Report

Should America Start Exporting Oil?

Energy execs and a powerful senator say it's time -- even though the U.S. still doesn't drill enough to supply itself.

Washington, long accustomed to hoarding America's energy imports, is now starting to debate the once-unthinkable: whether to start exporting crude oil from the United States. The political debate, which kicks off in earnest Tuesday with a speech and paper by Alaska's Republican senator, Lisa Murkowski, shows just how far the U.S. energy revolution has transformed generation-old ideas about energy security and the country's vulnerability.       

Exporting oil is banned by U.S. law. But Sen. Murkowski will try to make the case for why the U.S. needs to take a fresh look at the prohibition, and why exporting crude oil might make sense for a country that is still, and will apparently always be, a net importer of the stuff.

The pro-export bandwagon has plenty of supporters: oil companies, free traders, a spate of energy analysts, and the edit pages of the Washington Post and Chicago Tribune. Jack Gerard, the chief executive of the American Petroleum Institute, the oil lobby, is expected to repeat his group's call for an end to antiquated export rules in a wide-ranging speech on Tuesday. Energy Secretary Ernest Moniz has said it's worth revisiting the ban, too.

"Murkowski and Moniz are looking to put the issue on the table, and Murkowski is signaling that the GOP is ready to talk about this," said Skip York, an analyst at Wood MacKenzie, an oil and gas consultancy.

Generally speaking, proponents figure crude exports will lead to higher domestic production, lower prices for consumers, and a healthier trade balance.

But there's plenty of opposition to the idea as well, most notably from Democratic lawmakers such as Ed Markey and Robert Menendez, who say shipping U.S. oil overseas will hurt consumers by raising the price of oil and gasoline, no small matter in an election year.

"The calls to overturn decades of U.S. law to permit the export of American crude oil are about boosting the oil industry's profits at the expense of our energy security and our consumers," Sen. Ed Markey (D- MA) told Foreign Policy. "With the U.S. still getting nearly half of the oil it imports every day from OPEC, we should ensure that the oil we produce here stays here to reduce our dependence on unstable regions and protect consumers and our economy."

With a few exceptions, the United States has banned exports of crude oil since the energy traumas of the early 1970s, particularly the Arab oil embargo that underscored just how vulnerable the American economy is to supply shocks and volatile oil prices. Ever since, the export ban has been apparently irrelevant: U.S. dependence on imported oil kept rising as production plummeted, reaching a nadir in 2005 when the United States imported three out of every five barrels of oil it consumed.

But then the hydraulic fracturing revolution took the United States, and the world, by storm. Fracking unleashed huge amounts of natural gas, in turn setting the United States on the path to become a net gas exporter. At the same time, it made the United States into an oil-pumping powerhouse again.

Crude-oil output rose from about 5 million barrels a day five years ago to nearly 8 million barrels a day now. In 2012, U.S. oil-production growth topped the world. The Energy Information Administration just revised upward its outlook for crude production, and expects the United States to flirt with 10 million barrels a day by 2019.

Still, despite the fracking boom, the United States is far from self-sufficient in oil. It still imports around 10 million barrels a day, more in absolute and relative terms than it did at the time of the OPEC embargo. And plenty of energy experts, including in the U.S. government, expect crude production to taper off after that 2019 peak.

So why are crude exports even on the table?

In a way, it's because oil exports are already sneaking out the back door, in the form of refined products such as diesel fuel, gasoline, and petroleum coke. The United States now exports about 3 million barrels of refined products a day -- making the country a net exporter of the petroleum products, if not of oil itself. The hodgepodge of laws and regulations governing energy exports never banned the sale of finished goods, just the raw material. So part of the U.S. energy bonanza is finding its way overseas anyway.

As Sarah Ladislaw of the Center for Strategic and International Studies wrote recently, U.S. energy exports seem to be guided by "molecule laws," where hydrocarbons are treated differently depending on their molecular makeup.

Allowing exports of crude oil, proponents say, will help boost domestic production and enable a more efficient use of energy resources. Refineries on the U.S. Gulf Coast are optimized to process heavy, sour crudes, such as those that come from Canada, Mexico, Venezuela, and parts of the Middle East. The fracking boom, meanwhile, has unleashed torrents of light, sweet crude that could better be refined elsewhere -- but can't, because of the export ban.

Since there is a glut of domestic production in the center of the country, and a dearth of ways to ship it exactly where it's needed, U.S. oil prices trade well below the global benchmark price. Over the last year, the spread between U.S. West Texas Intermediate crude and London-traded Brent crude has reached $23 a barrel; right now, it's around $13 a barrel.

That's good news for Midwestern refiners, who can buy cheaper crude and then make gasoline and other products. But it doesn't do much for consumers, who still buy gasoline derived from the higher, global price. And it doesn't help U.S. oil producers, who get less money per barrel than their international peers.

"In terms of the U.S. consumer, there is no perceivable benefit from a ban on exports. To the degree there is a benefit in the market, it's to refiners who have access to cheaper crude, not necessarily to U.S. consumers," said Ed Morse, oil analyst with Citigroup in New York.

Echoing the debate that has taken place in the last couple of years over U.S. exports of natural gas, opponents of crude-oil exports worry that shipping relatively cheap U.S. fuel abroad will lead to higher prices at home.

Sen. Robert Menendez (D-NJ) warned President Barack Obama about the impact of exports on prices at the pump in a letter in December.

"Why would we want to export oil and raise American oil prices to match the world's oil price? Crude oil that is produced in the U.S. should be used to lower prices here at home, not sent to the other side of the world," he wrote.

Supporters of oil exports argue that free trade would actually lower prices.

"If exports of crude are allowed, it should have a damping effect on global prices, and a damping effect on gasoline prices. So ironically, you could move to a lower price gasoline environment by allowing crude exports," said Citigroup's Ed Morse.

Just as with exports of natural gas, supporters also point to the potential trade dividends. If the United States can eventually export 500,000 barrels a day -- and it already ships 100,000 barrels a day to Canada, one of the rare exceptions allowed under current rules -- that would be worth more than $16 billion a year at current prices.

Given that crude exports would help the trade balance and, by ensuring more domestic production, boost job creation as well, Wood MacKenzie's York thinks the White House could support easing the ban, despite the tricky politics.

It's still unclear yet whether there's enough momentum in Washington to end the ban on oil exports, and the physical glut in the Midwest may not max out until next year. But the very fact that top policymakers, including one of the leading energy voices in Congress, are taking a fresh look at the wisdom of restricting trade in a crucial global commodity speaks volumes about just how far America's energy revolution has already gone.

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Report

Cashed Out

Financial sanctions may have forced Iran into nuclear talks. They’re also unfair and undemocratic, European courts say.

The White House and Congress have credited international sanctions with forcing Iran to negotiate a nuclear deal. But the American and European coalition that imposed those measures is now in danger of coming apart, because of widely different notions about what makes sanctions fair. Some of America's closest allies now want to give blacklisted individuals the right to challenge their designation as international malefactors. It's a step the United States is fighting at every turn.

During the past 15 years, the United States has successfully mustered international support for targeted sanctions against hundreds of alleged terrorists, nuclear arms proliferators, and other international miscreants. The measures -- including travel bans, asset freezes, and trade and financial restrictions -- have exacted a high price for terrorists and their financial backers as well as for countries, including Iran and North Korea, that routinely flouted U.N. demands to curtail their nuclear activities.

But a series of European court rulings have denounced those very sanctions as fundamentally unfair and undemocratic. The measures violate basic norms of due process, the courts say, placing sanctioned individuals in a kind of Orwellian legal black hole with no right to challenge the evidence -- much of it secret -- used against them. European judges have overturned asset freezes on alleged Iranian nuclear proliferators. And European governments are pushing the United Nations to reform its sanctions system to grant individuals the right to some form of recourse.

"Effective sanction regimes and the right to due process of listed individuals do not contradict each other," Peter Wittig, Germany's U.N. ambassador, told Foreign Policy.

But the American notion of due process in these cases is different than the European conception. Individuals and companies designated by the United States can petition to be taken off the list, but petitioners and their lawyers are often not privy to the evidence against them because it is classified. Because most of the listed people aren't U.S. citizens, they aren't entitled to the due process rights of the American justice system. U.S. authorities have to prove only that they acted reasonably, not that the underlying evidence against a person or company proves them guilty beyond a reasonable doubt. Not only are the targets of American-led sanctions routinely denied access to the evidence that put them on the blacklist, but they have to appeal for removal to the same government office that put them on the rolls.

A series of high profile lawsuits have placed the U.N. Security Council, which serves as its own judge and jury, on a collision course with European courts, which are increasingly questioning U.N. actions that run afoul of human rights protections on their own soil.

Last summer, the European Court of Human Rights found governments in the European Union could not impose "restrictive measures" against Yassin Abdullah Kadi -- a resident of Saudi Arabia who was sanctioned by the U.N. Security Council in 2001 for his alleged association with Osama bin Laden and al Qaeda -- "without evidence to substantiate his involvement in terrorist activities." The ruling had little practical impact on the fate of Kadi -- who had already been removed from the U.N. sanctions list in 2012 -- but it raised the evidentiary standards required by European governments to enforce U.N. sanctions against individuals.

More worrying for American and European policymakers was a September ruling by Europe's second most powerful court, the European Union's General Court, which quashed decisions by the European Union to freeze some of the funds of an Iranian banker and seven Iranian banks, insurers, and companies linked to Iran's nuclear program. The court decided that the European Union failed to provide sufficient evidence to support its claims of wrongdoing. The European Union is appealing the case.

The row over the sanctions enforcement comes at a delicate moment. The sanctions against Iran and the people who support the regime are widely credited with leading to the current negotiations over Tehran's nuclear program. U.S. legislators are threatening to impose additional sanctions if such a deal doesn't pan out to their liking. (While the United States maintains its own blacklist, which is much longer than the U.N.'s list, the American efforts have been bolstered, both in effectiveness and perceived legitimacy, by the support of the United Nations and member countries.)

Some legal experts sharply criticized European judicial activism on behalf of sanctioned individuals. The European courts' rulings in favor of the rights of sanctioned individuals ignore European governments legal obligations under the U.N. Charter to enforce sanctions, these experts say, and could ultimately weaken the authority of the U.N. Security Council.

"For countries' that want U.N. Security Council actions to work, to be implemented, to have bite, they should worry about this." Larry Johnson, a former U.N. lawyer and professor at Columbia University Law School, told Foreign Policy. He's particularly concerned about "the precedent it sets for other sanctions, including those imposed on Iran and North Korea."

"If the European Union allows its 28 members to disregard binding Security Council sanctions, why can't any other country, citing its human rights standards, ignore Security Council sanctions on Iran and North Korea?" he added. "There is a real danger this will erode and undercut all binding Security Council resolutions."

The struggle to save the sanctions -- while keeping them fair -- is now centered on an obscure U.N. office, known as the sanctions ombudsperson. It's a post created in 2010 to grant a hearing to targets of al Qaeda sanctions after criticism that people were designated on flimsy evidence in the immediate aftermath of the 9/11 terrorist attacks. Germany and several other mostly European powers have urged that the mandate of the ombudsperson, a former Canadian judge named Kimberly Prost, be expanded to include other U.N. sanctions lists. The European goal is to gradually build in a review process in the hopes of satisfying European courts, and thereby surmount the current impasse.

"We have had so many legal challenges in our courts that we could come to the point where we cannot implement the Security Council resolutions because they violate other obligations we have under European and international law," Liechtenstein's U.N. ambassador, Christian Wenaweser, said in a telephone interview. "Our view is that having a better system of guarantees of due process will actually strengthen the sanctions regimes; it will give it more credibility and legitimacy. For sanctions to be sustainable this will be essential."

But the United States has pushed back, a European diplomat, who spoke on condition of anonymity, told Foreign Policy. The U.S. is telling its European counterparts that the expansion of such rights to all U.N. sanctions targets might alleviate some of the pressure those measures impose. American officials argued that efforts to enforce sanctions on Iran and North Korea to constrain their nuclear programs have already been hampered by resistance from China and Russia. A review process, they maintain, would provide those governments with another lever to limit action against sanctions violators.

And while a dozen countries -- including the U.K., France and Germany -- have so far signed agreements to share information with the ombudsman, the United States has not. (The United States does share some information in some cases.)

"One of the challenging things for me is that I need to get access to the underlying information, which may be classified or confidential," Prost said in an interview.

Since she was appointed over three years ago, Prost has finished 40 cases, which have resulted in 32 individuals and 25 entities being delisted, including the founder of an Islamic charity based in Oregon that was blacklisted after 9/11. Saudi Arabian Soliman al-Buthe was taken off the U.N. list in February 2013, but he and the charity Al Haramain Islamic Foundation remain on the American list.

"While the Americans still refuse to disclose reasons behind their actions, the United Nations now prohibits unfair practices," Buthe told the Associated Press when he was delisted. "It was this change that allowed me to clear my name."

Prost says there are cases where the U.N. delists someone and the U.S. keeps up its sanctions, possibly because they have confidential information that she doesn't have access to. "I do think they take a look at the cases when they come off the U.N. list, but it certainly isn't automatic by any stretch," Prost said.

Prost has been roundly praised by European diplomats for serving as an energetic advocate for listed individuals who merit removal from the U.N. blacklist. But her efforts have been insufficient to satisfy European courts, which are increasingly challenging the imposition of U.N. sanctions within European borders if they feel the U.N. hasn't provided sufficient evidence to build a credible enough case.

Individuals have long been caught in the U.N. Security Council sanctions net. But the number of individuals subject to asset freezes, travel bans, and other U.N.-imposed punitive measures has skyrocketed in the past 15 years.

After international revulsion over the deadly consequences of the crushing comprehensive 1990s trade embargo on Iraq, the U.N. Security Council developed the concept of "smart sanctions" -- targeted measures designed to punish terrorists, war criminals, and their supporters, or at least to coerce them into improving their behavior. The U.N. has since seized the assets or banned travel by warlords, businessmen, black market diamond traders, insurgents, terrorists, government officials, officers, arms traffickers, and other suspected international malefactors in Africa, the Middle East and East Asia.

In the late 1990s, the U.N. Security Council first imposed sanctions on members of the Taliban, which ruled Afghanistan at the time, for refusing to surrender Osama bin Laden to U.S. authorities. The list was expanded after the 9/11 attacks to include al Qaeda members and their supporters. At the time, the United States supplied virtually no evidence to support its claims that the sanctions' targets were, in fact, supporting the terror group.

But the sanctions have spawned multiple lawsuits, prompting European and other Western governments with nationals targeted by sanctions to press for reforms at the United Nations. In 2009, the Security Council agreed to establish the post of ombudsman to review cases to determine whether individuals deserved to be taken off the list.  

At the U.N., a coalition of countries -- including Austria, Belgium, Costa Rica, Denmark, Finland, Germany, Liechtenstein, the Netherlands, Norway, Sweden, and Switzerland -- recently pressed the Security Council to expand due process rights to other individuals.

Speaking on behalf of the group, Austria's deputy U.N. ambassador, Andreas Riecken, told the Security Council on Nov. 27 to gradually extend the ombudsman's mandate on a "case by case" basis to some other U.N. sanctions regimes, recommending the council start by providing recourse to individuals targeted by sanctions related to Liberia, Somalia and Eritrea.

"The question of fair and clear procedures is not limited to the al Qaeda sanctions regime; rather, due process standards and the rule of law apply in all situations in which the actions of the U.N. and its organs directly affect individual rights and fundamental freedoms," Riecken said.

"Every individual or entity included on a Security Council sanctions list should have the right to be informed of the reason for listing, the right to be heard, and the right to an effective remedy," he added.

Riecken said the reversal of sanctions against Kadi, the accused al Qaeda associate, "has made evident that the existing listing and delisting procedures cannot be the end of the line." The Security Council, he said, "needs to explore additional measures in order to improve the quality of listing and, most importantly, to increase the available information on reasons for listings."

The reality, according to Liechtenstein's Wenaweser, is that sanctions will only be sustainable over the long run if the U.N. Security Council can find a better way to address the due process rights of those it puts on the list. "Our view is that having a better system of guarantees of due process guarantees will actually strengthen the sanctions regimes; it will give it more credibility and legitimacy. For sanctions to be sustainable this will be essential."

But Columbia University's Johnson took issue with the European approach, saying that they were engaging in a kind of "European exceptionalism" by ignoring a central provision of the U.N. Charter -- Article 103 -- that, he said, makes it clear that the dictates of the U.N. Security Council override domestic or regional laws. "In the event of a conflict between the obligations of the members of the United Nations under the present Charter and their obligations under any other international agreement," the provision states, "their obligations under the present Charter shall prevail."

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