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21st Century Energy Markets: AFL-CIO

Hydrocarbon Engineering,

Highlights from the statement given by Brad Markell, Executive Director, AFL-CIO Industrial Union Council, before the Committee on Energy and Commerce Subcommittee on Energy and Power at the 21st Century Energy Markets hearing.

Gas prices likely not affected

“First, while the attention given to the effect easing restrictions on the export of crude oil would have on domestic gasoline prices is understandable, a focus on this question to the exclusion of other issues is not helpful in understanding which path the US should choose. The price of gasoline is set on the international market, and as the October 2014 Energy Information Agency report, ‘What Drives US Gasoline Prices?’ says, the price of gasoline in the US is best explained by the price of Brent crude oil. That report has seven key observations, including these three:

  • Gasoline is a globally traded commodity and, as a result, prices and changes in prices are highly correlated across global spot markets.
  • Brent crude oil prices are more important than WTI crude oil prices as a determinant of US gasoline prices in all four regions studied, including the Midwest.
  • The effect that a relaxation of current limitations on US crude oil exports would have on US gasoline prices would likely depend on its effect on international crude oil prices, such as Brent, rather than its effect on domestic crude prices.”
  • The economic importance of the refining sector

    “The refining sector is an economic powerhouse, and easing restrictions on crude oil exports threatens the long run health of the sector and the high quality jobs it provides. The threat of these job losses is concentrated in the Gulf of Mexico states. Simply put, if we lift the ban on crude oil exports, we will export both our oil and the jobs and economic activity associated with refining that oil. Over time, with no restrictions on the export of crude oil, the refinery sector will have meaningful incentives to increase operations outside the US to lower both labour and environmental compliance costs. The US would lose some of the jobs it has now, and fail to create jobs to process increased domestic light oil production volumes.

    “And the jobs that could be lost are very good jobs. According to the 2012 Economic Census performed by the Census Bureau, the average job in the refining sector paid over US$100 000 /y, supported by US$1.8 million in value added per employee. According to the Economic Census, while the industry paid its employees US$9.7 billion in total compensation, it also spend US$8.9 billion on professional services, repair and maintenance services, and leased employees. The industry is a significant employer of workers in building and construction trades occupations.

    “In 2012, refineries made over US$15 billion in capital investments. Their importance to our economy goes beyond the numbers, as the American Petroleum Institute put it in 2011, when it was making the case for domestic refining:

    ‘The US will depend on refining petroleum based products for much of its energy needs for decades to come. And, domestic refineries are competing directly with petroleum product imports. Because the refining industry operates on a global basis, America faces the choice of either manufacturing these products at home or importing them from other countries. US refinery closures would result in domestic job losses and lower government revenue in the form of taxes. It would also result in a greater reliance on foreign refineries, such as those being developed in the Middle East and India.’

    “Additionally, the output of US refineries is critical to US petrochemical manufacturing, with a large part of US refinery output integrated with follow on petrochemical manufacturing. If the US refining capacity declines over time, the petrochemical industry would also likely decline, compounding the economic damage form allowing crude oil exports.”

    The refining sector can retool to use more light oil

    “Much of the discussion of oil exports focuses on the mismatch in refinery capacity, with US refineries configured to handle more heavy oil and lacking capacity optimised for light oil. In this static view of the industry, the easiest fix for the problem is to reduce imports of light crude oil, and then export any remaining domestic light crude oil unprocessed. Indeed, according to EIA’s oil import tracking tool, imports of light oil to the US Gulf Coast region have declined from 1.7 million bpd in 2009 to just 0.26 million bpd in 2014, an 85% decline.

    “Rather than export the domestically produced light crude oil that US refineries are not optimised to process, there is another solution, one that emphasises investment in America, and expanding employment for American workers. In 2014, McKinsey examined the implications of increased domestic production of light, tight oil (LTO) on refiners, under scenarios where the crude oil export ban is not lifted. McKinsey believes that ‘…the continued growth of LTO in North America has the potential to drive a fundamental restructuring of the downstream industry in North America and beyond.’

    “The report’s 2020 scenario says that Gulf Coast refineries could see their LTO inputs increase to around 50% of all crude used, backing out imported crude oil. This will require refineries to remove bottlenecks in the light ends part of their distillation units, or to add new distillation capacity optimised for LTO. Domestic production of oil is projected to remain above 8 million bpd through at least 2035; the question is not whether this oil will be produced, but where it will be refined. It should be refined in the US so we can reap the full bounty of jobs, economic activity and energy security that our increased production of crude oil makes possible.”

    Edited from statement by Claira Lloyd

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