oversight

Alaskan Crude Oil Exports

Published by the Government Accountability Office on 1990-04-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office
                   Testimony
GAO

For Release         Alaskan   Crude Oil    Exports
on Delivery
Expected at
1:00 p.m. EDT
Thursday,
April  5, 1990




                    Testimony  by
                    Judy A. England-Joseph,       Associate  Director
                    Resources,  Community,      and Economic Development
                      Division

                    Before the
                    Subcommittee  on International           Economic   Policy
                      and Trade
                    Committee on Foreign Affairs
                    House of Representatives




GAO/T-RCED-90-59                                                    GAO Form 160 (12/87)
Mr.   Chairman,    Members of the       Subcommittee:

It is a pleasure   to testify     before you today on the preliminary
results  of our ongoing review of the consequences       of lifting   the
existing  ban on the export     of Alaskan North Slope (AN.51 crude oil.
The Chairman of the Subcommittee        on Energy and Power, House
Committee on Energy and Commerce, requested        this review and has
agreed for us to testify      before you.

Our review has focused on the changes in the                  Alaskan oil trade
that are likely   to occur through     1995, both            with and without   the
ban, and how these changes would affect        the           U.S. economy and our
energy security.1     I should caution    you that            because our work is
ongoing,  our results   are subject    to change.

In summary, if the ban is removed, some ANS crude will                    almost       II
certainly   be exported        to Pacific     Rim countries.      Exports    are likely
because the cost of transporting              oil to the Pacific     Rim is low and
the characteristics        of ANS crude may make it more suitable               to the
needs of Pacific     Rim refiners         than it is to West Coast refiners.
At a minimum, exports         will   include     the Alaskan crude that is
currently   shipped at high cost to distant              U.S. ports on the East
Coast, the Caribbean,         and the Gulf of Mexico.           However, because
Alaskan production       is declining,        sometime in the next several         years
these shipments     will    probably      cease.    In addition    to East Coast
shipments,    some of the oil that would have gone to the U.S. West
Coast is also likely         to be exported.

The probable      effects     of exporting       ANS crude    will   be to

       --   increase    the   price   of ANS crude      at   the wellhead    and,



1GAO previously     analyzed these issues in the report   Pros and Cons
of Exporting    Alaskan North Slope Oil (GAO/NSIAU-83-69,     Sept. 26, 1983).
                                             1
            consequently,      the price     that   West Coast      refiners     pay
            for crude oil,

       --   promote economic efficiency       by reducing   oil transportation
            costs,  increasing    domestic  oil production,     allowing    better
            use of refinery    processing   resources,    and ensuring    that ANS
            oil is allocated     to its highest    valued uses,

       --   hurt the maritime    industry     because        exports  are
            likely  to be transported      on foreign         flag rather
            than U.S. flag tankers,       and

       --   increase    total U.S. oil imports,    but decrease    net
            imports   (total  imports   minus exports)     to the extent
            that oil production      and refinery  efficiency
            increase.

BACKGROUND

The Export Administration            Act of 1979 states           that "no domestically
produced crude oil transported             through the Alaskan pipeline               may be
exported     from the United States.*            The purpose of this ban was to
restrict     *the export      of goods where necessary              to protect    the
domestic     economy from excessive         drain of scarce materials              and to
reduce the serious        inflationary       impact of foreign           demand.“     This
provision      of the law was part of the compromise                  that permitted       the
construction      of the Trans-Alaska         Pipeline.         The act allows       the ban
to be lifted      only upon the President's            certification         that the
export    of Alaskan oil is in the national               interest       and meets several
other specified       conditions.

ALASKAN CRUDE OIL DISTRIBUTION


Let me first   describe    the situation   as it            now stands.         In 1989, ANS
crude shipments    totaled    about 1.8 million             barrels  per       day (MMBD).
                                             2
About 1.3 MMBD went to the West Coast; about 0.3 MMBD to eastern
U.S. ports      via the Trans-Panama     Pipeline--the       U.S. Gulf Coast, East
Coast, and Caribbean;       and the remainder        to refineries    in Alaska,
Hawaii,      and the U.S. virgin   Islands.       Chart 1 illustrates      this
distribution       pattern.

Since 1987, the amount        of ANS oil shipped to eastern       ports has
declined  as a result   of      decreasing   ANS production   and increasing
West Coast consumption.          Because transportation     costs to eastern
ports are considerably        higher    than those to the West Coast, Alaskan
producers  sell most of       their   oil to West Coast refiners.

This trend is expected           to continue,        so that some time in the near
future    ANS crude shipments          to eastern      ports will   cease.     The exact
timing    of this development          will     depend to a large extent       upon the
rate of decline      of Alaskan        production.       Using the Energy               :
Information     Administration's            (EIA) base case assumption        of Alaskan
production,     shipments      to eastern        ports could cease by 1992, even if
West Coast demand for Alaskan production                    remains constant.     Chart 2
 shows this distribution           pattern.

IMPACT OF LIFTING THE BAN
ON ALASKAN OIL DISTRIBUTION

As I indicated      briefly    at the outset,      if the ban on Alaskan oil is
lifted,   there is general       agreement    that the oil now shipped to
eastern   U.S. ports --about       0.3 MMBD--will     be exported     to Pacific
Rim countries.       This will     occur,  to a large extent,       because such
action  would reduce transportation           costs by a considerable        amount.
Chart 3 illustrates         the resultant    pattern    of oil distribution.       YOU
may view this chart as illustrating             the minimum impact of lifting
the ban.

In addition, some of        the oil that         is now shipped to the West Coast
may also be exported,         but opinions         vary on how much.  A possible
                                             3
maximum &act       of lifting      the ban might be one in which the only
ANS oil that would continue           to be shipped to the West Coast would
be oil used by integrated          oil companies,   that is those that produce
oil in Alaska and transport           it to their  own refineries  on the West
Coast.    In 1989, these companies used about           0.6 MMBD of ANS crude.
Chart 4 illustrates        a pattern    of trade based upon this assumption
of exporting    about    1.0 MMBD.

To better understand        the effect      of lifting       the Alaskan oil export
ban, we requested       that EIA carry out an analysis-using                   its
Transportation      and Refining      of International           Petroleum    model.    This
model simlates       world petroleum        activities,        including     crude oil
production     and transportation,        refinery       operations,      and petroleum
products distribution.          Preliminary        results     from the model indicate
that if the ban had been lifted             in 1988, in addition           to the oil
going to East and Gulf Coast ports,                a substantial        amount of the oil
transported     from Alaska to the West Coast would be exported                      to
Pacific    Rim countries.       One reason why this might occur is that
Pacific Rim refiners        may be willing      to pay more for Alaskan oil
than arewest    Coast      refiners     because it better  suits  their product
demand aed refinery        configuration.

While these model results         are useful    in analyzing     the potential
impact of lifting       the ban, they may overestimate         the actual      changes
in trade patterns       that will    take place in the short run.          This
occurs hecause the model does not take into account institutional
constrahts       and other "frictions"      that inhibit     or delay market
ad j us tments .

ECONOMIC IMPACTS

Basically,  lifting    the ban would have two general      kinds of
economic effects.      First,  effects will occur   on economic
efficierry.      In a well functioning  oil market,    economic efficiency
means producing oil so long as incremental        benefits    exceed
                                            4
incremental       costs of production    and allocating          oil    to its highest
value    uses,    in both a national    and international             context.     Second,
parties     that are involved     in Alaskan oil trade           will     be affected,
creating      both "winners"   and "losers."

Efficiency     Increases

I would first      like    to discuss     potential      economic efficiencies          to be
gained from lifting          the ban.     Currently,      a declining,      but
significant,     amount of Alaskan          oil is making its way to eastern
U.S. ports.      Lifting       the ban would accelerate          the disappearance         of
this trade because Alaskan producers                 could reduce their
transportation        costs and receive        higher wellhead       prices     by selling
their    oil to Pacific        Rim countries.        This would produce an economic
efficiency     gain.                                                                       .-

Another potential        gain in economic efficiency             could arise in the
refining    sector.      As you know, light        crudes     are more suited      for the
"light"   petroleum      products,     such as gasoline        and diesel   fuel,     that
are preferred       on the West Coast.       Evidence       suggests   that U.S. West
Coast refiners       have invested      in additional       "downstream"    refining
capacity    to process medium-gravity          Alaskan      oil than needed to
process lighter       crudes.      This has occurred        because West Coast
refiners    have been able to purchase Alaskan               oil at a lower price
because of the export         ban.

If Alaskan     oil were priced    at world market levels,       which we would
expect if the ban was lifted,          these U.S. refineries     might instead
purchase lighter      crudes.    While this would increase       the price   they
pay for crude oil,       EIA's analysis     suggests    that it might allow
refiners    to free up downstream processing          capacity.    If this
occurs,   refiners    may be able    to increase     the volume of lighter
petroleum    products    they produce.      This could produce a gain in
economic efficiency.


                                             5
Lifting    the ban could also promote economic efficiency               by reducing
the amount of heavy petroleum        products,      such as residual      oil,
produced by West Coast refiners.           Residual    oil can be used, among
other things,      to power ships and generate        electricity.       Because
Alaskan oil is relatively       heavy, refiners       currently     produce more
residual    oil than desired.      This supply of residual          oil depresses
its price and leads to more of its consumption                 than might otherwise
occur.     EIA's analysis   suggests    that lifting       the ban would reduce
production     of residual  oil  if refiners      purchase lighter       crudes that
yield    a smaller   volume of residual     fuel.

The ban has also affected      wellhead     prices    for Alaskan oil and, as a
result,   Alaskan and Californian       crude production.        Preliminary
results   of the EIA model suggested        that lifting      the ban might
increase   wellhead    prices for Alaskan oil by somewhere between less
than $1.00 to more than $2.00 per barrel,             depending   on the amount
exported.     This is likely    to lead to some increases         in production
of both Alaskan and Californian        oil,    although    the size of any
increase    is uncertain.

Finally,     a key aspect of economic efficiency           deals with ensuring
that products        are allocated      to their highest   value uses.        In this
regard,     both the United States and its trading            partners    might be
made better       off by lifting      the ban.   Pacific   Rim nations       would have
access to Alaskan oil that has the potential              of better     fitting
their    industrial     needs, and the West Coast would import more light
crudes,     which better      fit  its needs for light-end      products.

Potential   Winners    and Losers

As I mentioned   in my introduction      of potential     economic effects,
lifting  the ban could produce winners       and losers.        Oil producers        in
Alaska and California    would particularly       benefit    from increased
wellhead  prices   if the ban is lifted.       On the other hand, lifting


                                         6
the ban is likely   to hurt    both              independent        oil   refiners      on the West
Coast and the maritime     industry.

Independent     California         refiners     are likely      to be hurt if the export
ban is lifted      because they will            have to pay higher prices             for
Alaskan and Californian             crudes.      Unlike    integrated      producer-
refiners,    against     whom they compete,            the independent        refiners      will
not benefit     from increases           in wellhead      prices.     EIA's ,model
analysis    suggests      that refineries          can be expected       to mitigate        this
loss by purchasing          lighter      crudes,    which are more ideally            suited
for producing      gasoline.           Lower costs of processing           these lighter
crudes may, to some extent,                help offset      increases    in the refiners'
crude oil acquisition            costs.

It is unclear            to what extent        the refiners        will     be able to pass
along increased            crude oil costs to their              customers        in the form of
increased         product     prices.      While,      as I noted earlier,             EIA's
modeling        suggests      a substantial         increase     in the price of Alaskan
crude,       it shows little          change in consumer prices                for gasoline         on
the West Coast.             We have identified            at least       two possible        reasons
why.      First,       a switch by U.S. refineries               to lighter         crudes could
mean more gasoline             produced than under the ban.                    Second, the
availability           of imported       gasoline      may limit       price increases          for
gasoline.           In contrast,       the price       of residual        fuel may rise
substantially           as a result       of lifting       the ban.         This rise is not
unexpected          given the larger         than desired        supply of this fuel
produced as a by-product                of processing        Alaskan crude.             A large
portion        of California        residual      fuel is either          exported      or sold to
foreign        shipowners      for fuel.

The U.S. maritime   industry   also stands to lose from lifting       the ban
on ANS crude exports.      As a result    of the Jones Act (the Merchant
Marine Act of 1920), U.S. flag tankers         transport virtually  all this
crude.   This trade is important       to the industry.    In 1989, 67


                                                  7
tankers      totaling      7.3 million   deadweight       tons (dwt) were involved.2
According        to November 1989 fleet        lists,     these ships represented    39
percent      of the U.S. tanker fleet         by numbers and 56 percent         by
tonnage.         If the ban is lifted      and some of this oil is exported,
foreign      flag tankers,      because their        costs are lower,   are likely   to
transport        that oil.     The result    will     be a loss of U.S. ships,     which
will    be   laid up, scrapped,        or sold,      and the loss of jobs.

To analyze    the impact of lifting           the ban on the maritime             industry,
we asked the U. S. Maritime            Administration          to provide     us
information     on the impact on U.S. tankers                during     the period     1990 to
1995 using the two scenarios            I discussed         earlier.       Chart 3
highlighted     the first      scenario   in which only Alaskan crude that
would have gone to U.S. Gulf Coast, East Coast, or Caribbean                            ports
would be exported.          Chart 4 illustrated            the second scenario,         in
which a substantial          amount of oil that would have gone to the West
Coast would also be exported.             The information            provided    by the
Maritime    Administration       also took into account the decline                  in
Alaskan production         that EIA estimates         will     take place between 1990
and 1995.

According      to the Maritime    Administration,        33 U.S. ships will       be
threatened      by declining    ANS production      during   the period      1990
through 1995 even with the ban in place.                 The effect   of minimal
exports     would be to accelerate       the loss of some of these ships.
Under the maximum export scenario,             the Maritime     Administration
believes     that an additional     7 ships,      or a total    of 40, would be
threatened.

The loss of ships under either    scenario  would reduce the
availability of U.S. tankers   for national   defense purposes.     In
1988, the Commission on Merchant Marine and Defense,      a Presidential

2 Some of these vessels   took part only occasionally.                      For the year,
transportation  of ANS crude required   the full-time                   equivalent  of 40
ships.
                                   8
commission made up of active                and former government         and industry
officials,      carried       out the most recent study of national                 defense
tanker needs.         It defined       the characteristics         of a "militarily
useful"     tanker and outlined           U.S. tanker requirements            to support     a
global     war.    It determined         that a militarily       useful     tanker     is one
of less than 100,000 dwt, the tanks of which are coated                            so that   it
can transport        military     petroleum     products.       Furthermore,        U.S.
requirements       in a global       war are 9.9 million         dwt.     According       to the
information      provided       by the Maritime      Administration,          13 of the 33
ships that could be lost under the first                    scenario     are militarily
useful.       As I noted earlier,           the demand for these tankers             on their
current     routes    is likely      to disappear,       with or without         the ban.
Under the second scenario,               14 of the 40 tankers         that could be lost
are militarily        useful.
                                                                                             ,*
ENERGY SECURITY

Lifting   the ban on Alaskan crude exports             would affect      U.S. energy
security    in three ways.        First,     it would increase    total,     or gross,
U.S. imports.          Second, it would probably       lead to a decrease in net
imports.      Finally,      in an integrated     world oil market,       U.S. energy
security    depends in large part on this market's             smooth and
efficient     functioning.       Lifting     the ban would contribute,         in a
small way, to this end.

Gross U.S. imports    will    increase     because exports      from Alaska will
be replaced   on the world market.          It is difficult       to tell with
certainty   where these imports       will    come from.     However, on the
basis of analysis    provided      by EIA's    model, much of the imports      will
probably   come from the Middle East, Southeast             Asia,   and Latin
America.

U.S. net imports,     that is total    imports  less exports,    will    probably
decline  because   exports   would not be replaced      on a barrel-for-
barrel  basis.    As I indicated    earlier,   imported   crude might lead to
                                              9
improved refinery          efficiency        with the result   that refiners,
particularly       on the West          Coast, may be able to meet the demand for
light    products      with less        crude.    Furthermore,   increased    U.S.
production,       arising      from     higher   crude prices  in Alaska and
California,       would reduce          the need for imports.

Worldwide       oil market efficiency       would improve to some extent            also
if the ban is lifted.            This development        would contribute      to U.S.
energy security        in two ways.      First,     increased     U.S. production
would help diminish,          to at least     a small extent,.        world dependence
on insecure        oil supplies.      Second, greater        security     and
diversification        of supply would reduce the likelihood                of U.S.
trading      partners    in the Pacific     bidding      up world oil prices       as
sharply      as they might otherwise        in a disruption.

OBSERVATIONS

Overall     it appears that lifting               the ban on Alaskan oil exports
could result         in a substantial         amount of Alaskan oil being
transported        to Pacific         Rim countries.         This would probably          lead to
gains in economic efficiency,                 but also it would probably              have
negative      effects        on the maritime        industry      and independent       refiners
on the West Coast.               It would, of course,           benefit     crude oil
producers       in Alaska and California.                 From an energy security
perspective,         lifting       the ban would increase            total   U.S. oil imports
but, probably,            decrease net imports          as a result        of increased      oil
production        and improvements          in refinery       efficiency.




I hope that my remarks will  be useful    to you in deliberating
whether to renew the ban on the export of Alaskan crude oil.        I
will  be glad to respond to any questions    you or your colleagues
may have.


                                               10
Chart   1


GAO         Alaskan Oil Export Ban In Place-
            1990




                                      d   West Coast



                                    \\1            Pipeline
                                              e----a_
                                                              eEast   Coast




                   Hawaii       /

                            *
Chart   2


GAO         Alaskan Oil Export Ban In Place-




                  Hawaii                       FQf?lto
                                                  Rim
                     d                   00    m m%.U.S.
                                                     Ed,
                                                         vigin
Chart   3



GAO         Alaskan Oil Export Ban Lifted-
            Minimum Export Scenario
                              H   I




                                   7-l
                                     GM
                                    Coast
Chart.   4


GAO               -Alaskan
                    - I    Oil Export Ban Lifted-
                  Maximum Expdrt Scenario




                                                v   East Coast




                                                                 St. Croix,
                                                                    us. virgin


             I   Refinery