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Energy policy provides key to US election

It could well be the sleeper issue of the US election campaign - pump prices and the rising cost of fuel for motorists.

Despite rising reserves and production, American gasoline prices are approaching levels that politicians consider a threat. So much so, the US administration is likely to authorise a release of crude from the country’s Strategic Petroleum Reserve (SPR) in an attempt to bring petrol prices down before Americans head to the polls.

Truth be told, US presidents don’t have much control over gasoline prices. But they inevitably take the blame when motorists feel pinched at the pumps. Little wonder, then, US president Barack Obama feels threatened. And no wonder his Republican opponents see an opportunity. Like it or not, pump prices are a proxy for energy policies and the measure by which they will be judged. They’re a public gauge of energy security, and right now Americans aren’t feeling very secure.

Every US president since Richard Nixon has promised energy independence; none has delivered it. In truth, the concept has been hard to define. Does it mean more domestic production, or fewer foreign barrels of oil – or both?

It’s only now that things could be changing. Ever since US output peaked in the early 1970s, the notion that the US could regain top spot as the world’s largest oil producer has been out of reach, whatever the efforts governments have made to boost local output.

Taking the credit

But the unconventional oil revolution is altering that, just as politicians gear up to fight November’s presidential and congressional elections. Now both sides are trying to take credit for the energy renaissance and the ensuing economic benefits.

In March, the White House released a progress report boasting of increasing domestic oil production every year since President Obama took office in 2008. Oil imports have been falling since 2005, notes the report, so with the bump in home-grown oil supply net imports as a share of total consumption declined from 57% in 2008 to 45% in 2011 – the lowest level since 1995.

According to government figures, the US has displaced about 1 million barrels a day (b/d) of imports since 2008 and replaced it with an equal amount of shale oil. That’s helped the US trade balance, but the rising production is also keenly felt in places like North Dakota, Pennsylvania and Texas, where the energy boom is helping those states lead the country out of recession. And the mix of more oil and weaker demand points to big changes in the entire US energy complex, with ripple effects on the economy and even geopolitics.

Obama’s Republican challengers aren’t exactly willing to credit the White House with this. And it’s safe to say Obama’s energy policy hasn’t always been coherent or consistent. That was illustrated in late March, when Obama said he would speed up construction of the southern leg of the Keystone XL pipeline. Previously, his administration, under pressure from the green lobby, delayed the main project, which would have piped Canadian oil-sands crude to US Gulf Coast refiners. Now he says the leg between Cushing, Oklahoma, and Texas can go ahead. Although it will alleviate a bottleneck at the main US trading hub, critics say it isn’t enough to deliver growing volumes from North Dakota’s Bakken shale to Gulf refineries.

Policies lag production realities

Republicans aren’t going to let Obama take credit for rising domestic production, either. David Wilkins, the former US ambassador to Canada, a vocal supporter of Republican presidential candidate Mitt Romney, told Petroleum Economist the US’ new production muscle “has little to do with anything the president has done”. America’s drilling boom, say the president’s Republican foes, have come in spite of policies that have discouraged production.

Most of the gains in output have come from privately owned land, while oil production on public land has declined. According to the Energy Information Administration, production on federal lands has fallen about 10% since 2003, to the equivalent of 18.6 quadrillion British thermal units. Despite vows to open federal waters for offshore drilling, Florida and California remain closed. Although drilling has resumed in the Gulf of Mexico, permitting levels are about a third of what they were prior to the 2010 Macondo disaster.

Obama, meanwhile, continues to refer to oil as the “fuel of the 20th century”, and in March called on the US congress to eliminate $4 billion in annual tax breaks to the industry. Hitting the oil industry may garner some votes, but could be counter-productive. As a recent editorial in the Wall Street Journal pointed out, the oil industry has paid $35.7 billion in corporate taxes since 2009, about 10% of non-defence spending. Without oil cash in US coffers, the country’s deficit would be much higher. The truth is that the industry is subsidising the government, the Journal argued.

That’s a discrepancy the challengers for Obama’s job are keen to exploit, hoping there are votes to be found in painting the president as hostile to one of the country’s biggest industries.

While it makes for good election fodder, these surface debates barely recognise the structural shifts under way in the US oil sector. According to Peter Tertzakian, an economist from Arc Financial, an investment firm, US energy policies are being shaped through the lens of scarcity. Images of gasoline shortages, which did much to scuttle the presidential re-election bid of Jimmy Carter in 1980, terrify the White House.

Structural imbalances distort markets

Yet the country’s politicians would be better off thinking of the US’ growing energy abundance – and ways to build the infrastructure necessary to get that output to market. Despite higher reserves and production, the glut of Bakken and Canadian oil dumped into Cushing is distorting the US market. Without adequate access to that oil, refineries on the east coast and Gulf of Mexico have been forced to buy oil whose price is based on Brent. That’s been reflected in the price of WTI, which has opened up record discounts to Brent. In short, the US may be producing a lot of its own oil, but infrastructure bottlenecks mean Americans are paying for it with prices that reflect events in Iran or South Sudan, not the Bakken.

Product differentials and downstream capacity constraints, though, aren’t part of the way the election cycle is framing the debate. For all the improvement in the US’ oil-trade balance, high gasoline prices are at odds with the average voter’s notion of oil self-sufficiency.

Indeed, both sides in the election have barely sensible ideas pandering to those whims. Obama hopes a release of crude from the SPR could soften gasoline prices at a crucial point in his campaign. In March, he began lobbying the UK and other countries to support a stock release, aware that unless other members of the International Energy Agency agreed, the ploy would be unlikely to work. Even if a release took place, it would do little to ease pump prices. And Republicans would rightly say the White House was using a national emergency stock for its own ends.

The Republicans are floating silly ideas of their own. Newt Gingrich, one of Romney’s challengers, has pledged a cap on gasoline prices of $2.50 a gallon, a third of their level now. But America’s drilling boom has come on the back of high oil prices. Cheaper gasoline would follow an unlikely collapse in international crude markets to around $50 a barrel. Such prices would also make a lot of oil production in the Bakken and Canada uneconomic, knocking out the very source of America’s growing energy autonomy. Rig counts have doubled because prices have climbed to $100 a barrel and stayed high, says Tertzakian. In that sense, $4/g gasoline shows the market is operating as it should: boosting the incentive to produce more oil, even as demand is rationed.

In the end, the differences between both sides may be more limited than thought. Republicans might be perceived as more industry friendly, but without a set of policies that envision an infrastructural overhaul of the US market, their focus on pump prices just injects hostile rhetoric while perpetuating the status quo. As the discourse dies down after November, more sensible policy-making must come to the fore.

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