Reverse Protectionism: Waxman/Markey ‘Fix’ for Keystone XL
Today and tomorrow, the House Energy and Commerce Committee will mark up H.R. 3548, the “North American Energy Access Act,” Rep. Lee Terry’s (R-Neb.) bill to nullify President Obama’s rejection of the Keystone XL Pipeline. The bill requires the Federal Energy Regulatory Commission (FERC) to issue a permit for the pipeline within 30 days of receiving an application. If FERC fails to act on the application within the 30-day period, the bill deems the permit to have been granted.
Waxman and Markey: From Cap-and-Trade to Ban-the-Trade
Committee Democrats lack the votes to defeat the bill, but they hope to use the markup to turn the rhetorical tables on Republicans, who claim Keystone XL will enhance U.S. energy security by reducing our dependence on Middle East oil.
Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) will offer an amendment barring exports from the USA of any Canadian oil shipped via the pipeline and requiring all petroleum products made from Keystone crude to be sold in U.S. domestic markets.
Waxman and Markey know full well that such restrictions would impair the profitability and competitiveness of U.S. refiners, potentially causing them to back out of the long-term sales contracts they negotiated with pipeline builder-operator TransCanada Corp. They know, in other words, that the amendment could scuttle the Keystone XL project and, therefore, that Republicans will vote against it.
But that’s the point. By forcing Republicans to vote no, Waxman and Markey hope to “expose” Keystone XL as an “export pipeline” and, thus, supposedly, as an energy security “scam.” The question they’re likely to pose again and again: If you Republicans really believe the pipeline will reduce U.S. oil imports from unstable, undemocratic, or unfriendly countries, then why won’t you guarantee in law what you say is going to happen anyway?
Keystone crude won’t back out any oil from OPEC, Waxman and Markey contend, because Gulf Coast refiners will simply turn it into products for export. What’s more, they assert, because the oil won’t be used to increase the supply and lower the price of gasoline and other finished products here at home, U.S. consumers won’t get any benefit from it. This line of argument is now the chief talking point against the pipeline (see here, here, here, and here).
Amendment Violates GATT
Although a clever rhetorical prop, the Waxman-Markey amendment is a mischievous ‘fix’ for a non-problem. Keystone supporters on the Committee should give it the raspberries it deserves.
To begin with, a ban on exports of petroleum products made from Keystone crude would violate one of the basic principles of the international trading system: “National Treatment” – treating foreigners and locals equally. The World Trade Organization (WTO) provides a succinct explanation:
Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. . . .National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
Under the National Treatment principle, once Canadian oil has entered the U.S. market via Keystone XL, it must be treated the same as oil produced from U.S. wells. Only if Congress were also to ban exports of petroleum products sourced from domestic crude would the amendment pass muster under the General Agreement on Tariffs and Trade (GATT).
If Congress chose to ignore GATT and enacted the amendment, the restriction would put U.S. refiners at a competitive disadvantage. They could not export products made from increased supplies of Canadian crude, but foreign refiners would be under no such restriction. This kind of reverse protectionism makes no economic sense, especially for folks like Markey, who view trade deficits with alarm.
Anti-Export Is Anti-Consumer
Indeed, one reason Markey wants to end America’s (mythical) oil addiction is because crude oil imports account for such a big chunk of our annual trade deficit. But in 2011, petroleum products — gasoline, diesel, and jet fuel — became America’s top export. U.S. refiners exported about $88 billion worth of fuel last year. If Keystone XL would boost America’s leading export, then shouldn’t Markey the trade hawk switch sides and oppose his own amendment?
Markey claims that without an export ban, Keystone crude will bypass rather than supply the domestic U.S. motor fuels market. That is implausible. Of the 1.2 billion barrels of finished petroleum products refined in the Gulf Coast region (PADD III) from January through October 2011, approximately half was sold in domestic markets. New supplies of Canadian oil will undoubtedly increase exports, but much of it will be used to offset declining PADD III imports of Mexican and Venezuelan crude. DOE analyst Carmen Difiglio observes:
Taken together, U.S. imports of crude oil from Mexico and Venezuela are about 1 million barrels/day lower than their previous peak levels. With an expected decline of Mexican crude oil production of 500,000 barrels per day and the likelihood of increased exports of Venezuelan crude to Asia, current heavy imports to PADD III are likely to decrease by a significant amount within the next five years.
Keystone XL opponents note that PADD III exports of finished petroleum products have increased rapidly in recent years. No dispute there. According to the U.S. Energy Information Administration (EIA), total U.S. exports of finished petroleum products “increased more than 60% since 2007 as markets have become more globally integrated,” and most of those exports came from PADD III.
But to view this as a market failure is deeply weird. Can you think of another U.S. industry that is castigated for becoming more competitive in the global marketplace?
Waxman and Markey profess to believe that banning exports made from Keystone crude will benefit consumers. But why stop there? Why not force refiners to sell all their products exclusively in the U.S. domestic market? Such a policy would produce a glut, gasoline prices would plummet. Great idea, right?
No, it would be just as dumb as banning exports of food, automobiles, computers or any other product on the grounds that decreased sales abroad means a more abundant market here at home.
Any benefit consumers might derive from a ban on petroleum product exports would be exceedingly short-lived. Capacity would be idled and thousands of employees would be laid off. Oil company stock prices would crash. Billions of dollars in capital would flee to countries that don’t persecute oil companies.
Those effects would have two further consequences. U.S. imports of foreign-made petroleum products would increase. The price of petroleum products would increase because we’d have to pay higher shipping costs and because foreign suppliers would face less (or no) competition from U.S. domestic refiners.
Although ostensibly pro-consumer, forcing an industry to produce for the home market only is emphatically anti-consumer. Such an absurd policy differs from Waxman and Markey’s proposal only in degree, not in kind.
Keystone XL Would Displace OPEC Oil*
The fact that U.S. petroleum product exports are growing is actually a reason why Keystone XL would displace oil imports from unfriendly and unstable countries. EIA’s International Energy Outlook 2011 projects that world demand for liquid fuels will increase from 85.7 million bpd in 2008 to 112.2 million bpd 2035. U.S. exports of finished products will also increase to help meet that demand, and refiners will source increasing amounts of crude from domestic producers. Nonetheless, to keep up with world demand while supplying the U.S. domestic market, U.S. refiners will also import millions of barrels daily from foreign producers.
So the question for Waxman and Markey is: Which foreign countries do you want the imports to be sourced from? Every barrel U.S. refiners import from Canada is a barrel they do not have to import from OPEC.
Keystone XL opponents have chutzpah. They argue with a straight face that reliable access to expanding supplies of Canadian oil would not enhance our self-reliance on North American energy, and that undermining the competitiveness of America’s leading export industry would help consumers and the economy.
Why push this ludicrous talking point to the fore now? I suspect it’s because the public isn’t buying opponents’ even more over-the-top claims that Keystone XL will ruin the Ogallala aquifer and wreck the global climate system.
* Jerry Taylor and Peter Van Doren make a strong case that the national security risks of reliance on OPEC oil are overblown. Nonetheless, both sides in the congressional debate on the Keystone XL pipeline assume that, all else equal, it is better to buy oil from friends rather than enemies, democracies rather than tyrannies, stable rather than unstable suppliers. My purpose here is not to assess the extent to which OPEC threatens U.S. national security but whether Waxman and Markey’s proposal makes any sense even on the basis of that widely shared assumption.