Last week, U.S. Energy Sec. Jennifer Granholm sent a letter to refining companies instructing them to limit fuel exports in anticipation of peak hurricane season and elevated domestic demand in the winter months.
Sec. Granholm wrote:
“Given the historic level of U.S. refined product exports, I again urge you to focus in the near term on building inventories in the United States, rather than selling down current stocks and further increasing exports.”
This is not the first time the administration has expected U.S. refining companies to act as miracle workers in the global fuel supply market. Earlier this year, the President sent a letter to major U.S. oil companies demanding they increase refining capacity and blaming them for “blunting the impact of the historic actions” the administration has taken to lower fuel prices – i.e. releases from the Strategic Petroleum Reserve. More on that in a moment.
Covering President Biden’s June letter, CNBC also noted that at the time, refiners were operating at essentially peak capacity and that refining is a complex operation that can’t ramp up immediately:
“Refiners can’t just ramp up output, and utilization rates are already above 90 percent. Additionally, some refiners are now being reconfigured to make alternate products like biofuel.
“… There is no easy solution. John Kilduff, partner at Again Capital, said refiners are working at historically high level. ‘There is nothing left to ramp up,’ he said.”
The Wall Street Journal described Sec. Granholm’s letter as a “political escalation from President Biden’s June command to refiners to immediately lower gasoline prices.” While the letter requests that refining companies voluntarily address domestic supply needs, Granholm’s letter could also be interpreted as a threat:
“It is our hope that companies will proactively address this need. If that is not the case, the Administration will need to consider additional Federal requirements or other emergency measures.”
The irony is that the United States has a dedicated emergency measure – the Strategic Petroleum Reserve (SPR) – which the Biden administration has nearly tapped out. It recently hit its lowest level in 37 years. But aside from emergency solutions, the Wall Street Journal editorial board argues that Sec. Granholm has misidentified the barriers to producing greater supply of refined products, particularly in the Northeast where fuel supplies are perilously low:
“The problem isn’t U.S. exports. It’s the political and regularly assault on U.S. production and refining. … Fuel storage levels would be much higher in the Northeast if not for New York state’s natural gas pipeline blockade, which has made the region more dependent on oil for energy.”
The Journal also makes the point that export restrictions would also further weaken European energy security and call into question the commitments the United States has made to increase oil and natural gas exports to Europe to help the region transition off Russian energy sources:
“The Granholm export threat is also a slap in the face to European allies trying to diversify energy sources from Russia. … U.S. refiners have recently been exporting more fuel to Europe, but Ms. Granholm is now telling them to stop.”
Moreover, Sec. Granholm’s instructions could actually be counterproductive for consumers and for the Biden administration’s political goals. As the Institute for Energy Research points out, since oil and natural gas are traded globally, restrictions on U.S. exports could actually contribute to higher prices:
“Restricting fuel exports is one more counterproductive Biden policy on fossil fuels that would actually tend to increase global fuel prices, including U.S. oil and petroleum import prices, due to reduced global supply.”
Sec. Granholm’s most recent ask of refiners only adds to the administration’s mixed messages. When the Secretary met with the executives of refining companies in June, Reuters reported that export restrictions were not discussed as a serious solution to high gas prices:
“Industry members had hoped to convince the administration not to ban U.S. fuel exports to combat record gas prices. Granholm all but took the option off the table as a short-term solution, the sources said.”
The United States is supposed to have emergency resources to manage domestic supply through natural disasters and other externalities. But unfortunately, due to the Biden administration’s actions that have discouraged U.S. natural gas and oil production and drained the country’s fuel stockpile to make a short-lived dent in gas prices, the country does not have full access to tools it would need to address supply disruptions caused by a hurricane or a colder-than-expected winter.
This is not just bad policy – it actually puts Americans at risk of serious energy supply disruption as the country approaches peak hurricane season.
Bottom Line: With the midterm elections looming, the Biden administration has reintroduced the threat of export restrictions while using the SPR as a political lever. This reflects a misunderstanding of the market and calls into question the United States’ commitment to our allies, since export restrictions would drive up prices and threaten both domestic and European energy security.
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