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The Energy Policy and Conservation Act (EPCA), enacted in 1975 in the aftermath of the 1973 oil crisis, sought to clarify US energy policy and promote energy security. Nearly 40 years later, the US has met many of the conditions for energy security, and, as an unintended consequence, the provisions of the Act have come to serve the interests of narrow groups within society rather than contribute, in any real sense, to American energy security. The EPCA, formulated to treat the energy market of the 1970s, restricts market efficiency in exchange for security by making energy more autarkic; it is these market inefficiencies that enable and give rise to rent-seeking. This rent-seeking compromises energy security by attempting to keep domestic energy prices low, thereby encouraging consumption and discouraging production. Thus, the EPCA presents a case of risk of unintended distributional conflict that undermines the original objectives of the legislation. The EPCA offers a study of the need for periodic review and revision of long-standing laws and definite objectives for legislations to better determine when interest groups are violating the intent of the law.

Theoretical and Analytical Framework

            This analysis seeks examine the dynamics and political economy of the American energy market and interest groups therein. The analysis will use Meadows’s systems theories to provide structure and address the effects of the Act on the individual oil and gas markets, thereby clarifying the beneficiaries and losers from the present conditions in the market. The distributional conflict will be examined through the lens of Thurow’s The Zero-Sum Society and Mancur Olson’s The Rise and Decline of Nations, supplemented by his earlier work, The Logic of Collective Action.

The EPCA sacrificed market efficiency for the sake of security in 1975, primarily by limiting the exports of oil and gas; it thereby enabled distributional conflict by granting undue economic benefits to those that benefit from export restrictions. The market changes and export restrictions in the 1970s create excess domestic supply and lower energy prices in the present. Applying the aforementioned theories of special interests, the benefactors of the present situation, those benefiting from low domestic energy prices, seek to perpetuate the market inefficiencies, while opposition groups, those wanting to sell energy at world prices, seek to overturn them. The small number of players in the distributional conflict ensured that interest groups organized quickly and held enough power to shape the distributional conflict and at a minimum delay, if not prevent, changes to the lucrative niches created as a result of the EPCA. It is this rigidity that undermines security by discouraging new production and adoption of new technologies, both of which depend on high prices. As such, the Act creates the conditions for the existence of interest groups, which then undermine the aims of US energy security.

Letter of the Law

            Following the 1973 oil crisis, the EPCA sought to improve energy security in a US economy configured to rely on inexpensive and readily available oil. The EPCA sensibly tried to improve US energy security by adding resilience to the energy market, primarily by addressing supply and demand and the inelasticities therein. The Act sought to encourage diversification away from the use of oil by supporting alternatives such as additional coal usage. The Act also created the Strategic Petroleum Reserve, consisting of up to one billion barrels of oil, with a minimum set at 150 million barrels to serve a buffer in the event of a supply disruption, though the minimum would have only constituted 23 days’ worth of imported oil in 1975.[1] The Act further gave the president the ability to implement contingency plans in the case of an energy emergency, with the added ability to impose conservation and rationing on ordinary consumers and industry in times of extraordinary distress.

The EPCA grants the President special control over the export of fossil fuels. Section 103 of the Act allows the President to “promulgate a rule prohibiting the export of crude oil and natural gas produced in the United States”[2] and “exempt from such prohibition…exports which he determines to be consistent with the national interest and the purposes of [the] Act.” As such, the executive enjoys a mandate to impose and remove export restrictions when it suits the national interest, defined nebulously. However, the Act provides a special caveat that the restrictions “shall not apply to any covered product if such covered product is manufactured, sold, or held for sale for export from the United States.” As a result, the Act effectively prohibits the export of crude oil and natural gas, but specifically exempts products derived from crude oil and natural gas – the exact products that most consumers and industries use, such as gasoline and diesel. In the 1970s this caveat was irrelevant as few such products were exported. However, the export ban and the caveat have created substantial market inefficiencies that encourage rent-seeking by beneficiaries.

The Spirit of the Law

After the 1973 oil embargo, President Nixon introduced his Project Independence initiative, maintaining that by 1980, “Americans will not have to rely on any source of energy beyond [their] own.”[3] He urged Americans to “adopt certain energy conservation measures to help meet the challenge of reduced energy supplies,” and used executive power to introduce limited energy efficiency improvements and lift restrictions on Alaskan oil production. With Nixon’s resignation, Ford carried on the initiative, making energy the main issue in his first state of the union address. In a speech given upon signing the EPCA, Ford made it a priority to give “industry an incentive to explore, develop, and produce new fields” and “expedite the decontrol of crude oil [prices] in order to increase domestic production.”[4] He raised import duties on oil to encourage domestic production and discourage consumption. The Act focuses on bolstering energy security, achieved through increased resilience by diversification of energy sources, promotion of domestic production and conservation, and diversified import partners.

The overarching US goal was to ensure that it would not be held hostage to foreign producers, sacrifice growth or suffer a debilitating transfer of wealth from the US to oil producers. Energy prices were relegated to a secondary standing, given that measures taken at the time increased prices directly and indirectly, coupled with a recognition that a sustained level of higher prices leads to increased supply in the future. With these aims, the low domestic energy prices in the present are not an original aim of the legislation.

The Oil Market

            In order to fully understand the manner in which the EPCA creates the opportunities for rent-seeking, establishing a systemic framework of the oil industry is necessary. In this system, two stocks exist: crude oil and refined oil products. Domestic and foreign producers both contribute to the stock of crude oil. Under the EPCA and presidential discretion, most crude exports are illegal and, because oil is usually not useful in its crude form, this stock can only be converted into refined products. The refineries and petrochemical companies form the intermediary and control both the outflow from the oil stocks and the inflow into the oil product stocks. Finally, the oil product stock outflows in two directions; it can flow to domestic or foreign consumers due to the lack of export restrictions on oil products. As a result, the US is a net exporter of oil products as these exports usually receive a higher price on the world market.

Adding further complexity, it is important to recognize that crude oil differs widely in quality, with the highest quality oil being low in both sulfur content and viscosity. Most US refining capacity, 52%,[5] is configured to accept low quality crude from Canada, Mexico, and Venezuela. With the US tight oil boom, the market has experienced an influx of high quality crude to the domestic US market that has no choice but to be sold to US refiners.[6] Ordinarily, high quality crudes command a premium on world markets as they can be converted into a larger quantity of high value refined products.

The EPCA artificially limits crude exports and thus gives rise to an anomalous situation in which high quality crudes cannot command their due premium. This is the result of inelastic supply as independent producers of shale oil continue producing so long as prices are above average variable costs. This has created a large and inelastic supply of domestic oil. As US refineries control nearly the entire demand for this oil, in addition to maintaining access to foreign supply, they receive inordinate market power. Furthermore, environmental regulations prevent an expansion of refining capacity, with the most recent US refinery coming online in 1976.[7] As a result, the refineries are able to receive high quality oil feedstocks at low prices and then sell the refined products on the international markets at a substantial markup. This market inefficiency has resulted in a record spread for refinery operating margins between the US and Europe.[8] With the prospect of liberalizing crude exports, refiners have formed an interest group to maintain the system that awards them undue economic profit. This mismatch risks curtailing the energy boom by disincentivizing additional production.

The Natural Gas Market

While similar to the oil industry, the natural gas market has its own nuances, though it remains similarly impacted by export restrictions. Natural gas is not a globalized commodity; it is confined to regional markets due to transportation costs. As such, the primary supply of natural gas in the US comes from domestic producers with a limited imports. Natural gas does not need to be processed to be useful, thus there is no intermediary. It is bound to pipelines, creating several gas stocks that flow from producers to consumers in regional markets. The primary consumers of gas are private end consumers for heating, power plants for electricity generation, industrial consumers, and chemical companies that use natural gas as feedstock. All four of these consumers benefit from cheap natural gas resulting from export restrictions.

Similar to independent oil producers, independent natural gas producers must continue producing to recover initial investment costs, creating the large inelastic supply of gas that brought prices down from a high of $12.69 in 2008 to $4.12 in November 2014.[9] This regional market structure has resulted in vast differences in regional prices and substantial arbitrage opportunities. As a result of restricted exports, the spread between US natural gas prices and those in Japan, the most expensive developed market, remains at $10.25 per million BTU of energy.[10] Given this lucrative opportunity for arbitrage, US natural gas producers, naturally, want to lift the export ban to take advantage of the wide regional price disparities. Although the Executive branch has granted a few export licenses, demand for such licenses far outstrips the pace at which they are granted. US natural gas consumption has increased dramatically in recent years, as low prices discourage conservation and encourage profligate usage. Gas consumption has outpaced real GDP growth by 1.6%[11] on average since 2007, when the US reversed its historic decline in gas production. Thus, export restrictions directly benefit the end consumers of gas.

The New Realities of American Energy

            Differentiating between the US in 1975 and 2014 serves to highlight the great strides taken to improving American energy security, both as a result of the EPCA and exogenous factors. The shock of the 1973 crisis and subsequent legislation did serve to diversify the US economy away from oil. In 1975, the US used about 11 times more petroleum for power generation, which presently accounts for less than 1% of oil consumption. [12] This difference has been filled with increased usage of coal and natural gas. Presently, nearly 70% of oil consumed in the US is used in the transportation sector where demand is most inelastic, up from 55% in 1975.

The US has also become much less energy intensive per dollar of GDP. Structural changes shifting the economy to services and increases in energy efficiency and conservation resulting from high prices in the 1970s and 2000s have been largely responsible. With the boom in unconventional oil and gas since 2009, which has come at a time of lower per capita demand, the US is well-positioned for energy security. Additionally, booming Canadian oil production and exports remain captive and oriented for the US market. As a result, the International Energy Agency predicts that “collectively, the United States and Canada become self-sufficient in oil before 2030.”[13] The goals set out in the initial impetus for the EPCA, decline in imports, decline in dependence on foreign producers, increased diversification and alternatives, and increased conservation, without sacrificing economic growth to achieve it, have all been achieved. The US has attained energy security as a synthesis of market and legislative forces.

Rent Seeking in the Oil and Gas Sector 

            The rent-seeking that the act has enabled is most apparent in the organization of separate interest groups seeking to influence policy decisions on the liberalization of oil and gas exports. Given that the recent US production boom and decrease in overall demand has moved the prospect of exporting substantial quantities of oil closer to reality, this has increased the impetus for organization among the various benefactors and losers of the present system. The EPCA gives rise to this particular situation as an unintended consequence, which encourages distributional conflict that works against energy security.

The benefactors from the oil export ban remain the refiners which benefit from low US oil prices and high world prices, while the oil producers do not receive a higher price for their oil. The oil industry’s longstanding interest group, the American Petroleum Institute, (API) has already begun the lobbying effort to lift the ban. A more specialized group, Producers for American Crude Oil Exports, (PACE) quickly came into existence in 2014 and represents only a few members in their support for lifting the ban.[14] Together, API and PACE represent all major integrated oil companies and many of the independent producers, all of which forgo revenues from the aforementioned anomalous oil pricing scheme. Consumers and Refiners United for Domestic Energy, (CRUDE) is comprised of independent refiners and opposes lifting the export ban.

Both sides are comprised of a relatively limited number of companies; API, by far the largest, only has about 600 members, of which only a handful represent a substantial portion of the market. API’s established organizational capacity has supplied a quick lobbying response. CRUDE and PACE have fewer members and thus have been able to lead an accelerated lobbying effort convince the administration and the public that their position is correct due to faster cost negotiations. As expected in Olson’s theoretical background, the consumer lobby is unorganized because an individual’s benefits from lobbying are diluted while costs are constant and cannot overcome mass freeriding. Insofar as the public is concerned, lower energy prices, most visibly in cheaper gasoline prices, are the major concern. The complexity of energy markets and the uncertainty over the effects of lifting the export ban has prevented a strong public response in favor of either side.

Within the natural gas sector, America’s Energy Advantage (AEA) and the American Public Gas Association (APGA) constitute the primary groups opposing gas exports. Both groups assembled shortly after the price crash in 2009 that enabled the prospect of exports. The APGA represents utilities accustomed to receiving cheap gas to sell to end users while the AEA represents the united interests of the largest chemical, fertilizer, aluminum, and steel companies in the US, which either rely on cheap energy derived from natural gas or cheap natural gas feedstocks to manufacture their end products. The AEA and APGA display all the traditional characteristics of an interest group: small size, organizational capacity, seeking to delay or prevent harm to their accustomed business. Once again, the API represents the gas producers seeking to liberalize gas exports from the US, and the individual consumer lobby remains unorganized.

Unintended Consequences

The EPCA was enacted during a time of unprecedented national duress; its main objective was the implementation of immediate measures to improve resilience and address slow-moving variables such as general oil demand, efficiency, and conservation. Despite imposing measures and tariffs to raise prices and spur domestic energy production, it was not intended to be redistributional legislation. This is most evidenced in the strict price controls imposed on oil and gasoline in the 1970s and the supplemental Crude Oil Windfall Profit Tax Act passed in 1980 after prices were deregulated to prevent extraordinary oil profits due to legislative action.

While the provisions of the Act did work to improve security in the 1970s, the changing market realities have enabled rent-seeking. Interested parties seek to preserve their own economic security by promoting the autarkic measures that keep domestic prices low as expected in Thurow’s formulation of interest groups. The exceptions for refined product exports, which were negligible in the 1970s and 1980s, have currently reached record levels[15] and can hardly be described as promoting energy security. These new realities of American energy of low domestic prices, unforeseen in 1975, encourage profligacy and discourage new oil and gas exploration and production, both of which retard technological progress by disincentivizing new production and efficiency solutions when energy is so cheap. The lobbying of CRUDE, AEA and APGA that focus on preserving market inefficiencies are particularly damaging to energy security and self-serving. The lobbying to remove export restrictions, while also self-serving, increases society’s income and government revenues and promotes conservation and production that feeds into energy security. The lobbying for market inefficiencies serves to make the US less resilient to future shocks and thus undermines the EPCA’s original aim of energy security. The EPCA addresses the energy market of the 1970s and presently provides the circumstances through its export bans that undermine the original aim.

Conclusion

            The EPCA functioned well in the 1970s energy market to bring about increased US energy security. However, the same inefficiencies that helped bring about energy security in the 1970s function to benefit consumer groups in the present with booming oil and gas production held captive due to EPCA export restrictions. This has led to a distributional conflict as the beneficiaries lobby to preserve their economic security, inadvertently undermining the very aims of the EPCA by attempting to keep energy prices low and decreasing US resilience to future energy shocks.

[1] Data derived from British Petroleum. BP Statistical Review of World Energy June 2014. (London: BP, 2014).

[2] US Congress. House of Representatives. Energy Policy and Conservation Act of 1975. H.R. 2. 94th Congress, 1975.

[3] Richard Nixon, “Address to the Nation About Energy Policy.” 25 November 1973

[4] Gerald Ford, “Statement on the Energy Policy and Conservation Act” 22 December 1975.

[5] Calculated by the author EIA, “Refinery Utilization and Capacity.” 20 December 2014

[6] EIA, “Attributes of Crude Oil at US Refineries Vary by Region.” 26 September, 2012

[7] Ben Lefebvre, “Shale-Oil Boom Spurs Refining Binge.” The Wall Street Journal. 2 March 2014.

[8] EIA. “Lower Crude Feedstock Costs Contribute to North American Refinery Profitability.” 5 June 2014.

[9] EIA. “Henry Hub Natural Gas Spot Prices.” 20 December 2014.

[10] This data derived from US Henry Hub spot prices as of December 10, 2014, and Japan LNG Import prices for November 2014

[11] Derived from BP and IMF figures by the author

[12] Data compiled by author from EIA Data – EIA, “Monthly Energy Review – November 2014.” 20 December 2014.

[13] International Energy Agency, World Energy Outlook 2013. (Paris, France: IEA, 2013) p 76-77.

[14] Jim Snyder and Brian Wingfield. “Oil Producers Form New Group to Lobby to Lift Crude Export Ban.” Bloomberg. 24 October 2014.

[15] Brad Plumer. “U.S. oil exports have been banned for 40 years. Is it time for that to change?” The Washington Post. 8 January 2014.

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