The export of domestically produced crude oil has generally been restricted since the 1970s. In particular, the Energy Policy and Conservation Act of 1975 (EPCA) led the Department of Commerce’s Bureau of Industry and Security (BIS) to promulgate regulations that require crude oil exporters to obtain a license.that BIS will issue licenses for the following crude oil exports: exports from Alaska’s Cook Inlet, exports to Canada for consumption or use therein, exports in connection with refining or exchange of SPR crude oil, exports of certain California crude oil up to twenty-five thousand barrels per day, exports consistent with certain international energy supply exports consistent with findings made by the President under certain exports of foreign origin crude oil that has not been commingled with crude oil of U.S. origin. Other than for these exceptions, BIS considers export license applications for exchanges involving crude oil on a case-by-case basis, and BIS can approve them if it determines that the proposed export is consistent with the national interest and purposes of EPCA. In addition to BIS’s export controls, other statutes control the export of domestically produced crude oil, depending on where it was produced and how it is transported. In these cases, BIS can approve exports only if the President makes the necessary findings under applicable laws. Some of the authorized exceptions, outlined above, are the result of such presidential findings. As we previously found, recent increases in U.S. crude oil production have lowered the cost of some domestic crude oils. For example, prices for West Texas Intermediate (WTI) crude oil—a domestic crude oil used as a benchmark for pricing—were historically about the same price as Brent, an international benchmark crude oil from the North Sea between However, from 2011 through Great Britain and the European continent.2014, the price of WTI averaged $12 per barrel lower than Brent (see fig. 1). In 2014, prices for these benchmark crude oils narrowed as global oil prices declined, and WTI averaged $52 from January through May 2015, while Brent averaged $57. The development of U.S. crude oil production has created some challenges for crude oil transportation infrastructure because some production has been in areas with limited linkages to refining centers. According to EIA, these infrastructure constraints have contributed to discounted prices for some domestic crude oils. Much of the crude oil currently produced in the United States has characteristics that differ from historic domestic production. Crude oil is generally classified according to two parameters: density and sulfur content. Less dense crude oils are known as “light,” and denser crude oils are known as “heavy.” Crude oils with relatively low sulfur content are known as “sweet,” and crude oils with higher sulfur content are known as “sour.” As shown in figure 2, according to EIA, most domestic crude oil produced over the last 5 years has tended to be light oil. Specifically, according to EIA estimates, about all of the 1.8 million barrels per day increase in production from 2011 to 2013 consisted of lighter sweet crude oils. Light crude oil differs from the crude oil that many U.S. refineries are designed to process. Refineries are configured to produce transportation fuels and other products (e.g., gasoline, diesel, jet fuel, and kerosene) from specific types of crude oil. Refineries use a distillation process that separates crude oil into different fractions, or interim products, based on their boiling points, which can then be further processed into final products. Many refineries in the United States are configured to refine heavier crude oils and have therefore been able to take advantage of historically lower prices of heavier crude oils. For example, in 2013, the average density of crude oil used at domestic refineries was 30.8, while nearly all of the increase in production in recent years has been lighter crude oil with a density of 35 or above. According to EIA, additional production of light crude oil over the past several years has been absorbed into the market through several mechanisms, but the capacity of these mechanisms to absorb further increases in light crude oil production may be limited in the future for the following reasons: Reduced imports of similar grade crude oils: According to EIA, additional production of light oil in the past several years has primarily been absorbed by reducing imports of similar grade crude oils. Light crude oil imports fell from 1.7 million barrels per day in 2011 to 1 million barrels per day in 2013. As a result, there may be dwindling amounts of light crude oil imports that can be reduced in the future, according to EIA. Increased crude oil exports: Crude oil exports have increased recently, from less than thirty thousand barrels per day in 2008 to 396 thousand barrels per day in June 2014. Continued increases in crude oil exports will depend, in part, on the extent of any relaxation of current export restrictions, according to EIA. Increased use of light crude oils at domestic refineries: Domestic refineries have increased the average gravity of crude oils that they refine. The average American Petroleum Institute (API) gravity of crude oil used in U.S. refineries increased from 30.2 degrees in 2008 to 30.8 degrees in 2013, according to EIA. Continued shifts to use additional lighter crude oils at domestic refineries can be enabled by investments to relieve constraints associated with refining lighter crude oils at refineries that were optimized to refine heavier crude oils, according to EIA. Increased use of domestic refineries: In recent years, domestic refineries have been run more intensively, allowing the use of more domestic crude oils. Utilization—a measure of how intensively refineries are used that is calculated by dividing total crude oil and other inputs used at refineries by the amount refineries can process under usual operating conditions—increased from 86 percent in 2011 to 88 percent in 2013. There may be limits to further increases in utilization of refineries that are already running at high rates, according to EIA. In our September 2014 report, we reported that according to the studies we reviewed and the stakeholders we interviewed, removing crude oil export restrictions would likely increase some domestic crude oil prices, but could decrease consumer fuel prices, although the extent of consumer fuel price changes are uncertain and may vary by region. As discussed earlier, increasing domestic crude oil production has resulted in lower prices of some domestic crude oils compared with international benchmark crude oils. Three of the studies we reviewed also concluded that, absent changes in crude oil export restrictions, the expected growth in crude oil production may not be fully absorbed by domestic refineries or through exports (where allowed), contributing to even wider differences in prices between some domestic and international crude oils. According to these studies, by removing the export restrictions, these domestic crude oils could be sold at prices closer to international prices, reducing the price differential and aligning the price of domestic crude oil with international benchmarks. Specifically, the Department of Commerce’s definition of crude oil includes condensates, which are light liquid hydrocarbons recovered primarily from natural gas wells. subject to export restrictions. One stakeholder stated that this may lead to more condensate exports than expected. Within the context of these uncertainties, estimates of potential price effects vary in the four studies we reviewed, as shown in table 1. Specifically, estimates in these studies of the increase in domestic crude oil prices due to removing crude oil export restrictions ranged from about $2 to $8 per barrel. was $103 per barrel, and these estimates represented 2 to 8 percent of that price. In addition, NERA Economic Consulting found that removing export restrictions would have no measurable effect in a case that assumes a low future international oil price of $70 per barrel in 2015 According to the NERA Economic rising to less than $75 by 2035.Consulting study, current production costs are close to these values, so that removing export restrictions would provide little incentive to produce more light crude oil. Unless otherwise noted, dollar estimates in the rest of this report have been converted to 2014 year dollars. These are average price effects over the study time frames, and some cases in some studies projected larger price effects in the near term that declined over time. ICF International West Texas Intermediate crude oil prices increase $2.35 to $4.19 per barrel on average from 2015- 2035. IHS Prices increase $7.89 per barrel on average from 2016-2030. NERA Economic Consulting Prices increase $1.74 per barrel in the reference case and $5.95 per barrel in the high case on average from 2015-2035. Implications refer to the difference between the reference case and its baseline with export restrictions in place, and also the difference between the high oil and gas recovery case and its corresponding baseline. NERA Economic Consulting also found that removing crude oil export restrictions would have no measurable effect in the low world oil price case. Regarding consumer fuel prices, such as gasoline, diesel, and jet fuel, the studies we reviewed and most of the stakeholders we interviewed suggested that consumer fuel prices could decrease as a result of removing crude oil export restrictions. A decrease in consumer fuel prices could occur because such prices tend to follow international crude oil prices rather than domestic crude oil prices, according to the studies reviewed and most of the stakeholders interviewed. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel Table 2 shows that the estimates of the prices could decrease as well. price effects on consumer fuels varied in the four studies we reviewed. Price estimates ranged from a decrease of 1.5 to 13 cents per gallon. These estimates represented 0.4 to 3.4 percent of the average U.S. retail gasoline price at the beginning of June 2014. In addition, NERA Economic Consulting found that removing export restrictions would have no measurable effect on consumer fuel prices when assuming a low future world crude oil price. Resources for the Future also estimates a decrease in consumer fuel prices but this decrease is as a result of increased refinery efficiency (even with an estimated slight increase in the international crude oil price). ICF International Petroleum product prices would decline by 1.5 to 2.4 cents per gallon on average from 2015-2035. IHS Gasoline prices would decline by 9 to 13 cents per gallon on average from 2016- 2030. NERA Economic Consulting Petroleum product prices would decline by 3 cents per gallon on average from 2015-2035 in the reference case and 11 cents per gallon in the high case. Gasoline prices would decline by 3 cents per gallon in the reference case and 10 cents per gallon in the high case. Fuel prices would not be affected in a low world oil price case. Implications refer to the difference between the reference case and its baseline with export restrictions in place, and the difference between the high oil and gas recovery case and its corresponding baseline. The effect of removing crude oil export restrictions on domestic consumer fuel prices depends on several uncertainties, as we discussed in our September 2014 report. First, it would depend on the extent to which domestic versus international crude oil prices determine the domestic price of consumer fuels. A 2014 research study examining the relationship between domestic crude oil and gasoline prices concluded that low domestic crude oil prices in the Midwest during 2011 did not result in lower gasoline prices in that region. This research supports the assumption made in the four studies we reviewed that to some extent higher prices of some domestic crude oils as a result of removing crude oil export restrictions would not be passed on to consumer fuel prices. However, some stakeholders told us that this may not always be the case and that more recent or detailed data could show that lower prices for some domestic crude oils have influenced consumer fuel prices. The Merchant Marine Act of 1920, also known as the Jones Act, in general, requires that any vessel (including barges) operating between two U.S. ports be U.S.-built, -owned, and -operated. closure, especially those located in the Northeast. However, according to one stakeholder, domestic refiners still have a significant cost advantage in the form of less expensive natural gas, which is an important energy source for many refineries. For this and other reasons, one stakeholder told us they did not anticipate refinery closures as a result of removing export restrictions. The studies we reviewed for our September 2014 report, generally suggested that removing crude oil export restrictions may increase domestic crude oil production and may affect the environment and the economy: Crude oil production. Removing crude oil export restrictions may increase domestic crude oil production. Even with current crude oil export restrictions, given various scenarios, EIA projected that domestic production will continue to increase through 2020. If export restrictions were removed, according to the four studies we reviewed, the increased prices of domestic crude oil are projected to lead to further increases in crude oil production. Projections of this increase varied in the studies we reviewed—from a low of an additional 130,000 barrels per day on average from 2015 through 2035, according to the ICF International study, to a high of an additional 3.3 million barrels per day on average from 2015 through 2035 in NERA Economic Consulting’s study.almost 40 percent of production in April 2014. This is equivalent to 1.5 percent to Environment. Two of the studies we reviewed stated that the increased crude oil production that could result from removing the restrictions on crude oil exports may affect the environment. Most stakeholders we interviewed echoed this statement. This is consistent with what we found in a September 2012 report.we found that crude oil development may pose certain inherent environmental and public health risks. However, the extent of the risk is unknown, in part, because the severity of adverse effects depends on various location- and process-specific factors, including the location of future shale oil and gas development and the rate at which it occurs. It also depends on geology, climate, business practices, and regulatory and enforcement activities. The stakeholders who raised concerns about the effect of removing the restrictions on crude oil exports on the environment identified risks including those related to the quality and quantity of surface and groundwater sources; increases in greenhouse gas and other air emissions, and increases in the risk of spills from crude oil transportation. The economy. The four studies we reviewed suggested that removing crude oil export restrictions would increase the size of the economy. Three of the studies projected that removing export restrictions would lead to additional investment in crude oil production and increases in employment. This growth in the oil sector would—in turn—have additional positive effects in the rest of the economy. For example, NERA Economic Consulting’s study projected an average of 230,000 to 380,000 workers would be removed from unemployment through 2020 if export restrictions were eliminated in 2015. These employment benefits would largely disappear if export restrictions were not removed until 2020 because by then the economy would have returned to full employment. Two of the studies we reviewed suggested that removing export restrictions would increase government revenues, although the estimates of the increase vary. One study estimated that total government revenue would increase by a combined $1.4 trillion in additional revenue from 2016 through 2030, and another study estimated that U.S. federal, state, and local tax receipts combined with royalties from drilling on federal lands could increase by an annual average of $3.9 to $5.7 billion from 2015 through 2035. Chairman Conaway, Ranking Member Peterson, and Members of the Committee, this completes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include Christine Kehr (Assistant Director), Quindi Franco, Alison O’Neill, and Kiki Theodoropoulos. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: After decades of generally falling U.S. crude oil production, technological advances in the extraction of crude oil from shale formations have contributed to increases in U.S. production. In response to these and other market developments, some have proposed removing the 4 decade old restrictions on crude oil exports, underscoring the need to understand how allowing crude oil exports could affect crude oil prices, and the prices of consumer fuels refined from crude oil, such as gasoline and diesel. This testimony discusses what is known about the pricing and other key potential implications of removing crude oil export restrictions. It is based on GAO's September 2014 report ( GAO-14-807 ), and information on crude oil production and prices updated in June 2015. For that report, GAO reviewed four studies issued in 2014 on crude oil exports; including two sponsored by industry and conducted by consultants, one sponsored by a research organization and conducted by consultants, and one conducted at a research organization. Market conditions have changed since these studies were conducted, underscoring some uncertainties surrounding estimates of potential implications of removing crude oil export restrictions. For its 2014 report, GAO also summarized the views of a nongeneralizable sample of 17 stakeholders including representatives of companies and interest groups with a stake in the outcome of decisions regarding crude oil export restrictions, as well as academic, industry, and other experts. In September 2014, GAO reported that according to studies it reviewed and stakeholders it interviewed, removing crude oil export restrictions would likely increase domestic crude oil prices, but could decrease consumer fuel prices, although the extent of price changes are uncertain and may vary by region. The studies identified the following implications for U.S. crude oil and consumer fuel prices: Crude oil prices . The four studies GAO reviewed estimated that if crude oil export restrictions were removed, U.S. crude oil prices would increase by about $2 to $8 per barrel—bringing them closer to international prices. Prices for some U.S. crude oils have been lower than international prices—for example, one benchmark U.S. crude oil averaged $52 per barrel from January through May 2015, while a comparable international crude oil averaged $57. In addition, one study found that, when assuming low future crude oil prices overall, removing export restrictions would have no measurable effect on U.S. crude oil prices. Consumer fuel prices. The four studies suggested that U.S. prices for gasoline, diesel, and other consumer fuels follow international prices. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well. Estimates of the consumer fuel price implications in the four studies GAO reviewed ranged from a decrease of 1.5 to 13 cents per gallon. In addition, one study found that, when assuming low future crude oil prices, removing export restrictions would have no measurable effect on consumer fuel prices. Some stakeholders cautioned that estimates of the price implications of removing export restrictions are subject to several uncertainties, such as the extent of U.S. crude oil production increases, and how readily U.S. refiners are able to absorb such increases. Some stakeholders further told GAO that there could be important regional differences in the price implications of removing export restrictions. The studies GAO reviewed and the stakeholders it interviewed generally suggested that removing crude oil export restrictions may also have the following implications: Crude oil production . Removing export restrictions may increase domestic production—over 8 million barrels per day in April 2014—because of increasing domestic crude oil prices. Estimates ranged from an additional 130,000 to 3.3 million barrels per day on average from 2015 through 2035. Environment . Additional crude oil production may pose risks to the quality and quantity of surface groundwater sources; increase greenhouse gas and other emissions; and increase the risk of spills from crude oil transportation. The economy . Three of the studies projected that removing export restrictions would lead to additional investment in crude oil production and increases in employment. This growth in the oil sector would—in turn—have additional positive effects in the rest of the economy, including for employment and government revenues.