Where Industry and Security Intersect
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Good morning Mr. Chairman and Members of the Committee. I am pleased to be here today to discuss the Commerce Department's authorities to regulate the export of crude oil and refined petroleum products.
At present, the Department imposes export controls on domestically produced crude oil based on statutory requirements related to its origin and mode of transport. These requirements are set forth in statutes including the Mineral Leasing Act of 1920, the Outer Continental Shelf Lands Act, the Naval Petroleum Reserves Production Act, the Energy Policy and Conservation Act, the Trans Alaska Pipeline Authorization Act, and PL 104-58 "Exports of Alaskan North Slope Oil." With a few exceptions - - most notably Alaskan North Slope (ANS) crude oil, which Congress freed for export in 1995 - - these statutes require an export license for domestic crude oil exports to all destinations including Canada. The Commerce Department administers these export control provisions.
As I will discuss in more detail later, the Administration also has discretionary authority under the Export Administration Act of 1979 to restrict exports of refined products (distillates). Those discretionary authorities have not been used since Malcolm Baldrige ended restrictions on refined petroleum product exports in 1981, despite periodic oil market uncertainties since then.
There are only a limited number of circumstances in which the Department will approve applications to export crude oil. These include exports from Alaska's Cook Inlet, exports to Canada for consumption or use therein, exports in connection with refining or exchange of strategic petroleum reserve oil, and exports of California heavy crude oil up to an average volume not to exceed 25 thousand barrels per day (MB/D).
At present, petroleum products (e.g., gasoline, kerosene, distillates, propane or butane gas, diesel fuel and residual fuel oil) refined within the United States are not subject to short supply export controls, with one exception. If the refined products were produced or derived from crude oil obtained from the Naval Petroleum Reserve (NPR) or became available as a result of an exchange of any NPR produced or derived commodities, a license is required to all destinations including Canada.
During FY 2000, the Department processed 15 applications for the export of crude oil valued at $858,025,000. Three licenses were for exports to Canada and the rest were for exports of California heavy crude oil, mostly for use as bunker fuel or to Far East markets where environmental restrictions are more liberal than they are in the United States. Heavy California crude is of such poor quality that it is mainly used for asphalt production or mixed with residual fuel oil for bunker fuel for ships. Those licenses are valid for 90 days.
Applications for the export of domestically produced crude oil for consumption or use in Canada may be approved provided that none comes from a Naval Petroleum Reserve. Licenses are valid for one year.
There is, of course, considerable interest regarding the scope of export controls that apply to the Strategic Petroleum Reserve (SPR). Therefore, I will address these controls in greater detail.
Applications for the export of crude oil from the SPR may be approved only if there will be a corresponding import of refined petroleum products that the Departments of Commerce and Energy determine are needed in the United States and that we would not have been able to obtain these refined products without the export of crude from the SPR. This provision effectively blocks the export of crude released from the SPR unless there is a compelling national interest to permit it. For example, if U.S. refineries are operating at full capacity and there is a need for additional product within the United States (e.g., home heating oil), it could serve our national interest to export SPR crude for refining and return to this country, or as a swap for already refined product. Although this is a useful option to have, to date we have not received any applications for the export of SPR crude.
Our regulations also contain a License Exception that permits the export of foreign origin crude oil that is owned by a foreign government or its representative which is imported into the SPR for storage under an agreement with the United States Government. If the foreign oil has been commingled with domestic crude oil in the SPR, the export may only be permitted if the Energy Department certifies that the oil to be exported is the same quality and quantity that was imported into the United States. It is my understanding that at present, this is a moot issue since there is no foreign oil in the SPR.
As I have already noted, there are no short supply licensing requirements for refined petroleum products unless they are derived from Naval Petroleum Reserve crude oil feedstock. Refined products derived from SPR crude oil therefore could be exported with no license required, except to a small group of embargoed countries such as Cuba and Libya.
Regarding the discretionary authorities I mentioned earlier to control refined petroleum product exports, the Export Administration Act of 1979's "Declaration of Policy" states that controls may be imposed "to restrict the export of goods where necessary to protect the domestic economy from the excessive drain of scarce materials and to reduce the serious inflationary impact of foreign demand."
In order to implement this policy, the specific authority to prohibit or curtail the export of commodities determined to be in short supply (SS) is contained in Section 7 of the Export Administration Act of 1979 (EAA), which reads in part "the President may prohibit or curtail the export of any goods subject to the jurisdiction of the United States or exported by any person subject to the jurisdiction of the United States". These authorities have been delegated to the Secretary of Commerce.
Mr. Chairman, some have suggested that the Administration consider imposing short supply export controls on home heating oil in order to ensure that adequate quantities will be available this winter. At this juncture, I think that would be a mistake for the following reasons.
First, over the past two months, U.S. refiners utilization rates have declined from about 96% to about 91% of capacity, as demand has decreased as we moved away from the summer driving season. While some of that capacity is off-line for maintenance, we expect that high margins will encourage refiners to defer maintenance where possible to keep capacity on-line. It would be unwise to impose regulations that discourage the orderly transition to maximum heating oil output. Oil and products are fungible. An export ban on heating oil would encourage refiners to produce other products.
While we could impose a ban on the export of all refined petroleum products, this reduces the incentive for refiners to stay on-line. This is surely a draconian measure that would likely cause even greater market disruptions. The United States is a major net oil importer. Discretionary actions taken by the Administration to restrict exports of U.S. petroleum products could result in retaliation, thus undermining the availability of crude oil supplies.
Second, we do not project at this time that there will be a short supply of home heating oil this winter. As Energy's testimony indicates, the home heating oil reserve is already fully stocked and production of distillates this year has been high. The conversion of refineries to heating oil production is proceeding smoothly. There is no shortage of feedstock. Although it is possible that some exporters will want to take advantage of higher prices that European consumers may be willing to pay, we cannot yet predict with assurance the scope and impact of such export activity. Accordingly, I think it is unwise to impose a new regulatory regime based merely on this possibility.
Applications for the export of 250 thousand barrels or more of any refined product in any fiscal year would require Congressional review - delaying action up to 30 days. Of course, if there were a total ban on exports, nobody would file for export applications knowing that they would be denied. If, on the other hand, there were exceptions, exemptions or other limitations, the entire process could quickly become very complicated and have unpredictable impacts on oil markets.
In summary, the Department is implementing crude oil short supply export controls that are required by statute. Discretionary quantitative restrictions on the export of refined products have not been imposed for almost two decades. While we will continue to monitor the situation closely in conjunction with the Energy Department, there appears to be no sound basis to change course now.
Footnote: Crude oil is defined as a mixture of hydrocarbons that existed in liquid form in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities and which has not been processed through a crude oil distillation tower.
In April of 2002 the Bureau of Export Administration (BXA) changed its name to the Bureau of Industry and Security(BIS). For historical purposes we have not changed the references to BXA in the legacy documents found in the Archived Press and Public Information.