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America's Secret Weapon: Liberalizing U.S. Oil Exports?

The Buzz

What would allowing U.S. crude oil exports do to the global price of oil? Tom Friedman, in a column Sunday, reflects popular conventional wisdom when he says they’d do a lot:

“The necessary impactful thing that America should do at home now is for the president and Congress to lift our self-imposed ban on U.S. oil exports, which would significantly dent the global high price of crude oil…. If the price of oil plummets to just $75 to $85 a barrel from $100 by lifting the ban… we inevitably weaken Putin and ISIS….”

He’s wrong. Here’s why.

This chart (click here) shows market expectations for Brent and Light Louisiana Sweet (LLS) oil prices. You should think of Brent as a “world” oil price and LLS as a “U.S.” oil price. The market expects Brent prices to be in the neighborhood of a hundred dollars a barrel for quite some time. It also expects LLS prices to be below Brent prices indefinitely. (The discount varies between about six and nine dollars over time.) Part of this – perhaps around three dollars – reflects the cost of transporting oil from the U.S. Gulf Coast (where LLS is priced) to northern Europe (where Brent is priced). A bit reflects the fact that LLS is higher quality than Brent. The rest of it reflects logistical and legal constraints on the ability to export oil from the United States.

Now imagine that those constraints were removed. Friedman says that oil prices could plummet by $15 to $25 dollars. Suppose for a moment that he’s correct. The Brent price would drop to $75 to $85 a barrel. The LLS price would remain a few dollars below that (mostly reflecting transportation costs) at, say, $72 to $82. Now take another look at the chart above: This would mean that U.S. oil prices would drop by between $7 and $22. The most obvious result of this would be to depress U.S. oil production relative to what it otherwise would have been.

But now stop for a moment: We are predicting a world in which oil production is lower and oil prices have also dropped. This makes zero sense: less oil production results in higher prices – not lower ones. Friedman’s claim about oil exports and oil prices quickly leads to a logical impossibility. The only possible conclusion is that Friedman is wrong.

That this is the correct conclusion can be seen by looking at what allowing oil exports would actually do to the global price of oil. As a basic rule, when you connect two markets where a commodity is selling at different prices, the common price that results is somewhere between the two. So further liberalization of oil exports should reduce Brent prices by at most a few dollars a barrel; anything more and Brent (plus transportation costs) would suddenly become cheaper than LLS. In actual practice the impact is likely to be considerably smaller, with most of the adjustment coming from higher U.S. oil prices rather than lower world ones.

There is an important caveat worth throwing in here: forward curves often are bad predictors of the future. It may well be that traders are underestimating how much constraints on U.S. oil exports will drive down LLS prices. But no one has identified plausible ways that the export ban could sustain a whopping $15 to $25 wedge between U.S. and world oil prices. Besides, even if it could, the impact of the ban would need to be entirely on U.S. prices (keeping them depressed), while the impact of lifting it would need to be entirely on world prices (reducing them to U.S. levels). That’s implausible.

Indeed if you look at estimates in a couple recent studies sponsored by the oil industry – which presumably would want to talk up the great benefits of removing the ban – you’ll see smaller numbers than Friedman’s. An ICF study sponsored by the American Petroleum Institute (API) pegs the impact on Brent oil prices at $0.05 to $1.05. An IHS reportsponsored by a group of oil companies claims a larger wedge – but even that stays below about $5 (see page IV-17 of the report for the relevant chart). (The IHS study also finds world oil prices never dropping below $95 even with free trade.) Indeed one prominent study (from a team at Resources for the Future) envisions an increase in world oil prices if oil exports are liberalized, as a more efficient refining complex boosts demand for crude oil.

I don’t know which of these figures is correct. But the one figure we can be confident is incorrect is the one that Friedman puts forward in his op-ed. Liberalizing U.S. oil exports would be a good thing to do for both economic and geopolitical reasons. But it is not a massive weapon that could fundamentally change U.S. prospects in the world – not by a longshot.

This article first appeared on CFR’s Energy, Security and Climate blog here. Levi’s book, The Power Surge, will be released next month in paperback​. 

Image: Wikicommons/Creative Commons License 2.0 

TopicsEnergy RegionsUnited States

The Ukrainian Crisis is at a Point of No Return

The Buzz

Petro Poroshenko, Ukraine’s embattled president, is looking to make a deal with the enemy. And why wouldn’t he be? In a preemptive move on the eve of the NATO summit in Wales, the Russian president, Vladimir Putin, announced a plan for peace talks in Ukraine. Western leaders, breathing a sigh of relief, expressed a “cautious optimism” for the ceasefire. But the West’s quiet acquiescence to the Russian plan has left Ukrainian leaders with few options.

In the weeks leading up to the NATO summit on September 4, Russia escalated its military invasion of Ukraine.

In late August, Russian armored troops and weapons crossed Ukraine’s southeast border in what Ukrainian officials called a “stealth invasion.”  The counteroffensive pushed back the Ukrainian military’s previous gains into separatist controlled territory. Following the offensive, the newly armed and reinforced separatists gained control of a long stretch of Ukraine’s southeast border with Russia, moving the front further south toward the strategic port city of Mariupol. Taking Mariupol would give Russia direct land access to Crimea — the Ukrainian peninsula annexed by Russian forces in March — which Russia has struggled to supply with basic goods and services. NATO estimates that “several thousand” troops and hundreds of combat vehicles are operating in Ukraine. Russia continues to deny involvement.

For their part, Western leaders, including President Barack Obama and the German Chancellor Angela Merkel, have been unwilling to use the “I-word” — invasion — when referring to Russian action in Ukraine. The day before the NATO summit, speaking in Estonia, President Obama made it clear that the United States would not provide military support to Ukraine. Obama’s comments reaffirmed the United States’ commitment to NATO but did little to quell growing fears of Russian aggression among the Baltic States. Formerly Soviet states, the Baltics are now the only EU and NATO members to share long borders with Russia. Estonia and Latvia’s entire eastern border is with Russia. Further south, the Russian exclave of Kaliningrad is strategically wedged between Lithuania and Poland. Seeing a newly awakened Russian bear hungry to restore its former glory, the Baltic States and Poland have not shied away from using the “I-word” to push for a stronger NATO and EU response on Ukraine.

The Baltic States have good reason to fear. Putin’s policy track record in Ukraine is littered with contradictions and broken promises. Putin’s seven point peace plan laid out prior to the NATO summit is no different. But with the West’s unwillingness to change the terms of the game with Russia, Poroshenko has two options: continue a losing military operation that has already claimed over 3,000 lives or negotiate with an untrustworthy enemy.

On Friday, September 5, the Ukrainian president conceded to Putin’s plan and called for a ceasefire of government forces. In a statement, Poroshenko said that his decision to stop the military operation was based on an agreement signed by Russia, separatist leaders, and the Organization for Security and Cooperation in Europe (OSCE). By signing the ceasefire agreement with separatist leaders, Poroshenko has opened the door to negotiations with groups that his own government has consistently referred to as terrorists.

Even this concession may not prove to be enough.  As the ceasefire went into effect on Friday morning, Russian troops attacked Ukrainian positions near Mariupol with heavy artillery and missile fire. By Sunday morning, two days after the ceasefire went into effect, the Mariupol city government reported that separatists, backed by Russia, shelled checkpoints near the city in the middle of the night, killing one civilian and injuring three others. This pattern is familiar: in June, Poroshenko ended a ten day ceasefire because separatists had persisted in attacking government troops and civilians.

The West’s “cautious optimism” should have given way to a sobering realism about the ineffectiveness of Western policy toward Russia, but it has not. Rather, EU leaders agreed to institute a fourth round of economic sanctions against Russia. The new measures place modest restrictions on state-owned Russian energy and defense firms and further limit dual-use civilian and military exports but fall short of broader restriction on entire industries or the energy markets. The last and toughest round of sanctions took effect in July. Since then, Russian intervention in Ukraine shifted from a barely covert operation to an overt military campaign with Russian tanks rolling over the Ukrainian border.

If the purpose of the sanctions was to deter Russian aggression, by that measure, they have failed. If the purpose was to show Russia that there are economic consequences for military invasion, then they have failed by that measure as well. So far, the sanctions have not affected the daily lives of most Russians, and Russian public support for Putin’s policy on Ukraine remains high. There are signs that the Russian economy is weakening: the ruble has lost 10 percent of its value since the beginning of the year and the economy is stagnant. The West hopes that in the long-run, the economic pressure will weaken Putin’s resolve in Ukraine. At best, this hope will be partially fulfilled: economic pressures could still shift domestic politics against Putin. At worst, the West’s Pollyanna worldview will give Putin everything he wants: a frozen conflict in eastern Ukraine and the West’s long-term complicity.

As a long-term strategy, sanctions could eventually constrain Russian action. But the Ukrainian crisis requires short- and medium-term solutions, which the West has been reluctant to explore. NATO’s plan to deploy a 4,000-strong rapid reaction force to the Baltic States is a step in the right direction, but it may come too late to influence Russian policy in Ukraine.

Western leaders squandered a key opportunity to take a strong stance against Russia after the Crimean annexation in March. If the NATO force was deployed six months ago, Putin may have thought twice about invading Ukraine. Putin has exploited this tactical mistake masterfully. As Russia continues to set the agenda on Ukraine and the West continues to implement the same ineffective strategy, Ukrainians feel increasing abandoned. The crisis has reached a point of no return, and Poroshenko is left with no options. 

Alina Polyakova, Ph.D., is a research scholar at the Woodrow Wilson International Center for Scholars in Washington, D.C. The views expressed in this article are solely those of the author.

TopicsSecurity RegionsUkraine

Ukraine: New Online Resources from the Center for the National Interest

The Buzz

Washington, DC – The Center for the National Interest is pleased to announce the launch of Ukraine Watch, a clearinghouse for information, resources, analysis, commentary and reporting concerning the ongoing crisis in Ukraine.  Ukraine Watch is available at http://ukrainewatch.cftni.org.

As the situation in Ukraine continues to develop, Ukraine Watch will inform researchers, journalists and the public and present competing views, including official perspectives.  It will also include Ukraine-related commentary from the Center’s award-winning foreign policy website, The National Interest.  “Though the crisis in Ukraine could define core elements of American foreign policy for years to come, there has been little debate in the United States—and even less information.  We hope that Ukraine Watch will contribute to a rich, informed and intellectually rigorous discussion of U.S. policy based on facts and on U.S. national interests,” said Center Executive Director Paul J. Saunders.

About the Center for the National Interest: The Center for the National Interest is a non-partisan public policy institution established by former President Richard Nixon.  Its current programs focus on U.S. relations with China, Japan, and Russia as well as energy security and climate change, non-proliferation and arms control, and resources and conflict.  The Center publishes the bimonthly foreign affairs magazine The National Interest, at www.nationalinterest.org.  The Center’s supporters include a variety of foundations, corporations and individuals, including Carnegie Corporation of New York. 

TopicsSecurity RegionsUkraine

Could the US Fight ISIS and China with the Same Weapons?

The Buzz

As President Obama struggles to find the right policy prescriptions for dealing with the growing challenge of the Islamic State in Iraq and Syria (ISIS), other parts of the world are ripe with challenges calling for Washington's attention. In the economically dynamic Asia-Pacific region, the People's Republic of China, through a variety of tactics, is challenging Washington's military dominance. If America found itself in a conflict with Beijing while attempting to use the same military platforms and strategies to fight a foe like ISIS, it could find it is militarily ill-equipped and unready for the challenge.

At present, Washington is well-suited to the task of taking on ISIS. U.S. airpower aboard aircraft carriers or short-range strike aircraft at present can surge quickly almost unchallenged and strike targets at will throughout Iraq and even in Syria if needed. Unmanned Aerial Vehicles (UAVs) can rapidly move into areas of surveillance interest, gather intelligence, and even strike targets largely without fear of reprisal. Even the most vilified of options, placing large amounts of "boots on the ground," if needed to stop, say, an ISIS march on Baghdad or Erbil, would be operationally possible as ISIS forces would be unable to stop an American or allied build-up. Indeed, one of the greatest military assets the United States has taken for granted since the 1991 Gulf War — being able to surge large amounts of military assets into a theater of combat operations — would be something Washington could very much count on against ISIS if the moment ever came. America could largely use the same types of assets and strategy it has relied on since the end of the Cold War — building forces in mass near a conflict zone, short range airpower, carriers based offshore, long-range strike aircraft (B-52, B-1 and even B-2 bombers) and cruise missiles to strike possible ISIS targets at will.

To read the rest please visit The Hill

Image: U.S. Air Force Flickr. 

TopicsSecurity RegionsChina

Time for Congress and the President to Work Together on ISIL

The Buzz

This past Sunday, September 7, President Barack Obama sat down for an exclusive interview with the new host of NBC’s Meet the Press, Chuck Todd.  If you happened to miss the interview, it’s worth a look: despite persistent questioning by Todd on the national security threat posed by the Islamic State of Iraq and the Levant, President Obama laid out in succinct detail what he and his administration plan to do.  The “we don’t have a strategy yet” comment that the president made last week in a late summer press conference (remember the suit?) is clearly behind him, and regardless of what some commentators and newspaper editorials continue to say, the White House does in fact have a strategy: enlist the support of key Sunni Arab states in the effort, use targeted U.S. military force against ISIL’s bases and leadership, squeeze its financing by obstructing the donations the group receives from wealthy donors in the Gulf Arab states, and ensure that Washington’s European allies (principally Great Britain, France, and Germany) are actively contributing to the campaign. 

For a lot of Republicans on Capitol Hill (I’m not naming names), this strategy is far more multilateral and time-consuming than they would like.  Building an international “core coalition” of states to tackle ISIL from multiple directions is not as sexy as employing the U.S. Air Force to, as Senator Ted Cruz said recently, “bomb them [ISL] back to the stone age.”  President Obama, however, doesn’t seem to be phased by the criticism that he’s been receiving; he is scheduled to give a speech to the American people this Wednesday, September 10, to double-down on his approach to the ISIL problem while explaining to the American people precisely what the objectives are and what it will take to successfully meet them.

Yet there was one line of questioning in the interview that could potentially cause the president some trouble over the next two weeks as he rolls out the anti-ISIL strategy to the public: Obama appears to believe that it’s not necessary to come to Congress for an up-or-down vote before the first U.S. fighter-bombers and drones start striking ISIL targets in Syria. 

Asked by Todd whether he will be asking for Congress to vote on his policy during the short time the chamber is in session this month, the president implied that he has all the authority he needs his under Article II constitutional powers act kinetically.  “I’m confident that I’ve got the authorization that I need to protect the American people,” Obama said, “and I’m always going to do what’s necessary to protect the American people.”  Although President Obama remarked that it’s important for Congress to “buy-in” to his plan, he wasn’t exactly clear what “buy-in” means.

This comment will naturally rub some lawmakers the wrong way.  Inherent in the checks-and-balances system of the U.S. political system is the give-and-take between the executive and legislative branches, and this dialogue is no more important than on the eve of a new war or before the acceleration of U.S. military action in some corner of the world.  One of the most consistent talking points that the Obama administration uses during press briefings or news conferences is the “consulting with Congress” line.  White House Press Secretary Josh Earnest states is prone to saying that President Obama remains committed to consulting with members of Congress before big decisions are made.  The only problem, of course, is that ‘consulting’ could mean a lot of things; it’s difficult, for instance, to see how simply informing congressional leadership of what the White House plans to do is the same as lobbying for their support.

Congress has a tendency to kick tough problems down the road for later consideration, especially during a tough re-election year when everyone is trying to keep their jobs and stay in their seats.  Lawmakers are only scheduled to be in session for 12 days before they recess again for the October campaign season.  But at least on this question—the question of ISIL—some members are not using the short legislative calendar as an excuse to abdicate their responsibility on matters of war and peace.  There are currently four bills (filed by Representatives Wolf and Issa, and Senators Nelson and Inhofe) that would authorize the president to expand air operations against ISIL into Syria.  If Congress genuinely wants to become an integral part of the debate, they have legislation to work from.

Normally, the president sends a request to Congress to kick-start the entire process of crafting an AUMF (authorization to use military force).  If the White House doesn’t follow this precedent, it will be up to Congress to press the issue.  And if Congress does press the issue with a vote, the president should applaud its willingness to have a debate and act on an issue of such grave concern to U.S. national security. 

As Obama once said, “our democracy is stronger when the President and the people’s representatives stand together.”  That remark as said on August 31, 2013, when the president asked Congress to authorize the use of military force against the regime of Syrian President Bashar al-Assad.  Nothing today changes that assessment.   

Image: White House Flickr. 

TopicsSecurity RegionsUnited States

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