Protectionism Gains Resonance as Prices Rise

The Biden administration has settled on a strategic stocks release as its tool of choice for tackling high energy prices for now, but a growing chorus of Democratic lawmakers are urging a reconsideration of the country's energy export policy.

The current energy price spike is the first the US is seeing since former US President Barack Obama signed off on a congressional repeal of a 40-year ban on most crude oil exports in December 2015. Domestic natural gas prices are now higher than at any time since US LNG exports began in February 2016.

“Oil companies are enjoying the surge in fuel prices. Consumers are not,” US Sen. Jack Reed (D-Rhode Island) said earlier this month when he sent a letter to US President Joe Biden asking for both export restrictions and a release from the nation's Strategic Petroleum Reserve (SPR).

Return of the Oil Export Ban?

Biden administration officials' assurances that they’ll continue to look at all available tools when trying to address high energy prices has kept the idea of restricting oil exports alive, even if it is standard patter for policymakers.

But the bulk of US domestic crude output consists of light, sweet barrels, especially in shale plays. The US downstream, on the other hand, is configured to run heavier, higher-sulfur crude than what is produced in the Permian, Eagle Ford and Bakken.

Crude export restrictions that could cause dislocations in the market seem unlikely for now. One senior official suggested Tuesday that if the administration thought restricting oil exports were useful, it would have already done so.

“There’s been a very rigorous process here trying to figure out what the particular tools are that are best suited to the particular market circumstances,” the official said while explaining the decision to offer up SPR barrels. “That’s why we made the decisions that we’ve made.”

Market players say they do not expect the administration to enact export controls, and that doing so would likely backfire.

“Restricting exports wouldn’t work” to reduce prices, said Alex Hodes, analyst with StoneX Financial. Instead, such a move “would tighten the global market.”

Still, market dynamics could incentivize more exports with the SPR release, a dynamic that could see oil exports increase before US consumers see relief at the pump — a situation that could increase the political scrutiny on exports.

The global market is already signaling increased interest in US crude. Brent’s premium to West Texas Intermediate (WTI) is close to $4 now, well above the spread needed to justify shipping US crude abroad. That differential widened in the aftermath of the SPR announcement. The spot market also continues to incentivize US producers to ship crude abroad.

Several regions are already saturated with light, sweet crude, and a slew of refinery closures and conversions has knocked more than 1.5 million b/d in throughput capacity off line.

The qualitative disconnect between upstream and downstream helped inform the Obama administration’s decision to lift export restrictions late in 2015.

Gas Exports Hit Harder

The argument is different for natural gas, which is a more versatile commodity.

“These record-setting natural gas exports are leading to higher prices for consumers, and they show no signs of a slowdown: natural gas companies exported US LNG in record amounts this year, and the nation’s LNG export facilities, plants, and tankers are running at or near capacity,” US Sen. Elizabeth Warren (D-Massachusetts) wrote in letters to the executives of 11 oil and gas companies Tuesday.

A group of manufacturers on Monday sent a letter to Energy Secretary Jennifer Granholm asking her to revise the legal underpinning that allows for LNG exports.

So far, the administration has shown little interest in curtailing gas exports, but the criticism is coming from both conservative and progressive wings of the Democratic Party.