Transportation Systems Casebook/Transportation impacts of lifting the crude oil export embargo

SUMMARY
There is current debate across many sectors in the country as to whether or not the crude oil export ban in the United States should be lifted. The case will review the motivations behind lifting and retaining the ban, the background of the ban itself, and the many policy issues that are currently playing a role in the debate. There will also be an explanation of the process of refining crude oil, as well as the various ways crude oil is transported across the country. This case study will give a thorough overview of the ban on exporting crude oil and the resulting impacts on transportation if the ban were to be lifted.

Government Actors
Bureau of Industry and Security: a sector in the Commerce Department that regulates crude export restrictions

President of the United States: can allow crude oil exports if found to be in the “national interest”

Congress: can pass or deny legislation ending crude oil export embargo

EPA: has ability to fine companies for spilling crude oil

Federal Railroad Administration: responsible for overseeing safety on railroads

Pipeline and Hazardous Materials Safety Administration: regulates safety guidelines regarding crude oil

Industry Actors and Concerned Citizens
American Petroleum Institute: the primary Trade Association for the U.S. petroleum industry, including members in exploration, production, transportation, refining, and marketing.

Independent Petroleum Association of America: Trade Association for independent crude oil and natural gas explorer/producers.

National Petroleum Council: a federally chartered and privately funded advisory committee to advise, inform, and make recommendations to the Secretary on any matter relating to oil and natural gas or the industries associated with oil and natural gas.

American Fuel and Petrochemical Manufactures: Trade Association representing high-tech American manufactures of fuel and petrochemicals.

Association of American Railroads: Trade Association representing America's freight and passenger railroads.

Association of Oil Pipe Lines: Trade Association representing America's oil pipeline infrastructure.

American Waterways Operators: Tug, tow and barge Trade Association.

Waterways Council, Inc.: Tug, tow and barge Trade Association.

Environmental Groups: opposed to lifting the ban due to fear of environmental impacts, such as increased carbon emissions

Union Associations: Workers in the industry for oil producers, transporters, and refiners.

TIMELINE OF KEY EVENTS
1973: OPEC Oil Embargo

1975: Congress passed the Energy Policy and Conservation Act of 1975.

1979: Congress passed the Export Administration Act.

March 24, 1989: Exxon Valdez Oil Spill in coastal waters off of Alaska

2001: The Export Administration Act expired. The President issued the International Emergency Economic Powers Act as an Executive Order.

2002: Pipeline Safety Improvement Act

2004: Coast Guard and Maritime Transportation Act

2006: Light Tight Shale Crude Oil Boom Started

July 25, 2010: Enbridge Oil Spill in Kalamazoo, Michigan

March 29, 2013: Pegasus Oil Spill in Mayflower, Arkansas

July 6, 2013: Train Derailment and Explosion in Lac-Mégantic, Quebec, Canada

April 2014: H.R.4349 (Crude Oil Export Act) introduced in the House. H.R.4349 will allow unlimited crude oil exports without a license to countries without sanctions.

March 2014: H.R.4286 and S.2170 (American Energy Renaissance Act of 2014) introduced in the House and Senate. H.R.4286 and S.2170 will allow unlimited crude oil exports without a license to countries without sanctions. .

December 2014: H.R.5814 (To adapt to changing crude oil market conditions) introduced in the House. H.R.5814 will allow unlimited crude oil exports without a license to countries without sanctions.

January 2015: H.R.156 (Crude Oil Export Act) introduced in the House. H.R.156 will allow unlimited crude oil exports without a license to countries without sanctions.

February 2015: H.R.666 and H.R.702 (To adapt to changing crude oil market conditions) introduced in the House. H.R.666 and H.R.702 will allow unlimited crude oil exports without a license to countries without sanctions.

March 2015: H.R.1487 and S.791 (American Energy Renaissance Act of 2015) introduced in the House and Senate. H.R.1487 and S.791 will allow unlimited crude oil exports without a license to countries without sanctions.

May 2015: H.R.2369 and S.1312 (Energy Supply and Distribution Act of 2015) introduced in the House and Senate. S.1372 (American Crude Oil Export Equality Act) introduced in the Senate. H.R.2369, S.1312 and S.1372 will allow unlimited crude oil exports without a license to countries without sanctions.

October 2015: H.R.702 (To adapt to changing crude oil market conditions) passed the House.

MAPS
Top U.S. Crude Oil Producing States in 2014

Oil Refining Capacity and Coking Refinery Capacity by PADD

[http://www.eia.gov/todayinenergy/detail.cfm?id=7170. Operable Oil Refineries and Capacity, 2012]

Map of North American Crude by Rail

Map of U.S. and Canadian Pipelines

NARRATIVE
Over the last two years, there has been a discussion on the feasibility to allowing the export of domestically produced crude oil. With the shale oil boom producing more light sweet crude than our refineries can currently handle, many production companies would like to permission to export crude oil. Infrastructure issues that have already become an issue with moving crude from production field to domestic refineries may become an even bigger problem if exporting crude oil is allowed.

Crude Oil Export Motivations
Producers want to earn as much as possible from their wells. Light Tight Oil is sold at a discount to other light sweet crude oils on the world market due to the inability to export. A higher price on the market could ensure that producers continue to drill for oil.

Infrastructure Issues
Most oil pipeline infrastructure was built when imports exceeded domestic production. Therefore, pipelines were built to bring oil from the Gulf Coast to the Midwest. East and West Coast refineries received foreign oil from tankships. With most oil now coming from Canada and North Dakota through Cushing, OK to the Gulf Coast, pipeline bottlenecks exist in Cushing, and in Houston, TX, the hub for the Gulf Coast. Oil fields in Texas are sending oil through pipeline to Cushing and directly to Houston as well. These bottlenecks are making the transport of crude oil through rail and marine modes more economical than they otherwise would be. Exporting crude oil would only exacerbate the pipeline bottleneck issues.

The refineries that most need the light tight oil produced domestically are on the east and west coasts. Rail is the primary method to transport domestic oil from the Midwest to the east and west coast as there are no current pipelines. However, in some case, the price to ship crude oil by pipeline to the Gulf Coast and then by tankship to the East or West Coast is cheaper than shipping by rail from the oil field to the refinery.

Export Ban History
In 1973, OPEC embargoed crude oil for delivery to the United States. This increased the price of all oil products and as a result, Congress passed the Energy Policy and Conservation Act. The Energy Policy and Conservation Act banned domestic crude oil from being exported without a license, established the Strategic Petroleum Reserve, and reduced energy consumption. However, the law stated that the President may allow export of crude oil as long as it is consistent with the national interest. The law was amended in 1990 and 1994. In 1979, the Export Administration Act established the Bureau of Industry and Security (BIS) to administer the licenses to export crude oil. The Export Administration Act expired in 2001 and the President created an Executive Order, the International Emergency Economic Powers Act, to keep the BIS administering the Energy Policy and Conservation Act.

The Energy Policy and Conservation Act requires a license from the BIS to export crude oil. Currently, licenses are allowed for the following reasons:
 * Crude oil from Alaska's Cook Inlet
 * Exports to Canada for consumption
 * Refine or exchange crude oil in the Strategic Petroleum Reserve
 * California heavy crude oil at not greater than 25,000 barrels/day
 * Consistent with certain international agreements
 * Consistent with other laws passed (Alaska's North slope oil)
 * Foreign crude oil not co-mingled with domestic crude oil

Some of the other laws passed allow crude oil that has been shipped through the Trans Alaska Pipeline. Crude oil that has been transported through a Mineral Leasing Act Federal Right of Way and crude oil produced from the Outer Continental Shelf must also go through the licensing process to be exported.

The Energy Policy and Conservation Act only prevented the export of crude oil. Refined products have been and are exported without any controls.

Crude Oil
Crude Oil - Each crude oil has its own characteristics and quality. The two major qualities are density and sulfur content.

Density - Density is measured in API (American Petroleum Institute) gravity. Light crude is easier to refine into the preferred products and therefore sells at a premium to heavy crude. Heavy crude is usually defined as 20 API or lower. Light crude is defined by the New York Mercantile Exchange as between 32 and 42 API.

Sulfur Content - Sulfur is an additive that must be removed from the crude in the refining process. Sour crude is usually defined as a sulfur content of 0.5% or higher. Sour crude is more expensive to refine. As a consequence of density and sulfur content, light sweet crude commands a premium on the free market over heavy sour crude.

Domestic crude oil (light tight oil) is a light sweet crude and will command a premium on the international market.

Refining
Refining - Refining is necessary to make crude oil into the products used by industry and the public. Different refineries have different equipment to handle the different types of crude oil. Each process unit costs around a million dollars with some costing up to 600 million dollars. Refineries in the Gulf Coast, Midwest, and West are configured to handle all types of crude from light sweet crude to heavy sour crude. As heavy sour crude is cheaper, these refineries are able to make a good margin on refined products. Refineries in the Northeast are mainly configured to handle light sweet crude oils. Refineries are able to retool their refineries to take advantage of different types of crude oil, but this may be a very expensive process.Currently, many of the Gulf Coast refineries are only importing heavy sour crude. The light sweet crude that they previously imported is now sourced domestically.

Refining Process
Fractionation (Distillation): using heat and/or pressure to separate the different types of crude into products. Light products (butane, propane, gasoline) will rise to the top. Medium products (kerosene, diesel) will rise but not as high. Heavy products (heavy fuel oil, residuals) will remain at the bottom.

Conversion: converting crude products into other products that are more needed by the marketplace. (More gasoline and diesel, less heavy fuel oil and propane.) Conversion includes decomposition, unification and alteration.

Decomposition: change heavy products into lighter ones

Thermal Cracking: heat through the Visbreaking process, Steam Cracking process or Coking process)

Catalytic Cracking: using a chemical catalyst through Fluid Catalytic cracking, Moving Bed Catalytic cracking, or Thermofor Catalytic Cracking.

Unification: change light products into heavier ones

Alkylation: done through catalysts

Polymerization: often done through heat, may be done by a catalyst

Alteration: alter the chemical structure to change the product into one more used by industry

Isomerization

Catalytic Reforming

Treatment: remove impurities (heavy metals, sulfur, oxygen, salts) to produce finished goods.

Formulating and Blending: form specific blends to sell (octane 87 or 91 gas)

Other refining operations: Solid waste and wastewater treatment, storage and handling, sulfur recovery, etc.

Auxiliary operations: pollution control, administration, air/water/steam gases, power generation, flares, sampling and testing, pumps/valves, etc The current domestic oil production is of light sweet crude. Many of the oil refineries that are close to the oil fields are set to refine heavy sour crude. There is a mismatch between the type of crude that is being produced and the type of refinery in the United States.

Oil Transportation Processes
Crude oil is transported by barge, ship, rail, pipeline and truck.

Notes: *Domestically shipped oil. International prices are $1-3 per barrel. **For domestic service, vessels must be U.S. built and U.S. flagged. ***Tank car inventory increasing rapidly.

The current capacity of pipelines is exceeded and rail and barge transport have increased as a substitute. The cost to build a new pipeline is more expensive than additional rail line. Owners of pipelines may require a 10 year commitment versus a 1-2 year commitment from a new rail line.

Rail transport has increased dramatically, mostly to east coast refineries. Rail is also delivering to ships and barges for the last portion of the transport chain to the refinery. Several new routes include:
 * rail to barge at St. Louis and Hayti, MO, and Osceola, AR, on the Mississippi River, to Gulf refineries
 * rail to barge at Hennepin, IL, on the Illinois Waterway, to Gulf refineries
 * rail to vessel at Albany, NY, on the Hudson River, to East Coast refineries
 * rail to Yorktown, VA, for coastal transport to East Coast refineries
 * rail to vessel at Anacortes and Vancouver, WA, for coastal transport to West Coast refineries.

Pipeline Policy
The Code of Federal Regulations Title 49, Volume 2, Subtitle B, Chapter 1, Subchapter D is the federal regulation for the transportation of oil via pipeline. This federal regulation covers the safety and compliance of transporting crude oil via pipeline.The Pipeline and Hazardous Materials Safety Administration (PHMSA) is responsible for implementing the regulations. The Pipeline Safety Improvement Act of 2002 was implemented in order improve pipeline safety, The act was intended to give control of pipeline inspection to individual states, increase the federal safety programs, as well as increase public awareness of pipelines. However, there has been a continued lack in staffing of pipeline inspectors. Another attempt to increase pipeline safety has been the use of automatic shut-off valves. The National Transportation Safety Board (NTSB) has recommended using the automatic shut-off valves, most notably in high-risk areas and those areas with high population. In order to make changes to the valves, there is a high cost factor, which has led to delays in implementation.

Rail Policy
The Federal Railroad Administration oversees the safety and implements regulations for the railroads in the United States. The PHMSA is responsible for implementing the regulations. The Code of Federal Regulations Title 49, Volume 4, Subtitle B, Chapter 1, Subchapter C Part 174 is the federal regulation for the transportation of oil via rail. This federal regulation covers the operation of the rail car, as well as handling, loading and unloading of tank cars, and the identification of tank cars as hazardous. The Federal Railroad Administration (FRA) oversees the safety aspects of rail transportation. Many safety guidelines come from the PHMSA, a section of the U.S. DOT, and the FRA then applies the guidelines to rail transportation. Following recent train derailments, many important safety implications have come to light involving rail transportation of crude oil. It has been suggested that speed, braking systems, crew size, and train control can have major impacts on the safe transportation of crude oil. Trains need to have an advanced system for braking that could help prevent derailments, or they would need to reduce speed. If a train is traveling at a lower speed, the likelihood of there being a spill is decreased. There are some that oppose this option as advanced braking systems are very costly and reducing speed could slow other rail lines down. Another option would be to have a minimum of two crew on a train at all times. There are some that oppose this because a second crew member has historically been shown to cause distractions, resulting in accidents. Another option is to implement better train control, which could override actions caused by human error, which could prevent accidents. Requirements for implementation are currently being debated.

Marine Policy
The Code of Federal Regulations Title 46, Volume 1, Chapter 1, Subtitle D, Parts 30-39 and Title 33, Volume 2, Chapter 1, Subtitle O, Parts 151-159 are the federal regulation for the transportation of oil via barge and tanker. This federal regulation covers the safety and compliance of transporting crude oil via waterways. In recent years there has also been legislation passed to increase safety of transportation of crude by barge. Congress passed the Coast Guard and Maritime Transportation Act of 2004 in order to implement better safety standards on barges. The legislation required that the Coast Guard implement safety inspections for barges and tankers and certify the inspections and ship-building that would be similar to what is required of other ships. This legislation would put in place better safety standards related to infrastructure and crew. There has also been efforts to implement limits on hours of service, but there continues to be debate on what the rest period should be, six or eight hours.

The Merchant Marine Act of 1920, better known as the Jones Act, requires that any cargo shipped domestically is required to be on a U.S. flagged vessel that was built in the United States, with a crew of U.S. citizens, and at least 75% owned by a U.S. citizen. The Jones Act was passed in part to support the U.S. merchant marine and U.S. shipbuilders.

The Jones Act make shipping oil by sea more expensive than it otherwise would be. Building a ship in the United States is 70-150 million dollars more expensive than building it internationally. Operating the ship is approximately four times more expensive, mainly in crew salaries. As a result, more than twice as much crude oil is being shipped by sea from the Gulf Coast to Canada (at approximately $2 a barrel) than from the Gulf Coast to the East Coast (at approximately $5 a barrel). A foreign flagged tanker can take the oil to Canada but a US tanker must carry the oil to the U.S. East Coast.

The approval to allow export of crude oil from the Trans-Alaska pipeline was allowed if the oil was carried on a U.S. owned and crewed tanker, built anywhere in the world. Oil exports never exceeded approximately 7% and ceased in 2000.

Repealing the Jones Act may allow East Coast refineries to take more U.S. oil. However, it will be at the expense of the U.S. merchant marine and shipbuilding industry.

Truck Policy
The Code of Federal Regulations Title 49, Volume 5, Subtitle B, Chapter 1, Subchapter C, Part 177 is the federal regulation for the transportation of oil via highway, which would include the transportation via tanker truck. This federal regulation covers the safety, compliance, handling, loading and unloading of tank cars, and the identification of tanker trucks as hazardous.The PHMSA is responsible for implementing the regulations. The U.S. DOT and Federal Motor Carrier Safety Administration are responsible for overseeing the implementation of regulations.

Transportation Safety
Transporting crude oil can be very dangerous, especially if safety is overlooked. No matter how oil is transported, spills will occur. The most dangerous mode for an oil spill depends upon what is the most concern: human life and property, amount of oil spilled overall, or the environment.

From safest to most damaging:
 * For human life and property: boat, pipeline, rail, truck
 * For amount of oil spilled per mile traveled: boat, rail, pipeline, truck
 * For damage to the environment: rail, truck, pipeline, boat

Currently, pipelines account for 70% of crude oil transportation, followed by 23% on marine barges and tankers, 4% by truck, and 3% by rail. However, with the rise in production of crude oil, rail transportation has seen a rise in usage, due to the ability to carry larger volumes. Between 2011 and 2012, rail transportation saw a 423% increase in transportation usage, by volume transported. Pipeline transportation is the most cost-effective means of transportation based on volume transported by distance over time. One rail tank car can carry approximately 700 barrels of crude oil. If a train had 100 cars, that means the train could transport approximately 70,000 barrels of crude oil. A pipeline can carry approximately 830,000 barrels the same distance. However, there is a much bigger network of rail track than there is pipeline in the United States. There is roughly 140,000 miles of railroad track compared to only roughly 57,000 miles of crude oil pipeline. A truck can only carry 200 barrels. Truck transportation is the least cost effective and least efficient mode of transporting crude oil.

There can be many causes for accidents, some due to negligence and some due to unforeseen actions that as a result have created mass destruction. Those that oppose lifting the ban have concerns that are deeply rooted in safety and worry about an increase in accidents.

Environmental Impacts related to Crude Oil Spills
Rail transportation, in attempts to be competitive with pipeline transport, has attempted to add more cars in order to transport more. However, this can have devastating consequences in the case of an accident and subsequent spill because the train cars are heavier and slower to react to stops. If the trains are carrying more crude, they would then have the ability to spill more oil, if an accident were to occur. One of the worst crude oil spills from a train occurred on July 6, 2013 in Lac-Mégantic, Quebec, Canada. While the train was stopped overnight, the necessary hand brakes were not all secured and a fire in the locomotive caused the locomotive to shut down, resulting in a lack of air brakes. As a result of many errors, the train rolled down the decline it was resting on and barreled into the city of Lac-Mégantic. The entire train derailed at the curve and the crude oil spilled out of the cars, which then caught fire and exploded. Forty-seven people lost their lives in the derailment and much of the town was destroyed. Regardless of the devastation in Quebec, rail has been shown to have a lower amount of spills, based on volume traveled, however, recent spills have made transportation by rail frowned upon due to increased number of accidents as of late.

Transportation by ship can also have devastating consequences when accidents and spills occur. Some of the largest spills on record are results of shipping accidents. When spills occur in the water, the negative impact on the ecosystem is instantaneous. One of the worst marine-related oil spills due to transporting crude oil occurred on March 24, 1989 when the oil tanker, Exxon Valdez, hit a reef in coastal waters near Alaska. As a result of the blow, the hull cracked and approximately 11 million gallons of crude oil rushed into the water. The devastation to marine life is still recovering, 25 years after the spill. Ship transportation is another mode of transportation that has a record of very low spillage per mile of transport, yet it is still frowned upon due to the significant ecosystem damage that occurs as a result of a spill.

Pipelines are not free from accidents or spills. There are roughly 280 spills from pipeline every year. There have been two notable oil spills from transporting heavy crude oil via pipeline in the United States in recent years. Even though both spills involved heavy crude oil, they bring to light many safety implications for transporting light crude oil as well. In other words, a great deal can be learned from the two following spills. On July 25, 2010, the Enbridge pipeline ruptured and the company was unable to shut the pipeline off for 17 hours as nearly 1 million gallons of heavy crude oil spilled into a nearby creek near Kalamazoo, Michigan. On March 29, 2013, the Pegasus pipeline ruptured near Mayflower, Arkansas spilling nearly 134,000 gallons of heavy crude oil into the town and nearby creek. Each company has been fined and have spent billions in cleaning up the spills, even though residents don’t feel the area will ever return to what they once were.

Environmental Impacts related to Climate Change
Another environmental concern that is playing a large part in the debate of whether to lift the crude oil embargo is related to the effects on climate change. Environmental advocates worry that the increased production of extracting crude oil will have negative impacts on the environment and increase the carbon emissions. In 2012, the EPA found that 32 million metric tons of greenhouse gasses were released as a result of oil production and transportation. This is a rather small amount when compared to the combined total of over 6,000 million metric tons that the United States produced that same year. An end to the export ban would likely increase global emissions, as a result of global usage and increased production. The environmental impacts related to climate change are greatly contested and are strongly debated. One alternative to debating whether or not environmental impacts would increase, it would be more beneficial for the United States government to look into proccesses which could make production safer and less damaging to the environment.

Energy and Economic Impacts
Lifting the crude oil embargo could have impacts on the economy by affecting oil and gas prices. Based on the economic theory of international trade, ending the oil embargo by adding US oil exports to the world market, the price of oil would be pushed more towards the world price. Therefore, an increase in world supply and demand would have an effect on the price of oil. In this case, an increase in supply, all else equal, would result in a decrease in the world price. However, with an increased supply, it is possible that demand for crude oil would increase, which would result in an increase in the price of oil. By lifting the ban on exporting crude oil, there would likely be an increase in the U.S. price of crude oil, but there would be a decrease in the world price of crude oil, due to increased competition. However, it is not likely that the effects on the price of oil would be great. An increase in the world supply of crude oil, would bring stabilization in the price of oil, which would have an important role should there be any future supply scares. Gas prices in the United States are impacted by the world price of crude oil. If the export ban was lifted and there was an increased world supply of crude oil, this would bring stabilization to the oil and gas market. The impact would be a decrease in the price of gasoline, however the decrease would be minimal, current estimates are a drop between five and ten cents per gallon. Ultimately, the effects on both the world price of crude oil and the domestic price of gasoline would be directly impacted by the reaction of OPEC to an increased supply of crude oil. OPEC controls the market and could take action to manipulate the price of oil. While it is likely that the world price of crude oil would increase and the price of domestic gasoline prices would decrease, both price effects would be minimal. An end to the crude oil embargo would also have an impact on the overall U.S. economy, as a result of increased exports. A study by the Brookings Institute has found that if the embargo were lifted, it could result in GDP in the upper billions to lower trillions throughout the next 25 years.

The United States is a member of the International Energy Agency. The International Energy Agency is an independent agency that works with its member states to stabilize supply of energy and reduce fear, but the IEA also works with non-member states to promote clean, affordable, and sustainable energy. As a result of being a member of the IEA, the U.S. must maintain a Strategic Petroleum Reserve, which can help resolve disruptions in case of increased supply needs. With an end to the crude oil embargo, the U.S. can become an ally in times of need or disaster for other countries, similar to how Europe was able to provide petroleum from their reserves after Hurricane Katrina. The oil embargo was put in place due to a fear of running out of oil. With increased production, the fear of running out of oil is no longer as great of a threat. An increase in crude oil would have an overall positive impact on the world energy resources.

CONCLUSION
Due to the increased production of crude oil, bottlenecks have already occurred while transporting crude oil across the country. Transportation of crude oil has already increased across all modes. If the export ban were to be lifted it can be presumed that the transportation of crude oil will also continue to rise across modes. An end to the export ban could lead to an increase in building infrastructure, as there would be an even higher need for more rail, pipeline, and ships. It could also be presumed that there would be an increase in employment, as there would be more need for individuals to produce the oil as well as transport it. Before the ban would be lifted it is necessary to look at every angle and ensure it is the best solution for the entire country. It is critical that safety is taken into high consideration and that the government looks into best practices. It is very important that all avenues are considered because the impacts of lifting the export ban would have an impact on the entire country.

DISCUSSION
Should the Jones Act be repealed? What would happen to U.S. merchant marine and U.S. shipbuilders if it was? Should the government require that exports be carried on U.S. ships?

What is the most important aspect of crude oil transportation safety (human life and property, amount of oil spilled, or damage to the environment)?

Is the possibility of more greenhouse gases contributing to climate change a reason to keep the export ban?

What are additional safety measures that could be enacted that could prevent spills and increase safety?

ADDITIONAL READINGS
U.S. Crude Oil Export Policy: Background and Considerations http://www.pennyhill.com/jmsfileseller/docs/R43442.pdf

U.S. Rail Transportation of Crude Oil: Background and Issues for Congress https://www.fas.org/sgp/crs/misc/R43390.pdf

Shipping U.S. Crude Oil by Water: Vessel Flag Requirements and Safety Issues https://www.fas.org/sgp/crs/misc/R43653.pdf