Policy

Growth in Domestic Oil and Natural Gas Poses New Policy Issues

Republicans want to make overseas shipment of liquefied natural gas easier

The United States is flush with supplies of oil and natural gas — and that has lawmakers contemplating policy changes. (Spencer Platt/Getty Images file photo)

When it comes to U.S. energy supplies, Congress’ default setting for decades had been worry: worry that America did not have enough energy to meet its needs and worry that OPEC would hold the U.S. hostage by jacking up the price of — or withholding — its oil.

That setting has changed. With the U.S. flush with supplies of oil and natural gas over the past few years, Congress has permitted the export of domestic oil and raided the Strategic Petroleum Reserve to reduce the budget deficit and offset costs of unrelated legislation. And now Republicans want to make it easier for producers to ship liquefied natural gas overseas.

“The thing that really moves energy policy is a supply shock, and if you look at most of the major energy policy we have, and for that matter, most of the major environmental legislation we have, it has always been in response to something bad,” said Kevin Book, managing director of ClearView Energy Partners, a D.C. energy policy analysis firm. “It’s very seldom the case that big energy laws come from nothing, and lately we have been extraordinarily well supplied.”

Energy prosperity has returned the nation to a status it hasn’t enjoyed since the 1950s: The U.S. is a net exporter of liquefied natural gas (LNG) for the first time since 1957 and on pace to be a net energy exporter by 2022, according to Energy Information Administration projections.

Those projections are trickling into Congress’ consciousness, motivating policy changes more in line with the Trumpian “energy dominance” economic worldview than the energy paucity illustrated by the oil embargo in the 1970s, which provided the foundation for much of the energy safety nets the country counts on in times of emergency.

But like a lottery winner who hit the Powerball jackpot, some experts caution that Congress is already spending its winnings. Its moves away from the energy safety nets now in place, they warn, could expose the nation to fuel shortages resulting from extreme weather or excessive exports.

“You have these people making these decisions thinking everything is going to be constant,” said Deborah Stine, associate director for policy outreach at Carnegie Mellon University’s Scott Institute for Energy Innovation “And it’s not going to be constant. That’s the one thing we do know: that it’s constantly changing, so you can’t assume conditions that are here today will be the same a year from now, and you’re affecting multiple industries, not just energy but energy-source industries too.”

Raiding the piggy bank?

Nowhere is Congress’ shift away from an energy scarcity mindset more evident than its repeated demands to sell oil from the Strategic Petroleum Reserve to offset congressional spending. The SPR was a piggy bank as it was used to offset costs and allow the advance of six pieces of legislation over the past two Congresses.

Those drawdowns will cut the SPR’s 655 million barrel supply in half over the next decade even after extreme weather in 2017 showed the importance of having it in place in times of fuel supply disruptions. In response to Hurricane Harvey, the Department of Energy released 5 million barrels throughout September in “exchange agreements” meant to steady domestic prices already reeling from reduced refining capacity from the storm.

Originally established in response to the oil embargo in the 1970s, the SPR is the world’s largest oil reserve. Held in salt caverns carved out of the Gulf Coast in Louisiana and Texas, the supply represents a kind of energy insurance policy. But those storage facilities are aging and need an infusion of federal dollars for maintenance and modernization, prompting some to question whether the SPR needs to continue to exist in its current form.

“I think the question now is that with the resources that the United States has with the new innovation, with the new energy portfolio that we have, does the Strategic Petroleum Reserve need to stay in its current form?” Energy Secretary Rick Perry asked House lawmakers during an April 12 budget hearing. “I am not ready to sit here and tell you I know the answer to that, but I think it is important . . . we need to have that conversation.”

In a roundabout way, Congress has already answered that question with the repeated use of the oil rainy-day fund.

In 2016 — before four of those outlined sales went into effect — the Department of Energy warned additional drawdowns of the reserve could compromise its ability to benefit the economy over the next 25 years.

“Do I like this? No, I don’t like the fact that every time they are looking for a big chunk of change, they automatically go to the SPR,” Senate Energy and Natural Resources Chairwoman Lisa Murkowski, an Alaska Republican, said in response to its inclusion in the budget caps agreement. “There is going to be a day where it is not able to do what we set it up for.”

Similar worries are starting to swirl around another energy backstop, the Northeast Home Heating Oil Reserve, a 1 million barrel supply of ultra-low sulfur diesel, and the Northeast Gasoline Supply Reserve, a 1 million barrel gasoline reserve put in place after Hurricane Sandy.

The home heating reserve was only used once in the aftermath of Hurricane Sandy. The gasoline reserve has not been used, prompting the Trump administration to call for its liquidation in its fiscal 2019 budget request — much to the dismay of Northeast lawmakers.

“By that logic, we might as well discard the federal government’s stockpile of smallpox vaccines, because the vaccines have not been used since the stockpile was created,” New Jersey Rep. Frank Pallone Jr., the top Democrat on the Energy and Commerce Committee, told Perry during an April 12 oversight hearing.

Speeding Up Exports

The decline of Congress’ fear of energy scarcity can also be seen in its push to unwind decades-old laws to limit exports of oil and natural gas.

As the natural gas industry readies itself for the next phase of its economic rise, the Trump administration and Capitol Hill Republicans are looking to make the regulatory process behind LNG exports a streamlined exercise that gets the resource moving internationally as quickly as possible, arguing the changes will bolster the economy and U.S. foreign policy initiatives.

That comes in addition to the lifting of the crude oil export ban at the end of 2015, the effects of which are just now starting to show up on world oil markets.

“We have such a surplus of LNG, and we are finding more and more of it every day,” said Ohio Republican Rep. Bill Johnson. “These are job creating opportunities. These are economic growth opportunities. These are actions that recapture America’s leadership position on the world economic stage.”

Along with Energy and Commerce Republicans, Johnson introduced a bill to amend the Natural Gas Act of 1938, a law put in place some 20 years before the invention of horizontal drilling and 80 years before its wide adoption. The legislation would remove a provision of that law that requires the Energy Department to review LNG export permit applications to assure they’re in the nation’s best interests.

Republicans had complained that such reviews took too long under the Obama administration and that the public interest standard is no longer needed due to the vast supply of gas buried in shale deposits across the country.

Murkowski included a provision to aid LNG exports in her bipartisan, broad energy and natural resource bill, which is awaiting Senate floor action. That measure would require permit decisions to be made within 45 days once the federal government finishes its environmental review — an effort to codify what has become a DOE emphasis under the Trump administration and its push for “U.S. energy dominance.”

Industrial groups have opposed the congressional efforts to do away with DOE reviews and have suggested DOE should better consider the amount of exports it is approving. So far, the groups noted, DOE has yet to reject a permit application.

“We do have a short-term abundance and low prices,” said Paul Cicio, president of the Industrial Energy Consumers of America. “We are not saying we have a pending crisis today or for the next few years. What our arguments are all about is the longer term.”

And it may be for good reason DOE keeps approving these exports — the economic impact is limited in its negative effects, according to a 2015 DOE macroeconomic analysis of increased LNG exports. And the natural gas industry is only getting better at discovering and producing more natural gas from existing and new wells, likely preventing any drastic increases in domestic prices, according to a separate report put out by the oil industry.

The shift to export may stem in part from the noise coming from the industry. International markets present a more lucrative opportunity for gas companies than a crowded U.S. market. Combined with a lack of political resistance, Congress is hearing the industry’s push more than anything else.

Previous laws to address energy scarcity were inspired in part by complaints from consumers, who say high gas prices and electric costs hitting their pocketbooks and voiced those frustrations at their representatives, said Christina Simeone, director of policy at the Kleinman Center for Energy Policy at the University of Pennsylvania.

“Now, we have a lot of energy, abundant supplies and diverse sources of energy, and consumers are benefiting, but producers are not doing well,” Simeone said.

A Decade’s Difference

The end of Congress’ focus on energy supplies has also allowed lawmakers to fixate on more overarching philosophical issues that were largely put aside the last time Congress passed a major energy bill.

The Energy Independence and Security Act of 2007 largely focused on policies to bolster energy and fuel efficiency. It also created the Renewable Fuel Standard, the EPA program to increase the use of ethanol in the nation’s fuel supplies.

“If you look at what the law was built for, it was built for gasoline demand that only went up in a world of ever-growing scarcity,” ClearView’s Book said. “And if you look at the reality we are in now, the reason there is so much conflict around the RFS has a lot to do with how the fundamentals have changed.”

Lawmakers, split along regional lines of corn-producing states and oil-producing states, are locked in a battle of words over the program as refineries complain the cost of compliance has become too burdensome in light of shrinking domestic demand. That fight has elevated to the White House’s radar level, and it can trace part of its problems to the U.S. oil supply improvements.

“If you have demand that is not growing and you add supply . . . that has resulted in a lower price,” Simeone said. “Again, it is consistent with this idea of we have an abundance of supply and therefore prices are low.”

The abundance has also carried over to energy efficiency mandates on the federal level. House Republicans have become more averse to legislation that would expand efficiency improvements at the state level via building and manufacturing codes and fuel efficiency mandates.

Their opposition has so far scuttled the Senate effort to pass the first major update to the nation’s energy policies in a decade; a foundational piece of that legislation looks to bolster efficiency requirements. The bill would also update a broad range of energy policies to better reflect the changed supply environment of the nation.

But for House Republicans, relatively flat electricity demand and prices gives the lawmakers cover to stick to their conservative philosophy of states’ rights when it comes to efficiency requirements.

“The world of scarcity looks really different,” Book said.

When Republicans including former Sen. Pete Domenici of New Mexico and Rep. Joe L. Barton of Texas were writing the energy bill that passed in 2005, “they weren’t sweating the small stuff like . . . the sovereignty of states and state regulators,” Book said. “They were thinking about what if the lights went out in the Northeast or the Southwest.” 

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