Investment research firm Oppenheimer published a new investment report on September 23rd focusing on U.S. energy policy. Oppenheimer analysts Fadel Gheit and Luis Amadeo argue that the U.S. needs to develop a comprehensive long-term energy policy, and that doing so would have a number of positive ramifications, including energy independence, a less fractured foreign policy and improved national security.
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The Oppenheimer analysts explain their perspective in the introduction to the report. “A national energy policy could be the US path to energy independence with a profound impact on the economy, foreign policy, and national security. Recent global events have brought a new sense of urgency to the energy debate. We believe lifting the 40-year old oil export ban, revamping the Renewable Fuels Standards, approving major pipeline projects and allowing LNG exports are critical to achieving this goal.”
Ending oil export ban
Gheit and Amadeo believe that ending the 40-year old oil export ban would reduce oil prices, narrow the crude differential and lower refined product prices, both of which would benefit the consumer and increase economic growth. They point out the biggest winners if oil exports resumed would be manufacturing and transportation firms and the most negatively impacted would be U.S. refiners as smaller crude differentials would shrink their cost advantage and likely reduce gasoline exports.
U.S. natural gas production continues to grow rapidly, reaching record levels for eight consecutive months so far in 2014. Most of the growth is coming from drilling in liquids-rich plays, where gas is just a by-product, a trend the Oppenheimer analysts anticipate will continue. Gheit and Amadeo also point out that LNG exports would “set a floor for U.S. natural gas prices”, leading to more capital spending and increased production.
Improving infrastructure constraints
U.S. domestic crude production now exceeds existing processing and transportation capacity, a situation that is not likely to be resolved for some time given permitting delays and uncertainty about production and pricing. The Oppenheimer report anticipates that “limited gas takeaway capacity to remain a major factor limiting production growth.” The analysts also highlight that the construction of the Keystone pipeline would “free up additional 850 mbd of oil for exports or reduce equal volume of imports.”
Reform of renewable fuel laws
Gheit and Amadeo also argue that renewable fuel laws need reforming. They note the” EPA acknowledged earlier this year that the Renewable Fuels Standards, the RINs cost, and the ethanol blending regulations are unworkable, [but] no changes have been made or even proposed”. They believe this uncertainty will muddy the refining industry outlook and reduce long-term investment. The analysts also note that refiners and car manufacturers are resisting increasing ethanol blending above 10% because of worries about potential liabilities.