Thursday, March 3, 2022

Time to Take the Brakes Off the U.S. Energy Industry

By Kevin D. Williamson

Wednesday, March 02, 2022

 

Canada has announced a ban (mostly symbolic) on Russian petroleum imports. The United States has not, because we have hamstrung ourselves. In spite of being the world’s largest oil producer — by far — we continue to import enormous quantities of oil and other petroleum products. That isn’t a bad thing in and of itself, but it does limit some of our options — and, in this case, it does so unnecessarily and, indeed, destructively.

 

There are four things to know here.

 

First:

 

The big immediate issue with U.S. petroleum production is not how much crude we produce but what kind of crude we produce. Before the boom in domestic production — enabled by the modern extraction techniques colloquially known as “fracking” — the United States depended heavily on imports, largely but not exclusively from the Middle East, because we had no other practical choice. As a result of that situation, many U.S. oil refineries are optimized to handle the “heavy, sour” crude we import rather than the “light, sweet” crude we produce. That persists partly out of inertia but also because of the fact that our sophisticated refineries have big advantages when it comes to turning that heavy crude into useful products. The science and the economics get complicated pretty quickly, but that’s the simplified version.

 

The U.S. petroleum industry has not done much to update or expand its refining capacity, in part because the owners of existing refineries do not want to create new competition for themselves, and in part because U.S. government policies discourage building new refineries.

 

Russian imports do not make up a very large part of the U.S. energy portfolio: More than 60 percent of our oil imports come from Canada, another 10 percent from Mexico, 6 percent from Saudi Arabia, and only 3 percent from Russia. (Estimates vary and the market is fluid — in November, Russia was in the No. 3 position instead of Saudi Arabia — but the Russian share is always in the single digits percentage-wise.) It may not be very much, but that imported oil matters more than you might expect it to, because of the specific composition of U.S. production facilities.

 

Second:

 

In January of 2019, the United States imposed sanctions on Venezuela, which had been a big supplier of the heavy feedstock U.S. refineries need. Deprived of that Venezuelan crude, U.S. refineries began importing substitutes such as Mazut 100, a semi-refined oil product from Russia. The boom in Russian oil imports pretty closely mirrors the decline in Venezuelan oil imports — an unintended consequence of sanctioning Venezuela, but not an unforeseeable one.

 

In the short term, Washington could decide that sanctions directed at Vladimir Putin are more important than sanctions directed at Nicolás Maduro and try to replace those Russian imports with Venezuelan imports — and Venezuela’s production has been making a little bit of a comeback recently. But a long-term approach would involve creating incentives to update and expand refining capacity in the United States.

 

Remember, there aren’t very many uses for crude oil — it is the stuff that refineries make out of crude oil that is useful and valuable.

 

Third:

 

Another problem with U.S. petroleum production is where we produce and refine it. With the exception of Houston, most of the large U.S. population centers are far from the Gulf Coast facilities at the heart of our energy industry. We import petroleum products in part because there is no good economical way to get them from the Gulf Coast to the East Coast.

 

In addition to heavy stock, we also import gasoline and diesel from Russia, along with light, sweet crude for West Coast refineries. New Englanders sometimes rely on natural-gas imports from Russia.

 

That is an almost entirely artificial problem, a big part of which Joe Biden could solve, unilaterally — today.

 

The Jones Act requires that ships going from one U.S. port to another U.S. port be built in the United States and owned and crewed by U.S. citizens. There are very few tankers and crews that meet this requirement. As a result, it costs two or three times as much to ship petroleum products from Gulf Coast refineries to East Coast cities (or from Texas producers to West Coast refineries) than it does to bring those products in from ports in faraway countries such as Nigeria and Saudi Arabia. So there is little or no port-to-port petroleum business within the United States.

 

The Jones Act is pure protectionism for a small number of uncompetitive U.S. shipbuilders. Without it, we could replace some of the Russian imports with domestic product almost immediately.

 

Repealing the Jones Act entirely would be a good policy move irrespective of the situation with Russia. But even without congressional action, the Biden administration has the authority to issue Jones Act waivers. The administration did that, in a limited way, after the cyberattack on the Colonial Pipeline in 2021. If there is an occasion for going big with those waivers, this is it.

 

Fourth:

 

Another barrier standing between U.S. petroleum producers and consumers: New York. A succession of New York governors — including Andrew Cuomo and Kathy Hochul — have prevented the construction of new interstate pipelines running through the state. This is what has cut New England off from so much U.S. petroleum production — and what keeps New York consumers from connecting with gas producers in Pennsylvania.

 

These same New York politicians have kept New York’s own oil and gas industries on the sidelines.

 

President Biden is himself an offender on that score, having scuttled the Keystone XL pipeline, which would have expanded U.S.–Canadian trade. That would be a win for many reasons, one of which is that Canada is a big producer of heavy oil, which is used to produce everything from heating oil to petrochemicals.

 

We move oil and gas around on trains and trucks, but the most efficient — and safest — way to transport fuel is via pipeline. Environmentalists who block pipeline projects do so out of an ideological opposition to building any new conventional-fuel infrastructure. (Sometimes, they even say as much publicly.) If the Biden administration is going to go along with that, it means taking some policy options off of the table in our confrontation with Vladimir Putin. There are many environmentalists who will say that the tradeoff is worth it, and it may be, in the long run — but we should be transparent about what the tradeoff is and thoughtful in evaluating it.

 

“Energy independence” is a pipe dream and always will be, even for a big producer such as the United States. The real-world energy business is too complex for that. But our relationships with Canada and Mexico are not very much like our relationship with Russia. And we are hobbling our domestic energy industry for political reasons.

 

That is a choice, and probably not the best one.

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