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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Failing U.S. Energy Policy Needs Some Radical Changes

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Congressman Pete Olson (R-TX22) wrote in the Houston Chronicle last Monday that the U.S. lacked a coherent energy policy. Bureaucracy and inefficiencies in the national energy system hold up access to oil and natural gas, while permitting new pipelines “has become remarkably and illogically difficult.”

Olson pointed to certain successes in remedying this situation. He credits himself and his fellow Congressmen with ending the ban on oil exports last year. He calls attention to an on-going effort in Congress to pass the power of approving inter-state and international energy projects to a new federal agency, “to streamline the permitting nightmare when projects cross federal lands or international boundaries, and generally try to make the process faster and fairer.”

Oil&Gas 360 pointed out that, in the past, crisis provoked a policy response: the energy disruptions of the 1970s led to federally-mandated speed limits and the U.S. Strategic Petroleum Reserve, which the U.S. could tap in the event of emergency shortages. Olson calls for similar shifts in national policy, which would encourage greater energy exports and a smoother, easier process for confirming domestic energy projects such as pipelines, refineries and export terminals.

Olson suggests that better policy can change market conditions that are hampering global access to energy. He points to markets in East Asia, such as South Korea and Japan, as destinations for U.S. energy products. Olson proposes that the U.S. government adopt “sensible rules that allow the market to work and benefit American interests at the same time.”

Olson’s enthusiasm for expanding U.S. exports makes sense: as the center of the potential U.S. energy export trade, Texas would benefit hugely from policies encouraging greater shipments of oil and natural gas to depart the U.S. for markets abroad. Since the export ban was lifted last year, companies in the Gulf of Mexico have taken advantage of high U.S. supply to export increasing quantities of refined products and LNG.

Olson’s editorial is good politics, especially in an election year, and his proposal for a new agency to fast-track domestic pipeline projects could accelerate access to energy at a time when a stark imbalance exists between different U.S. regions. Increased natural gas production from the Northeast, the country’s most densely-populated region, has created a supply glut while constraining the construction of new pipelines that would carry the products to market. Environmentalists protest the perceived dangers of fracking while landowners oppose the construction of pipelines drive by eminent domain; even local tourism boards are worried that energy infrastructure will despoil natural areas and impact camping, hiking and other recreations.

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“We will never steamroll local communities,” says Olson, a statement loaded with meaning when, less than a week later, the British government defied local opinion and approved horizontal fracking in Lancashire. A Congressionally-mandated federal agency that would push forward new pipeline projects would run into a lot of local opposition,

Beyond the considerable new challenges to domestic fossil fuel production, including growing environmental concerns and surging interest in renewable energy, market conditions make concentrated U.S. energy exports a tough sell.

As the EIA notes, while much of the country continues to import energy, the American southeast and the Gulf of Mexico region is a major exporter. The Gulf region possesses over half the country’s refining capacity and is already on the receiving end of pipelines from other producing areas, including the Marcellus shale play in the American northeast.

Since the lifting of the ban, the U.S. has steadily increased its export volume, despite depressed prices and intense competition. American crude exports in the first half of 2016 averaged 501,000 bpd, an increase of 9 percent from the previous year. The biggest market for American crude continues to be Canada, which was previously exempt from the export ban, and the Caribbean island of Curacao, the site of a major refinery near the Venezuelan coast.

American LNG, currently exported by Cheniere Energy from its terminal in Sabine Pass, could represent a major source of future energy exports. Despite the hype, LNG worldwide is facing a collection of obstacles, such as over-supply, inconsistencies in regional prices and high competition from other, cheaper energy products.

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An analysis shows that Cheniere’s cargoes have reached some unexpected destinations, including South America, where LNG prices are robust. East Asia, the expected recipient of the American LNG bounty, is conspicuously absent: competition from LNG producers in Qatar and Australia may be edging out Cheniere’s product. The expansion of the Panama Canal, which can now accommodate 90 percent of LNG ships, may alter that situation, but for now U.S. LNG exports are relatively minor. Cheniere will have two LNG trains operating by the end of 2016 and a series of other LNG projects have been approved.

Right now, LNG prices area buoyant, propped up by the expectation of winter demand. But structural over-supply will likely set in for 2017 and several years thereafter. As an analysis from Gas Strategies points out, investment in LNG is strong and the supply is growing: but demand hasn’t caught up, and traditional markets in India and East Asia will be growing more slowly.

A major expansion of LNG export capacity could position the U.S. to become a major LNG producer, but the fuel is one that carries with it an expensive price tag: infrastructures need to be converted, terminals constructed and domestic production ramped up.

If it wants to export to East Asia, the U.S. will face stiff competition from Qatar, which has been exporting to those markets for over a decade, and Australia, which has eight major LNG projects being completed that will put it comfortably ahead of Qatar as the world’s largest LNG producer. Thousands of miles closer to markets in Japan, India and South Korea, Australian LNG could stymie American ambitions. Yet even Australian exports will be curtailed in the face of poor market conditions.

The U.S. certainly has the resources to become a major energy exporter, and the will of those like Rep. Olson could make it happen. But between market conditions and the intricacies of domestic politics, it’s tough to see how quickly this could come to fruition. Like many other issues facing the United States, we may have to wait until after November to see which way national energy policy will go.

By Gregory Brew for Oilprice.com

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