

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Congress long has been interested in ending the ban on the export of U.S. crude oil (see [PFItemLinkShortcode|id:10748|type:standard|anchorText:July 2014 Policy Watch|cssClass:|title:July 2014 Policy Watch|PFItemLinkShortcode]) – and their interest in oil exports has increased with the recent international agreement to lift the nuclear-related sanctions on Iran.

At the same time, however, some legislators continue to oppose exports because they could raise prices to consumers and increase the environmental impacts of oil production.

Republican Sen. John Cornyn of Texas, speaking at a Center for Strategic and International Studies (CSIS) forum in July, described an energy security argument for ending the U.S. export ban, noting that oil exports are an international security weapon as shown by the convergence of European dependence on Russian oil and gas and their hesitancy to confront Russia regarding Ukraine.

Making U.S. oil and gas available to our European allies, he continued, could be an important foreign policy mechanism to assure a unified front in dealing with an increasingly aggressive Russia.

The senator also proposed another potential strategic benefit: Increasing U.S. oil exports would blunt Iran’s attempts to benefit from increased oil sales that could boost its military influence in the region.

A recent report by the Atlantic Council adds to these arguments, observing that if it becomes necessary to reinstitute oil export sanctions on Iran, the European community will be more accommodating if the United States is contributing to global oil supplies.

The report also notes the benefit of allowing crude exports to Mexico, which would help its refining industry gain access to light oil; currently, oil exports to Canada are allowed while exports to Mexico are banned.

Another popular argument for oil exports is that if we will allow unlimited Iranian exports, it is only fair then to allow U.S. oil exports.

In addition, U.S. producers’ continuing interest in selling oil at higher global prices is amplified with this year’s price drop, as the price spread between U.S. and global prices represents a larger percentage of the low price.

A March 2015 IHS analysis found that lifting the ban on crude oil exports increases supply chain jobs and economic activity by:

  • Stimulating capital investment.
  • Increasing crude oil production.
  • Lowering gasoline prices.

Representing the other side of the issue, Democratic Sen. Ed Markey of Massachusetts and 12 other senators sent a letter to President Obama on June 26 listing their objections:

  • Weakening or repealing the oil export ban could harm our national security, because we are and will continue to be dependent on foreign oil.
  • Exports could harm refineries that are in the process of making upgrades to deal with greater domestic production and increasing volumes of light oil – we essentially would be exporting our refining capacity.
  • There could be an increase in consumer costs and in the volumes of oil transported across the United States, which increases the risk of spills.

Refiners, who currently export large volumes of refined products, generally have been opposed to crude oil exports, which would decrease their refining margins. However, recently the refining units of four multi-national, integrated oil companies – Shell, ExxonMobil, Chevron and BP – sent a letter to the House and Senate energy committees supporting an end to the export ban.

Some small refiners continue to voice their opposition to oil exports.

Legislation

Both the House and the Senate held hearings this spring and summer on the benefits of crude oil exports. In addition, members of both chambers have introduced bills to end the export ban.

Comprehensive energy legislation also is working through the House and Senate, and oil and natural gas export provisions were expected to be part of both bills. However, as Congress started their summer recess, the House Energy and Commerce and the Senate Energy and Natural Resource committees excluded oil export provisions from their comprehensive bills in the interests of maintaining bipartisan support.

The Senate bill does include provisions to expedite LNG exports.

Comprehensive energy legislation passed the House Energy and Commerce Committee, chaired by Michigan Republican Rep. Fred Upton, on July 9. This draft of the bill, designed to be bipartisan, focuses on electricity reliability, natural gas infrastructure and workforce training – and is not loaded with partisan topics such as oil exports.

Oil and gas export provisions may appear when bill comes before the full House in September.

In the Senate, the comprehensive energy bill (the Energy Policy Modernization Act of 2015) contains provisions on efficiency, infrastructure, land and water conservation, and updated federal procedures. The bill would accelerate government approvals of LNG exports. However, legislation allowing crude exports was moved to a separate bill and passed by the Senate committee amid discussion that authorizing oil exports could be paired with an extension of renewable energy tax incentives when the legislation comes before the full Senate.

Impacts of the Iran Agreement

Iran will regain access to international energy markets and the global financial system once the International Atomic Energy Agency (IAEA) verifies that Iran has met restrictions on its nuclear program – probably several months from now.

Estimates of potential post-sanctions oil exports are varied:

  • The National Iran Oil Company managing director said production could increase by 500,000-600,000 barrels per day (b/d) almost immediately, and total exports could grow from about 1.5 million b/d to pre-sanction levels of four million b/d within six to 12 months if there is sufficient demand.
  • Reuters reports that analysts expect an increase from 200,000 and 700,000 b/d.
  • Additionally, an unknown volume of oil in floating storage could come on the market in 2016.

In addition to the United Nations’ nuclear sanctions that are being lifted, the United States has special sanctions – during the 1979-81 hostage crisis the country froze Iranian assets, and in 1984 it designated Iran a state sponsor of terrorism, which automatically triggered sanctions, including restricting foreign assistance, economic interactions and arms transfers, and restricting export of dual-use items.

A May 2015 law restricts the president’s prerogative to waive U.S. sanctions without congressional approval. Continuing U.S. sanctions may limit businesses or individuals engaging in commercial transactions with Iran. The European Union also has nuclear-related and other sanctions that can be lifted by votes of the 28 member-states.

Increasing Iranian oil exports may put downward pressure on already-low oil prices that reflect a large global surplus. The U.S. Energy Information Administration estimates that 2015 global oil inventory (amount that production exceeded consumption) grew 2.2 million b/d in the first half of 2015, but rising demand and slowing production growth will cut inventory builds to 1.5 million b/d in the second half of 2015 and 0.6 million b/d in 2016. These figures assume that Iranian production will change little through the first quarter of 2016. However, EIA estimates that re-entry of more Iranian oil could lower its 2016 price per barrel forecast by $5 to $15.

Oil sales from the U.S. Strategic Petroleum Reserve (SPR), which contains about 695 million barrels of crude oil, also could push down oil prices.

A test sale of five million barrels in 2014 did temporarily push down futures prices, but the sale volume was too small to have any significant impact. Now, with the growth in domestic production and decline in imports, SPR contains more oil than is required to help meet its treaty obligations to hold the equivalent of 90 days of imports.

That makes SPR look like a giant piggy bank to some in Congress – bills have been introduced in Congress to sell SPR oil to fund the Highway Trust Fund (101 million barrels) and increase funding to the National Institutes of Health (64 million barrels).

Whether these proposed sales will have a significant impact on oil prices depends on their timing.

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