Why the U.S. Energy Export Dream Will Be a While Coming

Speaking April 2 at the U.S.-EU Energy Council Summit in Brussels, U.S. Secretary of State John Kerry promised assistance to Europe in diversifying its energy sources to circumvent its dependence on Russia's energy supply. He also referred to the role future U.S. exports of natural gas would play in diversifying global energy markets, alluding to booming U.S. oil production and the administration's approval last month of seven new export licenses to help supply gas to global markets starting in 2015.

Geopolitical overtures to European energy independence in light of Russia's Crimea annexation reflect the administration's confidence in America's own newfound energy independence. According to Michael Levi, energy expert at the Council of Foreign Relations, exporting the gas and oil unleashed by the oil boom would eventually help the U.S. trade balance and add liquidity to global markets. Increased supplies of oil and gas worldwide would buffer economies against price spikes and reduce the likelihood of supply shocks. The administration's announcement to Europe is premature, however, on both counts of natural gas and crude oil.

First, the new excess of U.S. natural gas production that can be liquefied will take many years and billions of dollars in investment before meaningful amounts of liquefied natural gas [LNG] can be shipped overseas. Cheniere Energy Partners (NYSEMKT: CQP  )  operates the first LNG export terminal in the lower 48 states. Potential exporters would need to secure long-term contracts with dedicated customers to obtain the investments needed to construct specialized terminals. The seven new approved LNG terminals, among them the Jordan Cove energy project in Oregon and the LNG hub under construction in Louisiana by Cameron LNG, subsidiary of Sempra Energy  (NYSE: SRE  ) , are preliminary steps in what will be a protracted process.

Keep your eye on the dealer's hand...
The U.S.–EU summit coincided on the same day with congressional hearings on overturning the oil export ban, known as the Energy Policy and Conservation Act, signed by President Ford in 1975. With oil production set to grow by almost 1 million barrels per day in the coming years, the U.S. is poised to become the world's largest oil producer. While gas exports will take years to materialize due to a lack of infrastructure, excess crude is immediately available for export, and proponents argue overturning the ban would further boost oil production and trim the trade deficit. In testimony to the House Foreign Affairs committee, Continental Resources (NYSE: CLR  ) CEO Harold Hamm told lawmakers the U.S. could have "immediate impacts on global events by beginning [to] export crude oil." More concretely, lifting the export ban would vastly benefit Continental, which is the biggest leaseholder of the Bakken oil fields, among many others.

Proponents maintain that exporting crude would be a way to raise U.S. prices to correspond with overseas markets and ensure future production. Most importantly, they argue crude exports would provide a boon for U.S. consumers and the wider economy. A recent study from ICF suggested crude exports would lower gasoline prices by over 2 cents per gallon, provide tens of billions of dollars in annual economic growth and create up to 300,000 jobs, among other benefits.

There are considerable obstacles to reversing the ban. No legislation to do so as exists as of yet, and is unlikely to be introduced this year for fear of rising fuel prices during an election year. As the U.S. still imports more crude than it can export -- to the tune of 7.5 million barrels per day, compared to the 4 million barrels a day of refined products it exports -- it will also take time before enough oil is actually produced to the point that companies will need to find new markets. In addition, harsh opposition to lifting the ban comes from oil refiners, who buy cheaply and sell refined products overseas at a premium.

Underlining the political difficulties of overturning the ban, recommendations to lawmakers in the House Foreign Affairs Committee included "a go-slow policy to maintain market stability," because it is difficult to predict what effect dropping the oil export ban will have, as it will redirect flows of refined products in ways that are not fully understood, according to testimony by Deborah Gordon, senior energy associate at Carnegie. Going slowly, she recommended, "will minimize market disruptions and price volatility... [and allow recognition of] varying impacts on different groups." She added that environmental effects have to be taken into consideration, and that consumers could see price increases at the pump in the short term.

...but keep your eye on the money first.
Overturning the oil export ban is not likely to happen overnight either, then. With both increasing LNG and crude oil exports pending over what is likely to be several years, geopolitical overtures to Europe and dreams of global diversification based on the U.S. oil boom are premature at best, and hostage to politics for the foreseeable future. In addition, the domestic political will to overturn the ban will ebb and flow according to the degree of self-inflicting damage Western sanctions could incur on U.S. companies with substantial investments abroad, and the potential for rapprochement between the geopolitical players based on pressing mutual interests.

The bottom line for energy investors at this point is to maintain a positive outlook for the possibilities of U.S energy exports in the long term. In the shorter term this year, it should be assumed all things remain equal until after the November election, though the administration is likely to continue granting LNG licenses. In the meanwhile during this crisis for East-West relations, investors should not be deterred from looking to ExxonMobil, with its agreement with Russia for extensive drilling rights in Siberia, and other Western companies investing in Russian energy for evidence that the crisis is unlikely to stymie investment in foreign energy in the long term. In short, keep one eye on the future, and the other very firmly fixed on the present money, irrespective of the grandiose political statements coming from the administration.

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