Hillary Clinton Tips Her Hand
Back in 2010, then Secretary of State Hillary Clinton was asked about the prospects for TransCanada’s (NYSE: TRP, TSE: TRP) proposed Keystone XL pipeline expansion, which needed the State Department’s approval. Clinton responded “We’ve not yet signed off on it, but we are inclined to do so and we are for several reasons.” Those comments were criticised by environmentalists broadly opposed the project.
At that time the State Dept. was conducting an environmental assessment of the pipeline. Its report would ultimately weigh in in favor of the pipeline, stating that it would be unlikely to affect global carbon dioxide emissions.
Until recently, Clinton had never expressed any opposition to the project. Back in the summer she dodged a question from a New Hampshire voter who asked “As president, would you sign a bill, yes or no please, in favor of allowing the Keystone XL pipeline?” Clinton’s response was more politically calculating than her 2010 response: “I am not going to second guess President Obama because I was in a position to set this in motion. I want to wait and see what he and Secretary Kerry decide. If it is undecided when I become president, I will answer your question.”
Her shifting position on the issue completed its 180-degree turn last week in Iowa when Clinton matter-of-factly announced her opposition as if there had never been any question: “I think it is imperative that we look at the Keystone pipeline as what I believe it is — a distraction from important work we have to do on climate change. And unfortunately, from my perspective, one that interferes with our ability to move forward with all the other issues. Therefore I oppose it.”
What is behind Clinton’s flip-flop on this issue? I think the motive is purely political. Senator Bernie Sanders is her closest rival for the Democratic party’s nomination for the presidency, and he has been adamantly opposed to the pipeline. Likewise, Vice President Joe Biden — who hasn’t declared but who has many supporters hoping that he does — has steadfastly stated his opposition to the pipeline. In order to keep Sanders and potentially Biden from peeling away the support of many environmentalists, Clinton made the political calculation to rotate to the left on this issue.
This has two broader implications. First, Clinton is the current favorite to win not only her party’s nomination but the presidency next year. An online Irish bookmaker lists Hillary as the 11/8 favorite, followed by Jeb Bush and Donald Trump at 9/2 odds, and then Bernie Sanders, Joe Biden and Marco Rubio at 8/1 odds. (Those for whom Trump seems too much of a sure thing can even bet on Kim Kardashian, at 1,000 to 1 odds.)
In fact, no major Democratic candidate favors the pipeline, so unless the Republicans buck the odds the Keystone XL pipeline project is probably dead.
But there is another implication in my opinion. Opponents have cited various objections to the Keystone XL pipeline, but the core of opposition to the project was always the concern about climate change. Environmentalists believe the pipeline would be furthering a fossil-fuel dependent global economy that is leading to a climate catastrophe. And it turns out there is one more energy issue working its way through Capitol Hill that could be cast in those terms.
The U.S. has a crude oil export ban in place that dates to the Energy Policy and Conservation Act (EPCA) of 1975. Passed in response to the 1973 OPEC oil embargo, EPCA aimed to shore up U.S. energy security. One of its measures effectively banned crude oil exports to all countries besides Canada.
Thirty years later, as domestic oil production surged as a result of the shale oil boom, the export ban began to limit the markets for domestic producers. While the U.S. is still a large net importer of crude oil, U.S. refiners spent billions of dollars over the past two decades to install equipment to process heavy sour crudes. The crudes that have come online in the shale fields of the Bakken and Eagle Ford are relatively light. Thus, US refineries are limited in the volumes of this crude they can process.
As a result, the benchmark for U.S. crude oil, West Texas Intermediate (WTI), which had historically traded at a premium to international benchmark Brent crude, began trading at a discount. To rectify this, oil producers and politicians in major oil-producing states began lobbying for an end to the crude oil export ban so some of this light oil could be exported, which would improve market access and pricing for domestic producers.
Not everyone in the energy industry favors ending the ban. Refiners, in particular, have benefited from it. Because there is no ban on the export of finished products (e.g., diesel, gasoline, etc.), U.S. refiners can buy discounted domestic crude oil and then export the processed fuels at very healthy margins. Unsurprisingly, major refiners like Valero (NYSE: VLO) have come out strongly against ending the ban.
Ending the ban would likely decrease the margins for refiners, while boosting the profits of the domestic oil producers that supply them.
Nevertheless, there is significant support for ending the ban. Energy Secretary Ernest Moniz has said that the ban should be revisited. Senate and House bills have been introduced to end the ban, and the House Energy and Commerce Committee recently voted 31-19 in favor of one.
But following the vote, the Obama Administration came out against ending the ban, citing the potential for higher U.S. gasoline prices. Some believe President Obama’s opposition is also a nod to the U.S. Steelworkers union, which opposes ending the ban because of the potential loss of refinery jobs.
His primary motivation, I believe, as with the Keystone XL pipeline, has to do with climate change and the role of fossil fuels in economic development.
A number of studies — including one done by the U.S. government’s Energy Information Administration — have concluded that ending the ban wouldn’t increase gasoline prices. The EIA reported: “Petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports. As shown in a previous EIA report petroleum product prices throughout the United States have a much stronger relationship to Brent prices than to WTI prices.”
What is likely is that some places (like the Midwest) would see higher gasoline prices, other areas (perhaps coastal markets) would see lower prices, and the net effect would be neutral to slightly lower prices. But when you understand that the real basis of the opposition to ending the ban is the same as the basis of the opposition to the Keystone XL pipeline, then you understand that the gasoline price argument is simply a politically convenient cover.
What does this have to do with Hillary Clinton? One of my 2014 predictions was that the crude oil export ban would not be overturned by President Obama, on the basis of the same stiff opposition from environmentalists that paralyzed him on the Keystone XL pipeline issue. Given her new-found opposition to the Keystone XL pipeline, a President Hillary Clinton would likely stick with the crude export ban to appease environmentalists in the Democratic Party. Refiners will be very happy, while domestic crude oil producers will continue to have their markets restricted.