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Context is Key with CRS Memo on Oil Exports

The Congressional Research Service (CRS) recently published a memorandum that takes a closer look at what the potential impact might be on Eastern European countries if the United States repealed its ban on crude oil exports. While the memo offered an in-depth look at the refining capacity and configuration of twelve European countries – finding that most, not all, grades of crude oil refined in Eastern Europe are of a slightly different grade than what is being produced in abundance in the Unites States – it fails to take into account a number of other variables that could impact the flow of crude oil to this region of the world if the ban was repealed.

First, Eastern Europe refineries do indeed process light sweet crudes that arrive by tanker. These cargoes originate in the North Sea, Libya and West Africa. With North Sea reserves declining, these refineries will be in need of a new source, or become more, not less, dependent on Russia.

Another variable is the real possibility that some customers in this region may be willing to pay a security premium to ensure they have a stable and reliable source of crude oil. Sound crazy? It’s exactly what Lithuania has done to diversify their natural gas supply away from Russia by investing in slightly more expensive, yet stable and reliable, liquefied natural gas.

While this may seem like an in-the-weeds issue, it’s important for several reasons: U.S. allies and trading partners in the region are heavily dependent on Russia for their energy needs and by repealing the ban on crude oil exports, the U.S. would be well positioned as a stable and secure alternative to Russian crude should companies in this region choose to diversify their crude oil supply.

Former Secretary of Defense William Cohen highlighted the importance of this point, recently writing for TIME:

“Energy exports would strengthen NATO and our broader transatlantic relationship at a time of increased Russian aggression. The European Union has responded to Russia’s energy stranglehold by proposing policies designed to avoid future crises of supply and promote self-sufficiency. […]Working with our allies and partners, a joint effort to reduce Europe’s vulnerability to Russian energy coercion would be an important legacy for President Obama and send a signal to President Vladimir Putin that as long as he chooses to use energy as a weapon, the West will defend itself.”

Another former Secretary of Defense, Leon Panetta, writing alongside former National Security Advisor Stephen Handley, recently stated in a Wall Street Journal column:

“Most ominous is Russia’s energy stranglehold on Europe. Fourteen NATO countries buy 15% or more of their oil from Russia, with several countries in Eastern and Central Europe exceeding 50%. […]This situation leaves Europe vulnerable to Kremlin coercion. In January 2009, Russia cut off natural gas to Ukraine, and several European countries completely lost their gas supply. […] Further, revenue from sales to Europe provides Russia with considerable financial resources to fund its aggression in Ukraine.”

Accepting the fact that the light tight oil being produced in abundance in the U.S. may not be a perfect match for every refinery in the world – let alone the U.S –, by removing artificial barriers and allowing the market to allocate where oil is refined will benefit our allies, trading partners and the U.S. economy.

One benefit to our allies in the region is highlighted in the CRS memo:

“It is unlikely that Russia would keep prices static, should competitive crudes threaten Russia’s existing markets, and it may decide to reduce prices to maintain market share.”

In other words, simply the threat of U.S. produced crude oil making its way to Eastern Europe could limit Russia’s ability to use energy in a coercive manner and limit their ability to fund aggression in the Ukraine, as noted by former Defense Secretaries Cohen and Panetta.

What’s not disputed in this CRS memo is that lifting the ban on oil exports will open new markets for domestic oil producers and put Americans to work. How much oil will be exported and what refineries will ultimately process that crude is a function of the global market, which domestic producers currently cannot access. However, economists agree that repealing the ban and adding oil to the global market will put downward pressure on the price of gasoline and other finished petroleum products while also providing our allies and trading partners with a new, stable and secure supply source.

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