Personal Finance: Energy outlook changes, but U.S. policy doesn't

Personal Finance: Energy outlook changes, but U.S. policy doesn't

April 2nd, 2014 by Chris Hopkins in Business Diary

Chris Hopkins

Chris Hopkins

Photo by Patrick Smith /Times Free Press.

Energy regulation is hopelessly out of date.

Since the Arab oil embargo of 1973, U.S. energy policy has assumed a steadily declining supply of domestically produced oil and gas. Then all of a sudden, beginning around 2006, the landscape shifted dramatically, thanks to the genius of American technology and the impetus of free-market capitalism. Remarkably, we stand on the threshold of a radically different and transformative energy future, provided that we can find the wisdom to get out of our own way.

The United States is once again the world's leading producer of natural gas. Within a few short years we will surpass Saudi Arabia and Russia to reclaim the world's crude oil crown. This unexpected bounty has presented America with a fortuitous window of opportunity to invigorate economic growth and attenuate a stubbornly persistent trade deficit. What remains now is to dismantle some of the archaic restrictions that have long outlived their utility.

It has been illegal to freely export crude oil from the US since the energy crisis of the early 1970s, as waning domestic production and the rise of OPEC presented a clear national security threat. Today the situation has shifted dramatically, as the steadily increasing supply of American crude is obviating the rationale for restricting oil sales to our trading partners. Ironically, in the area of refined products like gasoline that are not regulated, the US has already become the world's largest exporter. In the months leading to the mid-term elections, look for increased advocacy in favor of liberalizing the oil trade as well.

Perhaps more interesting and potentially transformative is the natural gas story. Thanks to horizontal drilling and hydraulic fracturing techniques, America is experiencing a supply glut. Gas is now so abundant that it sells for one fourth of the price of oil per BTU. But like crude oil, natural gas exports are restricted by a series of legislative acts dating back to 1938. Now the supply, technology and private capital are all lined up and waiting. What remains is to fix the broken regulatory process. So far, only seven export licenses have been granted; meanwhile, 24 more companies are lined up outside the Energy Department twiddling their thumbs. And given the recent turmoil in the Ukraine that could threaten Western Europe's gas supplies, security considerations now argue for more exports rather than less.

The most risible example of a law that has outlived its usefulness is the Jones Act. This 1920 law mandates that water transportation between two U.S. cities be conducted by U.S.-made vessels, owned by American companies, staffed by American sailors. The gulf coast is swimming in more oil than it can hope to refine, while the East Coast refineries import expensive Brent crude from the North Sea. But the Jones Act guarantees that this imbalance cannot be addressed, given the shortage of U.S. vessels. Building a ship in the U.S. costs more than twice as much as in Asia, and operating an American vessel under the Jones Act can run three times higher than a foreign flagged ship. Dismantling this vestige of World War I protectionism would allow the market to begin correcting the supply imbalance, further reducing imports, and promoting creation of American jobs.

A decade ago, few observers anticipated this dramatic reversal of fortune in energy, including policymakers. Today, the market has done its part and the US stands on the threshold of a new economic renaissance. Now it is time for policy to catch up.

Christopher A. Hopkins, CFA, is vice president for Barnett & Co. Investment Advisors.