Why the U.S. Needs to Reconsider the Energy Policy and Conservation Act of 1975

Editor’s note: On December 10, 2014, Charles K. Ebinger testified before the U.S. House of Representatives Energy and Commerce Committee as part of a Subcommittee on Energy and Power Hearing on “The Energy Policy and Conservation Act of 1975: Are We Positioning America for Success in an Era of Energy Abundance?” Read his prepared oral statement below, download the full version of his testimony at the right or watch the full video of his remarks online.

Thank you Mr. Chairman. Before commencing, I want to thank you and the Committee for inviting me to testify this morning on the origins of the crude oil export ban which was enacted nearly 40 years ago during my first job as a Foreign Affairs Officer in the Federal Energy Administration. Given the profound changes that have occurred in unconventional oil and gas production over the last 6 years, it is critical to look back and remind ourselves how the energy situation in the United States has evolved since 1975.

During the 20 years prior to the 1973-1974 OPEC oil embargo, the chief issues dominating US energy policy were the future of nuclear power, price controls on domestic natural gas and oil enacted as part of President Nixon’s response to surging inflation, and limitations on oil imports through both a Voluntary Oil Import Program (1957-1959) and a Mandatory Oil Import Program (1959-1973). In reviewing this history, what stands out is that, just as is the case today, most energy issues were discussed in isolation from one another.

On the geopolitical front, the early 1970s saw momentous changes in the Middle East and North Africa as King Idris was overthrown by Colonel Gaddafi in 1970 and in response to a decline in real oil prices the major oil-producing countries mounted a unified campaign against the petroleum companies to extract more of the economic rent from their oil production. Under the Tehran and Tripoli agreements between the international oil companies and OPEC, the host countries concerned about rising inflation and a general sense that they were not being treated fairly by the international oil companied demanded a major increase in the price paid for their oil. After Tehran and Tripoli, OPEC was able to introduce an escalation clause in its contracts that it believed would protect their members from inflation. However this proved not to be the case as prices continued to slide. However with oil demand in the US and elsewhere surging, OPEC saw an opportunity to gain the upper hand. Hardly was the ink dry on one contract before OPEC made new demands for further upward price revisions.

Mr. Chairman, given the current glut of oil on the world market relative to demand, it is worth noting that global market conditions in the early 1970s could not have been more different than they are today. Demand for oil throughout the industrialized world was skyrocketing. In the US, domestic production had peaked in 1970, leading a Cabinet Task Force to recommend the gradual elimination of the quotas under MOIP, out of concern that they were costly to US consumers and did little to protect national security. In retrospect, given the changed circumstances confronting the US it is remarkable that this recommendation did not receive more salience in the Congress despite the fact that US oil consumption was skyrocketing, domestic production was peaking, and oil imports were up by 1973 to nearly 30% of US oil consumption.

The US could not have been more ill-prepared for the 1973 Oil Embargo. In response, one of the primary actions taken was the creation of the Federal Energy Administration which was immediately charged with administering a complex regulatory regime of oil and gas price and allocation controls. Unfortunately these were so ill-conceived that they only accentuated the impact of the crisis and exacerbated gasoline shortages, causing long lines of angry motorists buying highly regulated volumes of fuels often on odd and even days of the month depending on one’s license plates.

In response to the crisis, President Nixon launched “Project Independence,” designed to eliminate oil imports by 1980 and comprising a host of initiatives including the Energy Policy and Conservation Act of 1975 whose possible modification or rescission is the primary issue of today’s hearing. Under the EPCA, the President was granted the authority to restrict exports of coal, petroleum products, natural gas, petrochemical feedstocks and supplies of materials and equipment for the exploration, production, refining and transportation of energy supplies. The EPCA also authorized the President to exempt crude oil and natural gas exports from such restriction where doing so is deemed to be in the national interest. As the Act today only relates to crude oil, the main exemptions that have been made are for shipments to Canada and Mexico in recognition of our historic trading relationships. Other exemptions to the ban are noted in detail in an annex in my formal testimony. Today, through modifications to the EPCA, the US allows unrestricted exports of coal, petroleum products and petrochemical feedstocks, and on a case-by-case basis allows the export of natural gas. The only expressed ban that remains in place is that on crude oil exports.

In reviewing the history of US energy policy since the early 1970s, it is apparent that whenever the US government has tried to favor a particular fuel absent market realities there have been unintended consequences which have been deleterious to the US economy and US energy security. Controls on gas prices led to the failure to develop the Alaska Natural Gas Transportation System, creating massive natural gas shortages with devastating economic impact on the industrial Midwest. The ban on using oil and gas in industrial boilers and power generation led to a major switch away from gas and oil towards coal. This rush towards coal has led to scores of aging coal facilities that now have to be replaced as part of our national environmental policy and our international climate policy.

Conclusions

Mr. Chairman, it is evident that the US energy situation today is far different from what it was when the EPCA was enacted. With crude oil production continuing to rise in the US, it would be detrimental to US energy and economic policy to keep the ban on crude oil exports. Keeping the ban and attempting to manipulate policy to control a globally traded commodity with hopes that the US oil boom will lead the US to energy independence is a fallacy, as the US is part of the global market and therefore must participate in it; otherwise, significant benefits will be forgone. Lifting the ban generates paramount foreign policy benefits, increases US GDP and welfare and reduces unemployment, all of which will be forgone if the ban remains in place.

Mr. Chairman, there is no useful purpose in prolonging the current ban on crude oil exports. As noted, we no longer have any restrictions on any other energy source including petroleum products such as gasoline. We have a crude oil surplus of very light crudes which in the absence of major capital investments cannot be used in many of our refineries that were designed to use heavy crude oil imports. With future demand for petroleum products in the US projected to be flat or declining, many refiners are reluctant to make these investments for fear they will not be recovered in the marketplace. The US has an opportunity to be an important source of oil diversification from more politically volatile regions of the world. Lifting the ban will improve our trade balance and produce jobs for Americans on a sustained basis.

I thank you Mr. Chairman, and I hope I have provided some interesting background on how and why the current ban on crude oil came into place and why, given changed market circumstances, there is no justification for keeping it. The world we live in today could not be more different than in 1975. Unlike the rising level of oil imports we saw in 1975, today imports are falling and are likely to continue. When the ban was passed in 1975, US domestic oil supply was falling. Today, trends point in the opposite direction—according to the EIA’s high growth scenario, the United States is set to produce 13.3 mmbd by 2035. Today OPEC has far less control of crude prices as a variety of non-OPEC oil producers actively compete in the market.

In light of the above factors, Mr. Chairman, I can see no justification for continuing the current ban on crude oil exports and urge you to lift it in its entirety.

Thank you Mr. Chairman for this opportunity to address the Committee; I would be delighted to take questions.