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The Impact of Pricing Regulations on Argentina’s Energy Sector

23 Monday May 2016

Posted by V. Markov in Argentina, Fracking, Natural Gas, Oil, Vaca Muerta

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Argentina, Economics, energy, Energy Independence, Energy Security, fracking, gas, Kirchner, LNG, Macri, natural gas, oil, oil and gas, peronism, peronismo, Politics, security, shale, unconventional, unconventional resources, Vaca Muerta

Introduction

Since 2001, Argentina has tried to achieve the goals of promoting domestic production and supporting consumption of energy simultaneously. In a departure from the deregulation of the 1990s, Argentina’s government imposed a pricing regime to maintain the stability and affordability of consumer energy prices in order to stimulate economic growth and preempt the possibility of hyperinflation. Exports of energy were curtailed through a system of capital controls and export duties. As consumption rebounded following the 2001 economic crisis, producer prices remained below the prices for energy imports, thereby discouraging investment and volume growth. In response, the government instituted a system of producer price controls and subsidies to encourage investment, making up the difference between producer prices and controlled prices through federal budget outlays. Argentina’s regulatory system accomplished its goal of stimulating demand and limiting exports, however, in doing so it introduced distortions in the market that prevented the market from balancing with domestic production. The Argentina case study provides a lesson for countries seeking to accomplish contradictory goals through regulation, establishing a need for professional technocratic regulation, rather than regulation by decree, and flexibility in overcoming the interaction effects caused by intervention in the markets.

Energy Regulation between 1989 and 2015

            Following a period of liberalization and deregulation in the 1990s, Argentina’s energy sector has been increasingly regulated since the 2001 economic crisis. The energy sector operates under the basic 1967 Ley de Hidrocarburos (Law No. 17.319),[1] which establishes hydrocarbon reserves as the patrimony of the nation and grants the Executive wide powers to grant concessions and regulate energy. The energy sector became heavily regulated until the Menem administration (1989-1999) pursued a vast liberalization of the economy. During this time, the Congress promulgated the Ley de Reforma del Estado (Law No. 23.696)[2] in 1989 with the aim of privatization and deregulating industry. The Menem reforms enabled private participation in oil and gas, deregulated prices, and culminated in the full privatization of YPF, a process that started with Law No. 24.145 of 1992.[3] During this time, Argentina’s economy and energy sector underwent rapid growth. Despite the oversupply in the international oil markets and the weakness of Brent prices, Argentine oil production increased 76% between 1990 and 2001, while gas production more than doubled as presented in Figure 1.

Figure 1

1

Following the 2000-2001 economic crisis, the Argentine government took a much more interventionist role in the energy sector and economy in general. Seeking to stimulate economic growth and prevent a return to hyperinflation, the short-lived Duhalde administration (2002-2003) issued Decrees 310/2002 and 809/2002, which established export restrictions on oil and oil products, including a 20% export duty.[4] Export duties were extended to gas in 2004. The administration further began controlling energy prices, particularly freezing rates in the electricity sector.[5] Law 25.561, passed in 2002, established emergency control measures over the exchange rate and prices.[6] Further clarifying its role through Resolution 1104/2004, the Ministry of Energy and Mines established formulaic pricing for energy.[7] Both the Nestor Kirchner (2003-2008) and Cristina Fernandez de Kirchner (CFK, 2008-2015) administrations maintained the price controls. Although export duties were introduced as temporary emergency measures, they were effectively made permanent in 2007 through Law 26.217.

Consumer Prices and the Impact on Demand

While the price controls did appear to stimulate economic growth and promote stability in the early 2000s, the lack of political will to raise consumer prices stimulated demand beyond what would have been commensurate with economic growth. As a result of the price control legislation coming into force after 2001, energy prices were denominated in pesos and remained nearly fixed, in spite of wide fluctuations in the USD prices of commodities. Natural gas prices, as presented in Figure 2, remained close to their 2003 level until 2013, despite peso inflation averaging 17% per year between 2000 and 2014.[8] Figure 3 shows vehicle fuel prices at the official exchange rate, representing an unreactive pricing system. Faced with punitive export terms and pressure from the government to maintain prices, producers had no choice but to direct domestic production to the market at low prices.

Figure 21.png

Figure 31

Demand for controlled products, gasoline and transportation fuels, natural gas, and electricity, grew faster after 2001 than over the period 1990 – 2001. Compound annual growth rates for fuel and product demand are presented in Figure 4. As presented in Figure 5, demand for oil products, gas, and electricity grew rapidly in relation to its 2002 level, in total reaching 150% of 2002 demand by 2013. Consumers expanded structural demand for energy, leading to a large growth in residential energy demand per capita, as show in Figure 6.  The low fixed costs for products disrupted the distribution business, garnering complaints from the Argentine gas distributors trade group, citing the inability of distributors to maintain operations at current prices; GasNatural Fenosa, for example, depended on federal assistance of 515 million pesos for operation and maintenance in 2015.[9]

Figure 4

Growth in Demand by Product and Sector CAGR 1990-2013 CAGR 1990-2001 CAGR 2002-2013
Transport – Oil Products 1.5% 0.8% 3.2%
Residential – Gas 3.9% 4.1% 4.2%
Residential – Electricity 5.7% 6.4% 5.9%
Commercial – Gas -1.2% -5.0% 2.9%
Commercial – Electricity 6.5% 9.3% 4.6%
Industry – Oil Products 5.4% 12.9% -0.2%
Industry – Gas 2.3% 1.7% 2.8%
Industry – Electricity 3.7% 4.4% 3.6%

Figure 5

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Figure 6

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Regulatory Impact on Industry

            The regulation of the wider economy and energy sector in particular created large distortions in supply and demand that led to a severe decline in the upstream sector, in terms of investment, production, and wells drilled. Figure 7 presents private investment in the energy sector over the 2000s. Since consumer prices were fixed and could not react to increasing demand, prices in the upstream sector remained depressed, depriving the market of signals to raise production and seek new supply. The aforementioned export duties were introduced as a measure to maintain domestic supply for the market, yet only served to extinguish exports. Over the five year period following the 2002 introduction of export restrictions on oil, crude oil exports declined by 79%, despite production only falling by 12% over the period, as shown in Figure 8. Similarly, gas exports collapsed five years after export duties were introduced in 2004, falling 87% while production only decreased 7% (Figure 9). Imports of gas rose 36% during the period. The inability of producers to sell at realistic market prices, in either the domestic or international markets, disincentivized investment and production. Restrictions on repatriations for foreign firms, currency controls, and denomination of energy prices in pesos made Argentina even more unattractive as an upstream market.

Figure 7

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Figure 8

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Figure 9

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Regulation of Production

Seeking to address the deteriorating energy balance and decrease the outlays of foreign reserves to purchase energy in the international markets, the government sought to stimulate domestic production through a complex system of subsidies and producer pricing regulations. Wellhead prices for natural gas prices remained below $2.30/MMBtu until 2012 as a result of import competition and fixed consumer prices. Relative to international benchmarks, wellhead oil prices were also depressed as a result of an autarkic market and consumer price controls.

During the CFK administration, the Ministry of Energy and Mines declared Resolution 24/2008,[10] introducing the Gas Plus program, which enabled producers to receive prices greater than the controlled prices agreed to between the Ministry and producers. Similarly, the oil market received tax credits through the Oil Plus program, as part of Decree 2014/2008. Seeking to eliminate gas exports to keep the domestic market supplied, Resolution 127/2008 further raised the gas export tax to 100% of the highest price between Bolivian and LNG imports. Natural gas was subject to greater taxation as a result of its systemic importance to the Argentine economy, penetrating all sector including transport, and thus was deemed more important for retaining for the domestic market. This taxation stands in contrast to oil, which was taxed to a lesser degree and provided foreign currency export revenues for the government.

As the problem of domestic production became more acute by 2012, the government took more drastic steps through Decree 1277/2012, establishing the Commission for Planning and Strategic Coordination, and Law 26.741, nationalizing YPF-Repsol. The Commission gained pervasive powers to regulate the energy sector, including price-setting and approvals of private investment plans. The ultimate intention of the Commission was to ensure that firms were investing in the upstream sector in accordance with government plans for production. The expropriation of YPF similarly sought to bring greater control over the largest E&P player in the country in order to develop resources more quickly, particularly prolific unconventional reserves.

Production Subsidy Structure

The Commission, acting under a series of decrees, laws, and resolutions passed between 2012 and 2015, created a complex series of pricing regulation that sought to simultaneously subsidize both producers and consumers. In particular, Resolution 1/2013 set the wellhead price of natural gas to $7.50/MMBtu for production exceeding levels planned by the Commission. The federal budget covered the difference between the $7.50 price and the market price, which typically remained below $3/MMBtu, leading to large expenditures on energy. The remaining resolutions are summarized in Figure 10. The Commission established differential pricing for producers based on the final use of the gas, the date of operation, and the resource basin. Wells operating before 2013 may receive a price between USD $4/MMBtu and $7.5/MMBtu, depending on the production curves and whether or not the gas is reinjected. Projects streaming after 2013 sell into the market and receive the difference from the government to equal a wellhead price of $7.5/MMBtu.[11] Basins make a further difference, with the highest prices reserved for Neuquén Basin shale. Production for CNG networks receives a price of 0.89 ARS/m3.  The complexity of the subsidy structure, not only introduces uncertainty over its maintenance by political forces and added transaction costs, but also ensures that only large producers are able to meet their investment targets and field the legal expertise to capture the subsidy rents.

Figure 10

Law Effect
Decree 929/2013 New E&P projects can export up to 20% of production tax-free
Resolution 60/2013 Price range for incremental volumes for small gas producers set to between USD $4.00 and $7.50/MMBtu.
Law 27.007 Amends 1967 law extending length of concessions and lowers investment requirements
Resolution 139/2014 Defines rights of acquired companies to subsidies
Resolution 123/2015 Better defines participation in subsidy program
Resolution 185/2015 More firms eligible for production subsides

The oil sector, historically offering terms similar to international oil prices, attained a large degree of support following the 2014 oil price collapse. The CFK government retained pricing support at $77.5/bbl[12] at the wellhead in order to encourage investment and prevent an increase in unemployment in sensitive provinces. The Macri administration, coming into power at the end of 2015, lowered price support to USD $67.5/bbl for light Neuquén crude and $54.90/bbl for heavier San Jorge basin crude.

The combined total of energy subsidies, for both the upstream and consumer segments, began to take up an increasing portion of the federal budget. The budgetary cost in 2015 amounted to $18.4 billion USD, primarily requiring servicing through foreign reserves. After the accession of the Macri administration, Decree 272/2015 abolished the Commission and its duties were transferred to the Ministry of Energy and Mines. The Macri government began to unwind the subsidy structure, lowering guaranteed prices at the wellhead as previously mentioned and permitting free exports and imports and repatriation of 70% of export revenues. The pro-market agenda has already attracted investment, though years are likely to pass before the investment materializes into production growth.

Argentina: A Case Study in Regulation

Argentina’s energy regulations are the result of a series of incremental regulatory measures seeking to react to the problems caused by the initial energy price controls. The primary regulations of 2001 intended to stabilize prices and stimulate economic growth were successful, while export taxes did diminish exports, providing the domestic market with stranded supply intended for export markets. However, the temporary measures became permanent in practice and began to severely distort the market. Fear of political unrest ensured that only additional regulation, rather than amendments and rollbacks of previous measures, were possible. In accordance with basic economic principles, the price ceilings on energy resulted in a supply shortage as producers found it uneconomical to continue investments. Subsequent regulations sought to spur investment through a series of command-and-control measures and subsidies. However, each incremental regulation failed to bring about a balanced energy market.

Argentina provides a case for the need of an independent, institutionalized, and professional regulator that can balance the interests of consumers, producers, and the social goals of the government. In Argentina’s centralized political system, in which the Executive retains large powers to regulate and issue emergency decrees, requiring a 2/3 vote in the Congress to overturn, regulations were easy to issue and difficult to lift without checks and balances. Regulation by decree is inherently subject to political whims and only provides broad solutions to a particular problem. As such, the Argentine system continually introduced uncertainty into the energy market, preventing firms from modeling financial performance and investing, while constant changes precluded the institutionalization of a professional regulatory body. The complex multi-tiered pricing structure also added unnecessary opacity, complicating investment decisions and leaving room for patronage and moral hazard. An independent regulator, with formulaic, rather than set prices, would serve to introduce stability, particularly through cost-plus pricing. In particular, targeting bands of prices, rather than fixed prices, would allow limited price signals to give producers, consumers, and regulators insights into market developments. The top-down Argentinian regulatory model has not brought the energy market to balance, only eroded energy security, and its failures demonstrate the need for professional regulatory capacity for other countries seeking to manage the energy market.

Beyond the regulator itself, Argentina demonstrates the interaction effects of intervention in the markets. Additional regulation, rather than simply causing its intended effect, can often interact with preexisting market distortions to cause unintended consequences. Argentina’s government consistently sought to correct problems through additional regulation, which begot further issues and regulations. Often, the impact of a particular regulation is unpredictable, especially for energy, which impacts every sector of the economy. The interaction effects call for recognition of problems and the flexibility to address them, even at political cost. Argentina’s particular form of political populism may preclude the possibility of addressing such issues quickly and early, but the lesson may be applicable elsewhere. The economic impact of additional regulation makes a strong case for a technocratic regulatory body, with the power to reverse decisions as necessary; it is not expected that all regulations are correct or achieve their desired outcome each time. Maintaining simple, transparent, and flexible regulations can better achieve social goals than crystallized controls, even if it takes some power away from politicians.

Conclusion

            Argentina’s energy regulations throughout the 2000s demonstrate that even well-intentioned regulation can be subverted by top-down political processes and interaction effects, creating the need for an independent regulator and the ability to reexamine regulations, rather than introduce new ones to correct prior measures. In response to the 2001 crisis, Argentina enacted price controls to protect consumers from rising prices and stimulate economic growth. After a return to growth, price controls became fixed and permanent as the government feared political unrest resulting from their abolition. Low and fixed consumer prices, coupled with export restrictions, translated into producer prices that were insufficient to enable investment in the country, particularly given the general volatility of economics and politics. The government turned to making the energy market more autarkic before resorting to command-and-control measures and subsidies to correct the low producer prices caused by the initial regulations. Ultimately, the Argentine government oversaw a vast increase in federal energy subsidies while the country became a net importer of hydrocarbons. The Argentine case shows the inefficacy of broad centralized regulation by decree, necessitating an independent regulator to balance the interests of the government and market participants. The interaction effects of various decrees and controls further show that flexibility in implementing regulations is necessary to correct for unintended consequences. Argentina’s energy regulations evolved into capricious decrees that only worsened problems in the energy market, rather than solving them, demonstrating the need for pragmatic flexibility and a professional regulatory apparatus that can be applied beyond Argentina.

 

[1] Government of Argentina. “Ley de Hidrocarburos.”  23 June 1967

[2] Government of Argentina. “Reforma del Estado”  17 August 1989

[3] Government of Argentina. “Federalización de Hidrocarburos” 24 September 1992

[4] Government of Argentina. “Exportaciones” 13 May 2002

[5] David Mares. Political Economy of Shale Gas in Argentina. (Cambridge, MA: Belfer Center 2013).

[6] Government of Argentina. “Emergencia Publica y Reforma del Regimen Cambiario” 6 January 2002

[7] Ministry of Energy and Mines. “Aclaraciones y recomendaciones” 10 April 2016

[8] World Development Indicators. (Washington, DC: World Bank Group, 2016).

[9] GasNatural Fenosa. Interim Report January – September 2015 Results. 4 November 2015.

[10] Government of Argentina. “Gas Natural” 3 June 2008

[11] YPF. Form 20-F 2015. December 31, 2015.

[12] “Argentina Cuts Wellhead Prices” ArgusMedia. 6 January 2016.

Energy Policy and Conservation Act of 1975

26 Friday Dec 2014

Posted by V. Markov in History, Policy, Regulations, United States

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Tags

conservation, energy, Energy Independence, energy policy, Energy Security, EPCA, ford, gas, gasoline, gerald ford, interest group, legislation, Nixon, oil, Oil Crisis, OPEC, refinery, refining, regulation, rent seeking, richard nixon

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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.

Housekeeping and Moving Forward

05 Tuesday Nov 2013

Posted by V. Markov in Housekeeping

≈ Leave a comment

Tags

Energy Infrastructure, Energy Security, Oil and Gas Developments

I just wanted to get everyone updated on the status of Energy Security. This project is not dead, though I have been admittedly neglecting to post new analyses. I hope to fix that in the coming months. In addition, I think that everything will move in a different direction from the previous posts, with a focus on getting information out in a briefer format more frequently rather than submitting longer pieces, like those already up. The post on the Myths of Fracking may be a good example of how things will evolve.

Regardless, I’m looking forward to the months to come and bringing new content. With that said, I think the following topics will deserve a briefing:

  • Oil and Gas Developments in an Unstable Iraq
  • Effects of Iranian Sanctions on Russia and Central Asia
  • The American Shale Revolution – What It Means Domestically and Internationally
  • Canadian Bitumen – The Frozen North Heats Up
  • Fracking and Water Concerns
  • Primer on the Energy Infrastructure of the USA
  • Prospects of the Liberalization of Pemex
  • Twilight of the Supermajors and Rise of the NOCs?
  • Rosneft and the Russian Focus on East Asian LNG
  • Internal Energy Politics of Russia
  • Arctic Energy
  • Going Nuclear with Thorium
  • Systemic Effects of Draw down of Nuclear Power in Germany and Japan
  • The Viability of Algal Biofuels and Cellulosic Ethanol
  • The Latent Chinese Shale Revolution
  • PetroBras and Prospects of Brazilian Energy Independence
  • Instability in Nigeria – Boko Haram and the Nigerian Oil & Gas Bounty
  • Chinese Encroachment on Central Asia and Geopolitical Implications
  • Future of Coal
  • Energiewende
  • The Effects of US-Saudi Tension

If you have any suggestions or would like to see a particular topic covered more quickly, please go ahead and leave a comment. I can see to it that I cover it more quickly.

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