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COLUMN: Limit Crude Imports: Perhaps Eisenhower Was On To Something

by Deon Daugherty
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Rigzone Staff
 | Monday, January 25, 2016 | 9:41 AM EST
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COLUMN: Limit Crude Oil Imports – Perhaps Eisenhower Was On To Something
Geopolitical analysis suggests keeping crude in North America – rather than shipping it around the world – might be more meaningful to domestic energy and economic security.

Just in time for Christmas, the U.S. government made the decision – long championed by oil and gas producers – to lift the ban on exporting crude oil. Presumably, it would open the nation’s oil industry to new markets, reduce the excess oil currently stranded in storage and perhaps even raise the price of oil to numbers that make it more economic to produce. Instead, as U.S. oil reserves remained parked at an 85-year high, and oil prices per barrel fell close to $36.

What’s more is that decline hasn’t let up. A month later, and since the departure of the first tankers to export U.S. oil to foreign locales, the price of domestic oil has remained volatile and settled even lower. A barrel of WTI oil closed trading Jan. 22 with a 10 percent bump that only took it to $32.19 per barrel.

Despite the urging of producer powerhouses such as Harold Hamm, CEO of Continental Resources Inc., was the move a step in the wrong direction?

Not a mistake, said Ed Hirs, an energy fellow at the University of Houston, but certainly not a panacea.

“It was just a whole bunch of political capital expended on something that’s not going to have any impact or in any way really benefit the economy,” he told me. “How are [producers] going to sell their shale oil, which costs them (on average) $75 a barrel to produce for $30 and make a profit. It was, is and remains a fool’s errand.”

The dynamic itself doesn’t move the needle on “free market” principles in the United States for a variety of reasons. As Hirs explained, the United States currently imports between 7 and 8 million barrels of oil a day – mostly from the United States’ closest ally, Canada. Say the experts decide to export a million barrels of oil per day, then they have to import another million to break even. In short, the balance doesn’t change.

“We have lots of import restrictions,” Hirs said. “We have them on the labor market. We have them on ships. We have them on light trucks. We have them on cigars. We have them on sugar. We have them on cattle, oranges and ethanol. We’ve got import restrictions in every part of the economy you can imagine,” he said.

So what makes crude oil different?

Citing a recent column in The New York Times, Hirs noted the “hand-in-glove” relationship the United States appears to have with Saudi Arabia.

“For the cheap oil and military intelligence, we basically go and fight their wars for them. So the U.S. basically is a mercenary,” he said. “[The Times] didn’t say that, but I will.”

But back in 1956, before the widespread panic of the Saudi’s oil embargo and gasoline lines that stretched for miles, President Dwight “Ike” Eisenhower imposed by executive order a restriction on importing crude oil.

“He knew that we would buy that oil from anyone, and so he looked at the strategic importance of maintaining our own oil supply,” Hirs said. “That was not popular with Congress or the public, but who’s going to argue with Eisenhower? It’s not like Obama, Bush I, Bush II, Trump, Reagan, Carter or Nixon knew better than Eisenhower. These import restrictions raised the price of domestic crude to roughly double the world price.”

Consequently, the Organization of Petroleum Exporting Countries (OPEC) was created to figure out how to deal with the United States’ crude independence.

Including Canada as a 51st state of sorts, the United States could exist indefinitely on refusing crude imports, he said. In drafting a paper on the subject with fellow Yale University graduates, Hirs discussed the proposal with politicians of both red and blue stripes, each of whom agreed with their analysis and strategy. The hold-up? Public reaction to an inevitable increase in prices at the pump.

So what would happen if a modern-day president took the Eisenhower model and ceased crude imports by executive order?

“Well, of course, he wouldn’t be re-elected, but Eisenhower was on his way out of the office, [but] it’s just a strategic structure. Somebody in the [modern] campaign should talk about it,” he said. “Instead, they talk about import restrictions on the labor market – they’ve got all these concerns about immigration – that’s the labor market.”

The price shock to the energy markets would take current oil prices from the $30 to $40 per barrel range to around $140 before it found a balance, he said. Restricting crude imports – and relying more exclusively on North American hydrocarbons – would put more pressure on consumers, he said. But in the long run, it’s a matter of maintaining the nation’s security: both in energy and its economy.

“We’re just looking out for our own national interest. Believe me, the Saudis are looking out for their own national interests. And the same with the Russians. Keep in mind 80-odd percent of the world’s oil reserves are owned by national oil companies by governments, and these guys are looking out for their own national interests,” Hirs said. “We seem to be the only county that’s not.”


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WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

john weaver  |  February 05, 2016
It is stupid to import and export the same product at the same price. There is no benefit for America.
Greg  |  February 04, 2016
Good ideas, a made in North America price band with tariffs on imported oil from off the continent would provide stability both on the low side and high side of oil prices. Putting in a floor price will keep the domestic industry healthy and vibrant and putting in a ceiling would reduce damage to the rest of the economy that high prices would bring. Local governments that are reliant on tax revenues would see more stable income from royalties or taxes. Efficiency would be encouraged. Refinery utilization for heavier sour crude might require select importation as refineries were reconfigured for a North American blend. Although socialistic, Venezuela is suffering enormously and needs to be considered part of the supply pool under a treaty that would require democratization for participation. They are being put through the meat-grinder by OPEC as well and might appreciate the respite. Allies in Canada have such a large resource base they will surely agree with increasing production to meet US import needs as have never said no before and likely wont. Unbridled competitive dumping by Russia, Saudi Arabia, Iran and Iraq can fuel the rest of the world until customers get tired of their supply antics. North America will be able to sell their customers abundant supplies of LNG as an alternative. North America also now has vast quantities of natural gas that can supply low-cost clean energy back-up for centuries to come.
ROBERT WATT  |  January 29, 2016
I completely agree with Robert Spoley, an import tax is flexible, supports our domestic energy industry while forcing OPEC and Russia to deal with dumping Crude into the global market. We have tariffs on many Chinese products due to dumping low price inferior products into the US; why not provide the domestic energy industry the same protections as is provided to green energy technologies? Oh, that's right, the Obama administration believes that shipping Crude via rail is safer than via pipelines.
Don Jordan  |  January 29, 2016
We can fix the public relations issue very fast and enforce the regulation for Country of Origin (COO) labeling. If I drive up to the pump and see COO from Saudi Arabia or Iran, I will drive away or regret my purchase until I find a COO pump with USA or at least a non OPEC member like Canada. The gasoline tanker truck driver should carry his papers with him all the way to the gas station and should kept on file for inspection just like an elevator permit :) We also have stronger requirements and similar nonsense COO requirements in Dodd-Frank we could mirror and use before it gets repealed.
Jerry.  |  January 27, 2016
Sounds good, but heres the deal. Many of our Gulf Coast refineries were built to process much heavier crudes from Venezuela, Mexico, Saudi-Arabia etc. The design specs on these refineries can't be changed overnight. The other issue is they need volume to run efficiently. A refinery can't be shut down this week and started again next week as and when the right crude becomes available. That's why we're importing oil and we're exporting gasoline, lubricants, and other products and at the same time we're exporting condensate and light crude. That was the reason right after Obama lifted the US export ban, our first export of US crude by ConocoPhillips and Enterprise Product partners was a Light sweet crude/Condensate blend from the Eagle Ford. But, there is light at the end of the tunnel. During the 1930s when the Daisy Bradford #3 well was drilled in east Texas, Texans, who were quite some experts in distillation during the prohibition era started distilling Oil and making gasoline in copper stills. Being in East Texas, the gasoline they produced came to be know as Eastex and the refineries were colloquially known as TEAPOTS. Today, that term is used to define smaller refineries that produce a few thousand barrels of gasoline a day. China to date holds the largest collective of these teapots, which contributes to about 25% of China's refining capacity. They primarily used fuel oil as their feedstock, but have now diversified into other sources like bitumen blends as its not subjected to 8% import tariff duty that China levies on crude imports. According to Platts, the total volume of crude quotas granted to teapot refineries could be around 72.66 million mt/year, with 49.19 million mt/year awarded to 11 teapot refineries. So as you can see, all you need is an entrepreneurial attitude and political will to build the kind and size of refinery you want. All we can hope for is to have some Chinese investors build some teapots in the US itself, so we can have a market for local producers, irrespective of where they send the gasoline to, as long as it helps to soften the Bloodbath of Asset Disposals, Firesales and Bankruptcies our local producers and service companies are currently experiencing right now. And, with lots of Chinese Investors now circling around distressed leases in West Texas & Eagle Ford, those days are not too far off.
Robert Spoley  |  January 27, 2016
I disagree. A ban of any kind is not thought out and has no flexibility. However, an import tariff does have flexibility. The tariff money can be used to start paying off the national debt and should be earmarked as such. The net result is that domestic refiners will immediately start using domestic production which will raise the price of domestic oil, save American jobs and companies and will only raise the price to just below the tariff price. It will also dump the volume of imported oil back on the international market forcing those prices down below the lifting costs of KSA and Russia. This will eventually, through negotiations, result in international proration, thus stabilizing prices and production worldwide for consumers as well as producers. We are waiting for what?
David  |  January 26, 2016
This is not 1956, it is not even the 20th century; and like it or not, we live in the world now, not just in the U.S. Limiting energy imports would make the U.S. totally non-competitive and kill growth and jobs; and hence our economic security. The same is true for limiting exports by the way, just to a lesser degree in today's environment. Furthermore, Unconventionals have proven, if nothing else, that U.S. oil/energy can be ramped up pretty much on demand, so high-oil-price energy security is quickly achievable. Frankly, the U.S. is in greater danger from the lack in its ability to ramp up manufacturing more than the supplies of energy to support security. And given the new face of security and where the U.S. already stands in hard military assets viz-a-viz the ROW, the need for manufacturing to produce 20th-center- world-war-scale military output is not as dire as it used to be. My opinion of course...
Dan Murphy  |  January 26, 2016
I am not an economist. I am not an engineer (although I have spent the last 35 years with engineers). I am simply an old Sales Guy (Business Development) who has been in this industry since 1980 and I have seen quite a few ups and downs including the bust of 1985-86. OPEC has historically dominated Oil Pricing through their massive ability to turn their valves in one direction or the other. They have viewed our growing Domestic industry as a threat not only to their continued dominance as a supplier but also see us as potentially a major rival. We were on the precipice of becoming independent of OPEC but since they can easily afford to over-produce and drive down the World price of petroleum, that is what they have done. Stability is a term seldom heard when it comes to Oil Pricing yet this is what we are all seeking. My solution: A Floating Tariff. We need a steady and reliable floor on the barrel price of oil in order assure the Domestic Oil Industry any hope of long term growth and continued movement toward national Energy Independence. If, for example, the US producers need oil at $80 a barrel for long term growth and sustainability and OPEC imported oil is at $40, the US should slap a $40 per barrel Tariff on all imported oil. I can hear the screams and howls already.) If the OPEC price is at $80 or above--no Tariff. (Donald Trump: Are you listening???) We can also make a firm commitment to apply all Tariff funds to reducing the National Debt or a some other worthwhile national cause. If we don't take action---and soon---OPEC is preparing to give the US Domestic Oil Industry a slow and painful death. This is not an accident but rather a plan. I will go out on a limb and say that if we do not take this action soon we will see--in our lifetimes--Gasoline Rationing and waiting lines at the fuel pumps just like 1973-1974. I was there--I remember waiting for three hours in gas lines. If you think it cannot happen again you are not living in reality.
Tommy Tyler  |  January 26, 2016
Instead of an oil import quota, place a $10 to $20 a barrel import tariff on all imported oil. The money derived from this tariff is earmarked to modernize the U.S. infrastructure, roads, bridges, etc., and never placed in the general fund to be wasted by our politicians, Republican or Democrats.
Eric Smith  |  January 26, 2016
This analysis is spot on regarding the history of oil import quotas, although it fails to mention that the Eisenhower action in 1959, intended to help independent producers in the US, functionally brought about the creation of OPEC. What is fundamentally missing from the analysis, the sin of omission, is an explanation of what we do with all of that imported crude. The short answer is that we refine it in facilities that were specifically designed to process heavy sour crude oil. Without that imported heavy crude you would shut down roughly half of the US refining capacity and begin feverishly importing refined products. The long term fix would be to build new refineries that are optimized for light sweet shale oil but that will take years and billions of dollars per refinery. As with many things, we need to check out the unintended consequences before you leap into the seemingly simple policy change of promoting import quotas.
Bill  |  January 26, 2016
No president has the [guts] to do this, and yes, there is a historical precedent going back to the 1930s of organizing a price floor via various measures to support jobs, but that was when we as a nation were a large net exporter of oil. Times have changed and our country has a more diversified economy prohibiting this from being as calamitous of an event as it would have been 60 to 80 years ago. There is little incentive for a democratic president to consider such maneuvers for largely republican states despite how justified it may seem. I would gladly pay more per gallon to support American jobs in the midwest (I live in Maryland).
Pat  |  January 26, 2016
Finally, someone with some sense.
Marco  |  January 25, 2016
So when the U.S. is importing more oil than when the export ban was put in place, how could hurting the U.S oil industry ever be wrong? Well, if the country asking the question is the U.S, then the answer is unavoidably easy to answer. For some reason the Obama government feels that it is best if U.S companies in the oil industry are thrown to the wolves... a strange motivation for a countrys own leader.


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