The danger of a US fossil fuel export ban

One climate thing to start:

• Germany, Austria and the Netherlands are firing up mothballed coal-fuelled power plants after Russia cut gas supplies to Europe. It prompted a warning from European Commission president Ursula von der Leyen, urging the continent to not backslide on “the dirty fossil fuels”.

Welcome back to another Energy Source!

In today’s newsletter, I look at the US’s fossil fuel export boom, which is coming into the political crosshairs as president Joe Biden tries to tame high fuel prices at home. Is the export surge under threat? And in Data Drill, Amanda looks at China’s hotly anticipated carbon market a year after its launch. It’s been a sluggish start.

Thanks for reading!

Justin

Is the American fossil fuel export surge politically sustainable?

An armada of American crude, gasoline, diesel and liquefied natural gas shipments are delivering record amounts of fuel to a world running on fumes.

But as pressure mounts on president Joe Biden to tame surging fuel prices at home, those exports are coming into the political crosshairs.

“It’s time for the president to act, declare an emergency on behalf of working families, and limit exports of petroleum,” said Tyler Slocum, head of the energy program at Public Citizen, a Washington, DC group that lobbies for progressive causes. The sentiment has been echoed by a number of left-leaning Democratic lawmakers, including Senator Elizabeth Warren.

Among the biggest questions in energy markets is whether the Biden administration will try to rein in exports in an attempt to bring down prices at home. The president’s political prospects look dimmer and dimmer the longer Americans are paying $5 a gallon at the pump. The surging price of gas is among the main drivers of the highest inflation rate in the US in 40 years.

Export controls are one of the few levers the president has left to pull in energy markets after a record release of crude from the nation’s strategic stockpiles. The administration has fuelled speculation that it will act by saying “all tools are on the table” to combat high prices. Some might see oil and gas producers as an easy target as they cash in on tight global supplies. The administration is expected to meet oil industry executives this week, where exports are likely to come up.

There is evidence that elevated levels of exports are contributing to high fossil fuel prices at home. Natural gas prices, for instance, are down more than 20 per cent since a fire knocked out the south Texas Freeport LNG export plant for at least the next few months. An extended shutdown of the plant is likely to mean gas that would have been exported over the summer will instead go into storage, helping to lower prices.

Some argue a ban on exporting crude or refinery products such as gasoline and diesel could have a similar effect on prices for those fuels.

But a move to rein in oil, gas and fuel shipments would carry big risks, as it could wreak havoc in global markets and backfire at home.

Take a potential crude export ban: America’s refineries are mostly set up to process heavy and sour crudes from abroad, while the bulk of output from the big shale fields such as the Permian in Texas and New Mexico is light and sweet. US refiners are processing about as much domestic output as they can, making international markets a vital outlet for growing US shale production, which the administration says is one of its short-term energy goals.

Bottling up exports would swell inventories quickly and could soon force US producers to shut output for lack of a market. The move might temporarily push prices down domestically, but it would damage American oil producers in a way that could push prices higher over the long term.

Banning exports of gasoline or diesel would be just as messy. A temporary fuel export ban could help bring prices down in some areas, especially the refining heartland on the Gulf Coast, where there would be more supply available.

The problem would be moving the fuel around the US. A lack of pipelines and restrictions on seaborne shipping within the US under the Jones Act means that getting fuel from refineries on the Gulf Coast to the East Coast would be tricky. The move would likely push up the cost of the fuels on international markets. In turn, this could actually drive prices higher for major American economic centres such as New York, Washington, DC and Boston, which would remain reliant on imports.

But it’s the damaging effects abroad that could prove trickiest for Biden.

Under this administration there has been little talk of “freedom gas” or “molecules of freedom” as there was under former president Donald Trump. But Biden has similarly sold the world on US fossil fuels as a reliable and preferable replacement for supply lost as the West has tightened sanctions on Russia.

Biden has promised EU leaders a big rise in LNG exports this year to help replace gas piped into the continent from Russia, for instance. US exports are also helping plug a gap in Europe and elsewhere left by the loss of Russian diesel and gasoline.

Restricting exports might prove politically tempting because Biden has few levers left to pull to bring down fuel prices. But yanking US fuels off global markets for domestic political reasons, after knocking Russian supply off the market, would do major damage to the president’s standing at a time of deep, global concerns about energy security and soaring fuel prices. (Justin Jacobs)

Data Drill

It has been almost a year since China launched its national emissions trading scheme (ETS). It’s been a rocky start.

Prices for allowances on the world’s largest carbon market sit at less than $10 per tonne, a small fraction of the price the World Bank says is needed to meaningfully curb emissions.

While low prices are typical for early carbon markets, policy uncertainty and issues with data credibility have also helped stymie activity in Beijing’s ETS. In March, the Ministry of Ecology and Environment found numerous cases of inaccuracies and fraud in emissions reports. Earlier this month, the ministry delayed its deadline for emissions reporting by three months, citing Covid-19 restrictions.

“There aren’t many incentives for compliance,” said Luyue Tan, a carbon analyst at Refinitiv.

China’s ETS covers roughly 2,000 companies in the power sector, with plans to incorporate other industries in future cycles. While China was expected to include aluminium and steel in its carbon market in 2022, those plans are also likely to be delayed.

The delays come as China increases coal production to boost economic growth following lockdowns. According to the Global Energy Monitor, Beijing approved 7.3GW worth of coal power plants in the first six weeks of 2022, double the amount for the entirety of 2021. (Amanda Chu)

Power Points

• Russia’s decision to cut gas supply to Europe shatters the illusion that it would not turn on its biggest customers.

• Germany reopens coal plants to avoid energy shortages from Russia’s cuts to gas supply.

• Africa needs $25bn a year to achieve universal energy access by 2030, says IEA chief.

• Green tech start-ups saw funding collapse in previous market downturns, but investors say it won’t happen this time around. (Bloomberg)