 Okay, well thanks everybody for coming today and as Frank had said to you, we're really excited for today's session because it builds on a whole lot of different things that we've been working on here at CSIS and kind of makes it look like we're doing all of this on purpose so that always helps with our image. My name is Sarah Ladisla, I direct the Energy and National Security Program here at CSIS and our second panel today is dealing with the crude oil exports portion of the discussion. I want to just say really quickly, we're missing one of our panelists today, Kevin Book, who's an affiliate with our program and also a partner at Clearview Energy, had to go out of town last minute so we're sorry that he can't be here but we are in really good hands with Ted and Sharon who have agreed to be part of our discussion today. One of the things I wanted to point out is, oh and by the way, Lynn Westfall, you know, before going too far, I just wanted to say I totally disagree with you. You are exciting when you talk about Refining 101. I've seen that three times, I think it's amusing each time, I think that's the definition of exciting and interesting so congratulations. We've been working on what's happening in the North American context in terms of the oil and gas production surge for a lot of reasons here. One is because what we do is we focus on how policy and markets and technology intersect with one another and then two, we try and bring together what are the strategic bearings on those conversations. How should we as people who live in the nation's capital and think about these things from a long-term energy and security and strategic policy context, how should we be viewing what these sometimes somewhat wonky issues mean for our long-term strategic foresight. So I just wanted to hold up just some examples of the work that we've done. We put some copies out back but basically coming at this from two separate issues. The first is a study that we did two years ago now that looked at the geostrategic implications of the unconventional oil and gas production surge in the United States and asked what it meant for national security, for energy security and geopolitics, and for sort of U.S. economic well-being. It's great to see that the messages that we had in that report about having long-standing policies that sort of signal the direction of U.S. energy policy in a foreign policy context still resonate through even with all of the changes that we've seen happen geopolitically between now and then. And the second study that we had just released earlier this year, which is really framing today's event and several events that are going to come after it, are focusing on what Joanne Shore talked a little bit about, which is all of the changes, and excuse me, Martin as well, all of the changes that we've seen happen in the physical infrastructure in the market in North America. I mean, I think we spent a lot of time focusing on what the supply surge was, how durable it was, how long it was going to last for a good period of time, really understanding the upstream side. We've been absorbing how markets and companies and state and local regulators are responding to those trends. And finally, we've sort of come to a place where we've got some policy issues that have to get decided on, and those policy issues having a resolution in one direction or another is really, really important from a couple of vantage points. One, it helps the industry make the investments that they're trying to make on one side of the ledge or the other. And two, it sort of helps our allies, partners, and dare I say, you know, potential adversaries around the world to understand how we think about energy in a foreign policy context. So we're going to be exploring all of those things through a series of sessions throughout the course of the year. But what we thought would be good to do today is spend a little bit of time focusing on how the exports, the crude oil export debate has shifted since we had a conference on this roughly a year and a half ago. For those of you who are regulars, which I can see some of you in the audience, a year and a half ago, one of our good friends, Rusty Brazil, who runs a company called RBN Energy, made a impassioned plea for us to let our molecules go, free our molecules, which was, you know, which was a very sort of funny overt statement from someone who claims to not have a political bone in his body. But at that time, the question was really, will we reach a saturation point and how will this issue manifest itself? And it's really been interesting to see that with the advent of low oil prices, with all of the sort of geopolitical issues that have cropped up around the world, how this issue of crude oil exports has risen in terms of its strategic significance across a range of issues. And so what we thought we would do is start with Ted Kastinger, who was actually at that first session that we had. For those of you who don't know Ted, Ted is a partner at the Washington office of O'Milvony and Myers. I think I said that wrong last time, so I'm sure I got it right this time. But he's also been general counsel and then deputy secretary of the U.S. Department of Commerce and has been a lawyer in and around the Washington area for a long time. And Ted is going to talk to a little bit about what has changed in terms of the U.S. crude oil export debate. He is going to spend a little bit of time on the sort of the crude oil exports baseline understanding, because as we all know, sort of in Washington as issues evolve, people generate their own facts and opinions on things that can get kind of confusing. So we're going to go right back to the baseline of what some of those rules, regulations are and what kind of progress or evolution we've seen on that issue and what we might expect to see over the next year and a half or so. And then we're really pleased to have Sharon Burke here, who is a senior advisor at the New America Foundation recently off a very successful stint as an Assistant Secretary for Defense of Operational Energy at the U.S. Department of Defense. I told Sharon the other day I had a meeting with somebody who was telling me how successful the Department of Defense has been in tracking its energy usage throughout the department and was sort of focusing on some of the other strategic issues that they need to focus on. I thought what a wonderful thing to say, because I know how hard Sharon has worked towards that effort and how hard it was. So to have someone sort of checked the box for her from their inside opinion, whether it's true or not, was a compliment to the work that she had done. Sharon's going to talk a little bit about looking at this crude oil export issue from a national security perspective and an energy security perspective, which was a good bit of what she did before her time at DOD, during her time at DOD, and now some of the work that she's focusing on. So without further ado, Ted, why don't we go through your presentation and then we'll move on to Sharon. Great. Thank you very much, Sarah. It is a pleasure to return. I well remember that panel that I joined Rusty on, although anybody on a panel with Rusty Brazil is distinctly a part of the audience as opposed to the panel. Rusty and I had a very interesting sidebar conversation after that panel about the relative differences in processing condensate, which manifested itself several months later in a way that we'll discuss. So although I have a feeling that most people in this audience understand very well at this point, 18 months later, the fundamentals of what the crude export ban is, I thought to use a favorite Washington term, we ought to do a little level set first, and so let me walk through initially just the basics on what the legal framework is, because that is the point of departure for the debate that is going on. We'll go on in Congress about what to do and how you might change the ban. So that's where we ought to start, and let me do that. So quickly, it's important to understand that there's not a single statutory basis for the crude export ban. And actually the ban resides in a number of different statutes, all of which were passed during the 1970s. The one that most attention is focused on is the Energy Policy and Conservation Act in 1975, General Comprehensive Ban, but there are other statutes we can't forget about Mental Land Sleasing Act, Outer Continental Shelf Lands Act, Naval Petroleum Resources Production Act, and the fundamental authority for the export regulations themselves is the Export Administration Act. So any legislative proposal to address the ban has to address all of these statutes. They all basically say the same thing, but nevertheless it's a pretty comprehensive web of legislation. So going in on EPCA, the fundamental language is the law requires the President to promulgate a rule prohibiting the export of crude oil and natural gas produced in the United States, pretty straightforward and unambiguous, except this kind of oddity that the law requires the President to propose a rule, it's not a direct ban itself. Then the law authorizes the President to exempt from any prohibition, crude oil or natural gas export, which he determines to be consistent with the national interest and the purposes of the law. The key part of that really is the national interest, raw discretionary authority, but a serious test, national interest, and as we'll see, fairly rarely exercised. But some of the debate you hear is about calls for the President simply to exercise authority under existing law to exempt for the categories of crude or to broadly lift the ban. He could do that, but it would require a pretty significant step on his part. We'll return to this later, but the other statutes, the MLA, the Outer County Nail Shelf Lands Act and the Petroleum Reserve Act all also create exemptions, possible exemptions, for certain swaps and exchanges. And this is when we hear about the PIMEX, which regularly is in the news proclaiming it's on the verge of getting a license from the Commerce Department for a swap that ties into this authority. So the fundamental thing to understand is that any crude oil that's produced in or that enters the United States, as from Canada or from another foreign source, can't be exported to any destination without a license. So if it's in the United States, you have to go to the Commerce Department and get a license to ship it out. There are no restrictions on exports of petroleum products. And so as a consequence, as our earlier panel noted, there's significant product exports. I think I thought the current level of gasoline exports was something like 30% of production. But whether it's 15% or 20% or 30%, there's a lot of product exports going out of the United States. And there's no limitation on that. So if you can export products but you can't export crude oil, fundamental question is, what is crude oil? And there is a regulatory definition in the Commerce Department export regulations. You see it there. The question around condensate exports stibs directly from the language that's highlighted there. Hydrocarbons, which have not been processed through a crude oil distillation tower. So what is processed, what constitutes a distillation tower has been part of the debate controversy around condensate exports. But if you fit this definition of crude oil, you have to get a license in order to exit the US. So as a matter of policy, the Commerce Department, which administers these rules, has adopted a few specific instances where it says it will grant license applications. So exports from Alaska's Cook Inlet to Canada for consumption in Canada in connection with an SBR exchange, up to 25,000 barrels a day of California heavy crude oil, foreign origin crude oil where the exporter can demonstrate that the oil is not of US origin and has not been commingled with oil of US origin. So this is an issue with Canada. Bringing in crude oil from Canada, can you keep it sufficiently pristine through pipelines or tankers, tight cars, and storage facilities so that it's not commingled with US crude oil? If you can do that, you can readily get a license to re-export it. You have to get a license, but it can be re-exported. There's a catch-all. Commerce says it will grant a license in other circumstances where they're consistent with findings made by the President under the other statutes. That is a catch-all, not much in play. In addition, Commerce Department will, in the rules, there are two circumstances involving possible swaps or exchanges. The general rule on swaps, which would involve swaps of crude oil of any foreign country, there's a three-part test. Basically, you have to show that a shipment you want to send out of the US and what you bring in or an equal, it's an equal or greater quantity, excuse me, of the import. There's sort of an easy term. You have to be able to terminate the contract. But the most important part of the three-part test is number three, the applicant for the export license has to demonstrate that there are compelling economic or technological reasons beyond its control such that the applicant cannot reasonably market that crude oil in the United States. If that sounds like a tough test, you're right. It is. The Commerce Department has never granted a license under this test. Been some question and discussion about whether, for example, the collapse in oil prices over the last year, you know, can someone demonstrate their compelling economic reasons no one has yet, as to my knowledge. So the potential is there, but it's a losery. A little bit more interestingly, you know, a little bit more interestingly, Commerce will also consider a license application for something most of us call exchanges with adjacent foreign states. So this is Canada or Mexico, basically. For Canada, it doesn't really matter because you can readily get a license to export to Canada for consumption in Canada. So the question that's been more on the front is, can you get a license to exchange crude oil with Mexico in similar quantities? And the answer is yes. And it's kind of a mystery why it hasn't happened. At least since last summer, there have been PIMEX has periodically announced it's applied for a license application from Commerce to exchange up 100,000 barrels of Mexican heavy for U.S. light. And any day now, you know, it seems like they expect that license to be granted. I can't imagine what the hang-up has been. I think any, the principal challenge, I think, is to show that the swap or exchange under this rule would involve incremental additional crude. So there's a fair amount of Mexican crude already contracted to be sent to the U.S., refining the U.S. You can't say I'm going to take part of that and match it up against the U.S. cargo as an exchange. You have to find some new buyer, new crude. It hasn't happened. I think it will happen. I don't think it involves any significant policy decision on the part of the government at all. I think the Commerce Department will, as a matter of course, consider these licenses. And when the facts are sufficient, they'll grant one. So that's the basic, you know, lay of the land in terms of the ban. I thought I would step back and, you know, over the next couple of slides say, how did we get here and then talk about where we're going? So how did we get here? You have to look back a century, really. For the first part of the 20th century, the Texas Railroad Commission really effectively controlled U.S. production of oil and consequently global oil prices. Post World War II, the real issue was oil imports, not exports. The monopoly asserted by the TRC came under great threat as imports began to pour in the United States, as oil fields in the Middle East and elsewhere began to be developed. By the late 1950s, the government had come up with a system of so-called voluntary import controls and then ultimately under President Eisenhower towards the end of his second term, actually imposed import controls. And that was the big concern, not exports. Just kind of rapid fire through the 70s. President Nixon imposed wage and price controls, allocation controls. Oil, great concern was oil production, which continued to fall and the U.S. imports continued to increase tremendously. By 1973, the Railroad Commission abandoned any effort to continue to control production. And many of you looking around, some of you, at least my age, will remember the gas lines of the early 70s, mid-70s that resulted as production just collapsed in the U.S. And there were long gas lane lines, a lot of concern. That actually predated the Arab oil embargo, which occurred later in the 73. So there was a lot of a lot of concern about adequacy of oil supply in the U.S. So, oops, let me back up. So, that set the stage and for what then became the series of laws that we referred to earlier, in 1975, the EPCA, actually the Mineral Lands Leasing Act amendment, slightly preceded that, and then you had the other statutes in the 70s as well. So the notion was, great concern was scarcity, need to keep the oil in the U.S. We had this price control system, had to put export controls on in part to prevent people from selling oil abroad where they could get a higher price than in the U.S. where it was controlled. And it kind of, we stumbled into the system of export controls that has been in place ever since. So 1981, first executive order of President Reagan was to remove the price and allocation controls on oil, but we still have the man. It's been in place during the 80s, a series of little incremental openings there, all based on this kind of notion that the President can create exemptions through the national, exercising his natural interest, national interest authority. 1985, exports to Canada for consumption. That was right around the time of the U.S. Canada Free Trade Agreement, really tied to that, as you remember. Exports from Cook Inlet, exports of Alaska, North Slope, excuse me, California heavy crude. Importantly, 1995, 96, Congress itself opened the door by authorizing the President to issue a national interest determination on exports of North Slope, taps of oil. That occurred under President Clinton. It was a fairly long period of time, and now we get to 2015. I raised the question, Mexico, February 18, Senator Murkowski and a number of other senators wrote the Secretary of Commerce urging that Mexico be given the same status as Canada, at least, under the export ban. That is, you could export to Mexico for consumption in Mexico without tax. For every reason I could think of, that's a very good idea for both economic, national security, political reasons. I think that could happen. I don't have a specific prediction on it, but it seems like a very logical thing for the President to do, and maybe we'll see that as the next addition to the string of exemptions that's occurred. So take a moment on process condensate exports. It's just a full disclosure here. I represent pioneer natural resources, which actually got one of the two classification decisions, commodity classification decisions that have to do with process condensate exports last spring. So in the middle of last year, the Commerce Department did issue what's called a commodity classification decision to pioneer natural resources. Confirming the assessment of those companies that condensate process through the distillation tower in the fields for stabilization purposes is not crude oil under the definition that we looked at earlier. It's in the regulations. There is a distillation tower process that goes on. It's sophisticated. And it had not occurred to anyone before, but as we looked at that, we realized not every stabilization process involved distillation towers, but some do. And we asked the Commerce Department and we're not surprised when the Commerce Department confirmed our analysis there. So a commodity classification decision is something the Commerce Department does every day. Whether it's the crude oil export regs or any other export regs, there are questions about how products are classified under the rules and then how those rules apply as a result of the classification. And so there's a very standard process. You write in, present the facts, the Department confirms your classification or says no, actually it's classified in some other way. And that's all that happened. There was no significant policy administration having to do with condensates. It was simply a very fact-specific decisions on the facts presented by these two companies. It did become somewhat controversial when it became public later. A number of companies asked for similar decisions. The Commerce Department took a relook at the overall approach and on December 30th they accused that explaining the process the analytical process that they would go through in order to reach these decisions. It is exactly the same questions that Pioneer and Enterprise got. And again I think the Department would emphasize it's a fact-specific decision case by case, not a policy call. Nevertheless, it does it did open the door for some crude oil process in a way that hadn't been thought of before and exported. Not necessarily huge amounts but was notable let's say. So let me talk a little bit about what's happened on the arc of the political debate over the 18 months since we first got together. The first thing is there's been this incredible march of the analyses which have consistently headed in the same direction on the merits of the crude oil export ban whether from an economic or national security standpoint. John Mayers who is here with Resources for the Future was one of the first. And a lot of the initial studies including Resources for the Future was on the question of how does the ban, if you lifted the ban what would happen to gasoline prices that seemed to be the political concern. The conclusion that Resources for the Future reached as well as all the later studies was either no impact or prices would tend to be depressed. But there was I think without pausing on any single study it's worth just looking at the march of these ICF, IHS, Brookings, GAO, Aspen Institute which studied the impact on the manufacturing sector. EIA studies see Congressional Budget Office, Columbia in January can med like Baker Institute most recently in March just one after another deep analytical studies all reaching substantially informing the debate in a number of ways but in every case concluding that from an economic standpoint the U.S. would be better off as well from a national security standpoint. I would put up a slide showing all the studies on the other side except there are none. Literally there has not been a single analysis reaching a different conclusion. It's also been notable as you look back over time how former senior officials from the current and prior administrations but once freed of the shackles of office all have reached the same conclusion in public. There are many that could put up but a couple of notable ones included Larry Summers, Dr. Summers when he introduced the Brookings Institute and NERA report last September pre-ringing words, right? The question of whether the U.S. should permit exports is easy. The merits are as clear as the merits of respect to any significant public policy issue that he's ever encountered. It could be less ambiguous, right? about where he stands. Tom Donilon, former national security advisor to the president at the rolling out of the Columbia study in January laid out powerful, clear explanation of why it's in the national security interest of the United States to lift the crude oil export ban. So that's just two. But there are many others, Michelle Flournoy Sharon's former colleague at defense Carlos Vesquiel State Department just from this administration but you can go back to prior administrations as well former officials who stood up. Again, I could put up a slide that says no one on the other side and it would have no one on it. So you have former policy officials, you have any number of experts in the area won't pause on these long, but it's one after another, op-ed either a testimony, editorial writers. Pretty surprising. In my mind, the initiation of the public debate here actually kicked off in late 2013 in the same week and now the blue to me, both the Washington Post and the Wall Street Journal editorial pages called for lifting of the ban and they have done repeated, done that since, but not just these papers, Boston Globe Chicago Tribune and others. So you got the the experts, former officials the editorial writers where are we today? What are the prospects for change? So we're at the 40th anniversary of EPCA. Price controls ended in 1981, but still the export ban lives on. We had House and Senate hearings in March. I think you can expect more hearings in the next couple of months. Senator Borkowski leading an effort in the Senate on a comprehensive energy bill similar effort underway in the House, not on crude oil exports, but generally on energy measures that would probably be the will be the place where this issue will be debated and maybe incorporated as time goes forward. I think it's important to to also keep in mind the external and security environment the debate over Iran sanctions Russian adventurism in Europe have the question should the president act unilaterally should Congress enact legislation or both I think personally it'll be some combination of the two. Let me conclude just by one quick look back you look at the arc of the debate so 18 months ago and when we started it was what is this ban what is it about why is it still here and most of the initial discussion was all about gasoline prices and what's the impact there because everyone assumed that was the political issue. The expert studies I think have kind of answered that question so much so that at the House hearing in March even the witness from the AFL-CIO which opposed lifting of the ban there is no question the global prices gasoline prices in the U.S. there's no debate about that issue anymore the debate then moved into kind of the secondary market impacts I think you look at the Brookings study Charlie Emiger here led in September the Aspen study noted very in depth report on the impacts of on manufacturing and I think that's important as people began to rise this is not just an oil patch issue then you had the collapse in oil prices in the fall and there was a lot of discussion about well is this issue even relevant anymore in an environment of low oil prices who cares my personal view is the answer that has been that has been answered because production keeps rising the gap between WTI and Brent continues to expand you have thousands of steel workers being laid off because of the collapse in the energy industry so I think the the answer is still relevant well where we are today in the debate I think is over the impact of keeping of lifting the ban on a few refiners not all but a few refiners and then environmental concerns is it consistent with the efforts to address greenhouse gas emissions so it's gone a long way over 18 months and the hardest thing in the world is to get a law changed and may not be changed but I think we're in a very different spot than we were 18 months ago let me conclude there thanks well thank you very much and I'm delighted to be here I think it would be good for me to start by telling you a little bit more about who I am because I think that's part of the reason that Sarah wanted me to come today whenever you have a speaker before you who's talking about energy security and energy politics you need to know where they stand but you really need to know where they sit so I work for a non-partisan non-profit organization I'm the only person that works on energy security issues there I do not take any money at this time from anybody who has a dog in this fight I do my own work whatever I feel like doing which is largely concerned with energy and warfare and the relationship between the two so my view is heavily colored by the fact that I'm a former defense official and the defense department comes at this issue in two significant ways one is how would change in the export ban affect energy geopolitics and the use of energy as a tool of national power and then secondly DOD comes at it in a way that no other government agency does it's a major consumer of fuel if it were a country it would consume more than about I think two thirds of the world's nations so this is a very significant consumer of fuel and keep in mind it's a consumer of refined product not of crude and DOD depending on where we are in the world and what we're doing consumes and buys most of that fuel overseas so that's where my view is largely colored by so you do hear in this debate a lot of people talking about this is a national security issue it's a driver it's an imperative so I think it's a DOD term I don't know if this is in normal parlance but the bluff the bottom line up front the bottom line up front in this is is it? yeah kind of sort of to some extent it's a mixed picture it is a national security issue but it gives and it takes here so I'm going to tell you a little bit more about why I think that and why it's both yes and no start off by saying what is the security problem when it comes to energy well first it's the scale of demand the pattern of demand the global market is what 89 90 million barrels a day right now and so it's that global demand and where the demand is growing that has a lot to do with how secure reliable and affordable our supplies are the United States consumes right now about 18 to 19 million barrels a day so we are still a major consumer we still have net imports right we still need to supply some of our own fuel by importing that's going to be true for I don't know a little while at least maybe forever who knows and we have a very important choke point in our own economy which is transportation our transportation sector is overwhelmingly dependent on petroleum and I know these are basic facts but it's good to lay them out about why it is demand such an important driver in energy security so when when there are shocks that's where we're vulnerable because transportation is a basic sector in the U.S. economy and it touches all things touches agriculture it touches commerce touches residences it touches everything so when there are price shocks it reverberates throughout our economy and that is the core of our vulnerability when it comes to energy and the fact that we're part of a global market where other people's demand determines what's available what's affordable and how reliable it is of course the other thing that determines that is the supply what's been the problem up until fairly recently it's not so much the overall supply in the market but the concentration of supply so who has it and the fact that it's highly concentrated in specific countries and regions and that those specific countries and regions have a terrible habit of being unstable and in some cases being unfriendly to the United States and to our interests so whether they do it deliberately or just as a matter of course because they're not stable and oil has a tendency to do that to governments for a variety of reasons I think most people in here are well aware of we can't control how reliable that supply is we haven't been able to historically I think I did some counting and about 46% of the world's oil supply still today is in countries that the transparency international rates as corrupt and that in the stability index state stability index are rated as unstable ranging from extremely unstable like Libya to somewhat unstable so you know almost half of the global supply still is in these countries that's been the problem is the concentration of supply and the unreliability of the supply and then the other problem has been of course energy as a weapon and resource nationalism and the fact that most of the world's oil supply is in the hands of countries that use national oil companies so it is a direct element of state power Russia obviously has used that to great effect for some time now but not the only ones lots of countries use energy as an element of state power and that's been part of our energy security problem and concern and then there's a fourth area that I'll touch in more about whether or not these are still problems which is there's a general issue of national character and national power at state care so first on demand so US demand is flat or declining as we've heard earlier today people do talk people used to talk about peak supply in the United States now they talk about peak demand so is the United States going to only stay at this or lower with cafe standards with other efficiency improvements reasonable to think so at the same time of course if there's economic growth you may see some more growth in demand it's hard to say but we are not going to be the drivers in demand in the world economy it's going to be Asia it's going to be other economies it's going to be China and we'll get to that in just a second what that means and also there's a really interesting sidebar here as natural gas becomes more available everybody's watching that too to see how that might affect electric vehicles I do have a colleague at my current at New America who's very interested in electric vehicles and very optimistic about the penetration of that that could also affect our demand in ways that are pretty significant natural gas I think in personal fleets not so much but in heavy fleets fleet vehicles that could change the structure of our demand and again to me these are all economic arguments for liberalizing the export regime but keep in mind that as a national security person one of the things I'm really concerned about in demand is that we've been the biggest customer in the world and there's a certain amount of strategic leverage and power that comes with that we are not the biggest customer in the world anymore China is and a lot of our partners in the world and specifically in the Middle East are looking East that is a very interesting strategic reorientation that will not be affected at all by liberalizing the ban on exports and it's something that bears a lot of watching I know you're going to do work on that and you have been doing work on that and it's a strategic driver that this is irrelevant to and that the United States needs to watch the concentration of supply from my point of view as a national security person increased US production helps no matter what because we're displacing our imports other people are able to buy them we're exporting refined product we're affecting the global market period to me the efficiency of that process so liberalizing the export policy to me is fine why wouldn't you it's an economic driver but as far as the security driver goes the big deal here is more US production no matter how it hits the market on some level I'm agnostic I don't care I just happen to believe it's more efficient to release the export ban but the bottom line is it doesn't change so to the extent that the United States allows producers to respond more efficiently to market signals all to the good but it's not the primary driver then I think what's very interesting here on the supply side is again the possibility of North American producers being a stabilizing influence in the market the thing that's been so difficult for us on a national security side is the volatility of this market and the unpredictability of it and just even in the last few years if we hadn't had so much US product coming on market even with a ban on crude exports you would have seen so much more price volatility and so many more spikes Libya coming off Iraq's in trouble Iran under sanctions Russia under sanctions this would have been a catastrophe we wouldn't have been able to do it frankly we would not have been able to hold coalitions together to maintain sanctions because of what it would have done to energy prices so the stabilizing effect of having reliable producers growing in the market in Mexico there's lots of reasons to be optimistic about that at this point that they're becoming a more reliable producer to the market to me that's a really important influence as a again as a national security person looking at the geopolitics of this having a more stable reliable market gives us a lot more room to move in global relationships again it comes back to one thing I think is very interesting that it would be very interesting to look at is one of the chestnuts has always been Saudi Arabia is the only place it has spare capacity so when you do have these things popping up where you need to stabilize the market they were the only people that could do that the only country that could do that of course we don't function that way we're not a state controlled on the other hand tight oil shale gas these are different ways of bringing oil to market how fast could we react in a supply crisis or in a price shock how fast could we ramp up can we function as spare capacity de facto even though we're never going to do that as a state policy except for the strategic petroleum reserve which has rather significant limitations in its effectiveness I think the answer to some of that is it's limited you will never get around the fact that 20% or so of the world's oil right now that will remain a choke point until we can displace 20% on a dime we'll still be vulnerable to those shocks so that doesn't necessarily change if you lift the export ban and I think it comes back to you in the last panel a very interesting question about where can we compete and where is this oil going to go it's a weapon again we don't use energy as an instrument of state power the way other countries do so when we say we could affect the dynamics with Russia and Ukraine by promoting exports of oil to Europe or we could affect the rebalance to Asia by promoting exports to Asia you know it's going to be that's going to make its own choices and it's going to be a question of where we can compete we certainly overall are affecting those dynamics but again that's not necessarily a question of where the crude goes although we certainly have important allies who have very big refining sectors and does that allow us to draw closer to say South Korea it might and I think that would be certainly an interesting aspect but as far as whether we can use this to affect what's happening in Europe right now it doesn't work that way it'll depend on where the market is or where the joint venture is where the economic incentive is so it depends that's not a very strong argument to make it certainly mitigates against how those countries can use their energy as a weapon and that's where it gets more interesting because of the low prices Russia, Iran these countries are not able to wield that weapon as effectively but again that's not dependent on crude oil exports that's a factor of the US and North America producing more in general again it wouldn't hurt if we were more efficient about how we convey it to market but it's not a direct effect there but keep in mind that even though this is all to our benefit and we like this it also hurts some of our friends and allies you know the low prices right now whether and our contribution to it is a real problem for our strategic interests in Iraq Iraq is really suffering with having a lower income from their oil sector that's not in our interest so when I say it's a mixed picture it is a mixed picture it gives us more leverage with Russia it destabilizes Libya and Iraq where we have a very strong interest in stability and we've put our troops on the line for that so it is a mixed picture we have other allies, formal allies and very important strategic partners around the world who do not benefit from this you know again as a defense person I'm very concerned about the relationship with Qatar and Kuwait United Arab Emirates we have very important relationships and bases there and this is not good for them so it's a mixed bag I think where you get a really interesting argument that I find very persuasive is what I think Michelle Flournoy wrote and what Carlos Pasquale my other former colleague wrote which is it's more about how the US looks in the world and that we have to be willing to walk our own walk if we're for free trade we're for free trade if we're going to bring complaints in front of the WTO then we need to be able to say that we also are promoting the same values so an export ban is not consistent with that and I do think it matters how we appear to the world and that we live by our own values in areas such as this so I do think that matters but again that's not a direct national security argument the direct national security arguments are not so strong the indirect ones are very strong that it's about how we look in the world and how we use our national power to promote our interests and in that case I think that there's a very strong national security case so as I said it's a mixed picture as is often the case with the politics in this issue it's not that simple it really depends on what you've got in your backyard so to speak and that's really the picture I wanted to present at this point Thanks Okay so that was a lot to add to it already complex morning what I want to do is maybe ask a couple questions and then open it up because we're going to run a little bit late on time here you know the way that I look at and Ted I really liked your presentation sort of tracking the evolution of the issue over what is sort of a very short period of time as far as issues evolve but quite frankly the supply surge has been over a record period of time so why don't we speed up the politics bit you know I see it as a debate between incrementalism right there are incremental ways that we can sort of continue the process of sort of opening the door to the crude oil export van versus making an argument for a new way of thinking about the way that we manage this issue right and it cuts on both sides of what you guys have been talking about one and quite frankly what we were talking about this morning which is are you what is the choice that we're asking policy makers to make or the way in which we're trying to ask them to think about it from a strategic vantage point is it about trying to find little ways that the issue becomes a little bit more acceptable because a wholesale change would be you know drastically different or have some sort of repercussions and I was really interested in your perspective you sort of lined up all the ways in which people have made the case very compelling and you know according to your analysis there is nobody on the other side of the ledger that's either a terrifyingly deafening silence right or it's a statement of the problem stands in terms of or I guess the issue stands in terms of people's ability to absorb all of the potential interesting implications one of the things that I get concerned about is when you look at the complexity of the investment decisions that we talked about this morning and we didn't have an upstream producer here but we had IHS CERA come in with their latest study last week and talk about sort of the complexity of the analysis on the sort of economics of the boost that it gives here in the United States or what you know what the marketing of crude oil exports would look like abroad these are really really complicated issues is it that people just don't know yet what the conclusion is or they're not sure if it's an incremental approach that we should be taking or sort of a wholesale rethinking of the policy in general where do you think we'll see this move I think that we will see it move most likely in an incremental direction but not necessarily a predictable one I think the issue is complex for one thing lifting the crude oil export ban is not on the top five list of anyone in Congress whether Republican or Democrat you know this is the compelling national issue that we need to address and so I think in terms of education interest there are a lot more people aware of it and inquiring than there were even just a few months ago but to move into the realm of action I think there has to be probably a lot more of that discussion that goes on as well as continued leadership by some people who have put it at the top of their list but I think caution concern still about potential political ramifications of gasoline prices going up I think the easiest thing is to do nothing and so I think it will move along pretty slowly as an issue unless there is a significant crisis that precipitates a reason for action or there is some kind of additional incremental proposal out there to look at a partial lifting of the ban or something like that so just a pause on the uncertainty and the ability of a surprise to come up if we come back from the recess the Iran negotiations have fallen apart the legislation moves forward as in its current state the proposition currently on the table is that the U.S. would threaten sanctions against countries that don't reduce their imports of Iranian oil to zero to the minimums talking about Japan, South Korea China and others if we really went in that direction a lot of challenges there but one of the first questions is you know is the U.S. really going to take that position and say but we're not going to sell any crude oil on the market it becomes almost untenable so or if Russia did something more in Eastern Europe or the Baltics even if you can't say that crude oil exports today would solve this issue in Europe still what would people be looking around for something to do so that's the kind of issue that could come out surprisingly to force a decision earlier than people might otherwise want one point about refiners I wanted to make the refiners and then there are refiners and when you talk about uncertainty investment decisions I have to think that an integrated producer with a refinery probably looks at this a little bit different than someone you know an independent refiner and we know from public comments even among that group there are different views on this and then you have some small refiners in the northeast which have a particular problem in terms of access to crude I can't imagine a circumstance where there is going to be sufficient certainty that the export ban will never be lifted or altered that would cause at least some of the larger refiners to say yes and that will cause us to make the $500 million investment you know in a wholesale of recasting of the refiner that we have today I mean it's always going to be there to me and ever more so as production you know the production ability in the US occurs so large refiners are free traders so it's a little hard to see where that certainty ever occurs I think Ted's point in there too that the optics matter and that so for example if there is a crisis and we do liberalize exports and say that that's to deal with Iran or Russia it won't really make a huge difference but it matters that it looks that we're taking action that's how we got this bad law in the first place right because we had to do something the pressure to do something in response to the price crisis in the 70s so you know this would be something that's more constructive than this ultimately ended up being but at the time it was in good faith people were trying to figure out how to deal with a crisis so the optics matter even if the reality lags a little bit what I was going to ask you actually Sharon because it was I think within the national security space and when we we're starting to talk about this in 2013 it was a bit of a no-brainer for us because it was you know whether or not we need time to decide how we're going to deal with this which is sort of the party line at the time people were picking up messaging whether we were delivering it or not right people were picking up messaging the international audience that we were sort of talking to asking about the foreign policy and national security implications were saying your lack of a decision is signaling something it is signaling that you're questioning some of the fundamental principles that have always been there is that really what's on the table and so I think that one of the things that I'm curious about your perspective on is first you know from an international audience perspective I think no matter how we eventually get around to addressing or not addressing this issue people will pick up messages intended or otherwise right from that we know that our words and our choices matter right pivot so but then also how we do this from a national security perspective matters I think we saw this a lot in the LNG export debate where we basically came to a process we understood what it was that we wanted to do from a domestic perspective we had time to feel a little bit more comfortable about what was happening within gas markets and how much gas would leave the United States I would argue in a period of low oil prices we can feel a little bit better that it wouldn't you know be one of these situations where a huge amount of oil would leave the country and we'd actually be doing a lot to boost investment in places that might be harmed by a lower oil price environment now but the signaling of it if there's a foreign policy opportunity to be taken where you can say we're wielding a softish-hardish power there's people in the fence about which can't we energy folks are in so stay tuned but but if there's an opportunity for that kind of signaling is it something that you think from a national security perspective does actually build a case I think there is but I think one of the reasons that it only goes so far is that the voting public or the American or the public that doesn't vote the American public will I think accept that argument and you do see that in polling that one of the few arguments that is consistent over time is the national security messaging around energy however they're going to care about it a lot less when prices go up in you know all things be equal prices will go up at some point and so they'll buy that argument a lot less when it means that they have to pay more and which is why this is going to be on the slow boat that Ted's talking about but I mean I think there are ways to use this messaging I won't I won't out the colleagues in the room who were with me on this but before I left government we were in Nigeria on a presidential mission talking to leaders there this was in December 2013 and you know we were talking to them about the need to address some of their internal problems with how they manage the income from their energy sector and we were talking about their macro economic exposure and some of the just how precarious position they were in and we told them you know we think prices could go down now did we really well roll the dice that day we were we did we all agreed that that was a good message to carry and that they were terribly exposed and we could see a situation within a year of prices going down to $60 a barrel and you know did they believe us and and did it make our message maybe maybe so but I will say one of the officials we talked to looked me right in the eye and said well that's okay we're just going to sell to China now instead so you know messages go both ways but yes I do think that kind of messaging matters and particularly when you want something specific out of it whether it matters to the U.S. public I think will depend entirely on what the price is at the pump sort of issue maybe to discuss and Ted it's because you brought it up I mean there you're right we kind of the pattern in Washington often tends to be sort of clearing through a variety of strategic issues you know one at a time to get to an end state and and the one that hasn't necessarily been fully vetted at this point is sort of the environmental angle right and that's something that we bring up in the study that we released earlier this year and something that we'll be dealing with over the course of these policy issues that we think matter I've got a personal view on how that'll manifest itself but I don't know if you've done any thinking about where that debate is going to go it's interesting that so far that has not been a significant part of the debate around the lifting the crude oil export ban there have been some NGOs that have taken an interest but you know this is not Keystone yet it's not the idea of lifting crude oil exports has not assumed a kind of you know iconic status as you know testing of where one is on environmental issues so remains to be seen whether that would happen I think there are some signs that there'll be concerns but it won't ever hopefully not get to that kind of level of debate where you lose the facts on either side so I think it's out there I think there'll be concerns I think you know the responses that some analysts have made so far of course make sense to me and I'm not sure and I think may be persuasive ultimately and that is it's not a lot of indication that lifting the ban would significantly increase GHGs in the US and if the goal is long term to reduce emissions which it is there are far many better ways to address that than trying to control the supply so really need to work on the demand side there and I think a lot of people understand that okay well I'm going to open it up for questions we've got about 10 minutes left we'll start with John in the back Kinko's got a microphone for you John Shagas strategic program consulting Ted under current law if crude oil is exported from the United States up to Canada and then mixed with bitumen and then comes back into the United States through a pipeline and all the other criteria are met to keep it separate it's no further commingled by anything else could that Dilbit be exported I'm tempted to say a bit that's it's an area of remarkable lack of clarity so yes so the basic rule on commingling is that the commerce department was setting aside the Dilbit issue but if you bring Canadian crude let's say through pipeline to port in the US as long as there is only conventional commingling that's the magic phrase with domestically produced crude oil that Canadian crude oil is considered to stay Canadian not US you can ask for license and export it so the Dilbit issue is suppose you send condensate like crude from the US to Canada it's used to dilute tar sands or heavy crude brought back in the US does it still exist as a separate set of molecules US origin and when it's brought in the US do you need a license at least for those molecules and there's no clear measure about that to my knowledge I think you can start with the incidental commingling so small bits of mixing with the bitumen is okay I think and the crude brought in diluted from Canada still considered Canadian origin you can get a license but whether it's as you move up the mix I think to my knowledge at least the commerce department doesn't have a magic spot that says that's too much but there is a point where it's too much so I don't have a better answer for you than that I think it's that you know but clearly some is okay Bennett Johnston, Johnson Associates the previous panel indicated that the potential export market is two and a half million barrels a day is the spot market sufficient to absorb that much particular light sweet crude or do you need long term contracts that would be particularly a salient question if the president decided to incrementally lift the ban I think the discussion on the earlier panel was a question of whether or not it would be up to the volume of two and a half million barrels a day and I think Martin you talked a little bit about the ability to absorb that kind of crude into the market over a period of time but I think that the questions are about whether or not that much in fact would leave and how much it would be at that time but I don't know if you guys have done much thinking about it I don't know the answer to your question whether you would need whether the structure of long term or spot contracts would make a difference I think your question raises I think probably goes to the more interesting point whether if you were pursuing an incremental approach could one thing the president do but Congress could do as well is to permit exports up to a cap and maybe you start with two or two and a half million barrels a day see how that goes and you could increase it over time and that makes a lot of sense to me I think the cap has to be high enough to be meaningful Charlie, I'm in your brookings Ted in response to Sarah's question you kind of hinted that you did not think the environmental issue had gotten the salience of the keystone within the I think you were referring to the external environmental community but my question relates what do you think is the attitude within the administration itself do you believe whether you're talking about crude oil exports or a keystone that there aren't some people in this administration who really genuinely believe that all these activities lead to greater use of fossil fuels and hence more GHG emissions yes so there are yes but there are also some who don't believe that so welcome to every administration I think the other thing too is that we haven't had a very developed conversation in this country about how to have your cake needed to in the context of the climate challenge and so I think that we've been having a sort of a defensive discussion rather than a proactive discussion and I do wonder if a period of low prices where you're evaluating oil and gas competitiveness from a U.S. perspective from a U.S. upstream perspective from a U.S. refining perspective all the way through to the most economic cost-effective ways of reducing greenhouse gas emissions over the long term is just a very underdeveloped conversation so far and I my money is that we're going to have it I mean I think what Ted said was really actually really great point which is you know I think the environmentalists that are arguing this are making a moral argument trying to make an economic argument or a security argument they're saying it's a moral argument that you don't want to put more supply in the market and I respect that position but I think what Ted's point was though it's a demand problem and if you can't you know the global demand for this is keeping economies afloat and taking away the supply doesn't change that problem so you have to address the demand side and I think that's where the discussion needs to go as it gets more robust oh sorry Nelson Lee from BHP-Bilton so I'm the guy who did the common-state exports out of the United States for the first time so as an upstream producer I figured one of the Sharon's questions was how long does it take for Eagleford to switch on and off so we're shutting down most of our fields we're two-thirds of them because of the low oil price and we think we can ramp them back up probably in about 30 days so there you go that's one month yes my question is you know we're already exporting condensates and I don't think the question is whether, well it is whether we're allowed to export condensates but it's does an infrastructure there for them to actually export so one of the reasons why Pioneer hasn't actually gotten anything out is because they simply can't logistically so the question is is if the government or the administration allows crude oil exports are they prepared to maybe wait a year or two before meaningful exports go out of the country and have any effect just as a factual point and Pioneer itself should address this but it has announced that it has shipped numerous cargos out of the U.S. of condensate so there has been a fair amount well they have a marketing well but it's Pioneer but it doesn't matter there have been significant numbers of cargos let's say not only from Pioneer Enterprise, BHP possibly some others that have gone out I don't you know personally I think the administration does not see those shipments as particularly relevant to the bigger question of lifting the crude oil export ban you know that was a commodity classification decision by commerce it's considered downstream product there'll be some market you know forces that determine how much goes out including the infrastructure issue but I don't think whether there's none or a lot of exports under that kind of framework will affect the broader decision about whether to further to liberalize the ban thank you Fred Lawrence from the Independent Petroleum Association of America just in terms of what you were talking Ted about the arc on crude oil exports and sharing what you were talking about in terms of you know the national security perspective how do you see this whole infrastructure build out optionality so you have pipelines and increasingly you have rail you have water born exports increasingly becoming involved and you know midstream companies getting more involved how do you see this optionality coming out so you have the rail issue which is becoming a bigger deal in North America versus pipelines and of course the water born issues playing a bigger role how do you see how do you see these concepts working together as we go forward because these are very large investment decisions as our refineries and of course some of these may have national security issues as well as economic I do I think that's an important point and I do think it's possibly also what Senator Johnson was getting at which is the incrementalism of this decision does that unlock sufficient investment because people have to make some pretty big decisions that are going to be having longer term horizons and I'm not sure that incrementalism gets you there particularly in the current price environment so I think it's an important question and I did notice that EIA has started doing just added rail into their I think is extremely helpful in knowing how to answer that question because we haven't had enough information to even address the questions so but it's a fair point I would just add that in part it may be a regional issue so in the Southwest there's tremendous amounts of investment in infrastructure pipeline storage capacity everything around the refining complex in the Gulf Coast that's going on and will be built out so the ability to export from the Permian or further from the Eagleford I think is going to be there I think it may be different if you're talking about the Bakken or Colorado and the issues around railcar transportation I think are real and threaten the very idea of cause people to be concerned about production at all So one more final two more final things one question for Ted pre-occupations with all of this has been that I think what people really are finding both in industry and on a geopolitical perspective troubling is that they really don't know how the thinking around this issue is evolving from an administration perspective and part of that has to do with the way in which the incremental sort of licensing changes have happened within the Department of Commerce very very different from the process in terms of LNG exports there's not a lot of officials coming out and making public proclamations about where the wiggle room line is drawn on some of these issues is the transparency aspect of this discussion of problem is sort of the ability to hide behind a black box and not necessarily make those distinctions part of the public discourse is that a problem that either the administration or Congress should be thinking about so that we could be having a more sort of open debate about those issues or is that really just sort of rearranging the deck chairs and then just really quickly for both of you to run out of time I love bluff I did not know bluff before but bottom line up front if you think about this from sort of a behavioral economics perspective what are the the opportunities that we might not be realizing or the harm that could be realized based on the way in which we make these decisions both sort of economically and then for you on sort of the geopolitical side how should we be thinking about this as an opportunity based on the decision that we make or some sort of harm that might be felt because we do something different why does this matter as much as we're spending all this time talking about it so let me start with the first one and then Sharon can address the second one so on the first I don't see transparency as a particular concern here the you know sort of debates about relative transparency have mostly dealt with the particular peculiarity of the condensate classification decision and that's just driven by the framework company specific requests company by company a lot of factual business and confidential business information involved in those but commerce came out with its FAQs I think everyone knows the analytical framework the bigger question of opening the door for further exports of crude oil itself there's a policy call that will be debated it's not going to be made by a commerce licensing officer so I think that we'll have plenty of robust public debate around that on the first point we don't want to kill the front row on the first point I think one of the problems is also that our means within the US government for making energy policy are fragmented there's a lot of players in that space and they're all coming from different points of view and that's true in the legislative and in the executive branch where again the views aren't strictly partisan even on the hill they have to do with what's in your district or what's in your state so you might see senators and members that are not on the same page even so it's complicated and that does make it hard I think for us to be it's not a transparency problem it's just we just don't have the means to make concerted policy smoothly in this area on the geopolitics I mean I think that the export ban again was done in good faith that at the time that it was enacted people thought it was something we needed to do but it's not an effectual policy what good is it doing and how is it protecting the energy security of this country and the answer is nothing it's not really effectual but it may be causing problems certainly as far as our ability to influence the broader market and the efficient functioning of that market what I worry about also was are we missing an opportunity to lessen our vulnerability to short term shocks by making a more reliable market and a better supply more reliably supplied market because to me that remains a big problem for us because 30 days for Eagleford is not good enough the economic damage that would be done within 30 days to a sharp shock would be overwhelming and again I think people are somewhat complacent about that that oh you know the straight up will never close and if it did we would open it I would I'm not at all complacent based on what I saw from my time in the Department of Defense so it seems to me like that's one of the opportunity costs for not doing anything about it is we do have an opportunity to mitigate a vulnerability like that and given that the policy is not effectual why not take it just briefly adding to that it is important it is an issue important to address I recently went back and looked at the 2008 quadrennial defense review which you know really captured the posture of thinking at the time which is that you know the defense strategy of the US proceeded from the assumption that the US was a huge rely hugely rely on an import and would be for the foreseeable future you know when that was written in June or July of 2008 no one imagined what was going to happen on the production side of the US so we have a totally different posture both from a national security and an economic standpoint today and it affects millions of jobs it affects our whole way of thinking on the defense sector we have immediate foreign policy issues that are affected by whether we keep the ban or not so it is an important issue and I think it rightfully is occupying a lot of attention well we obviously think it's an important issue too but it's among a number of them that we're going to be focusing on this year I mean anytime you've got sort of the strategic shift that the US has taken in terms of energy posture in light of what's happening around the world it's time to rethink how you're positioned so we've got a number of issues we're going to be taking up this year certainly one of them I just want to thank everybody for hanging in there through the carbon chain and all you guys stuck it out you should be congratulated for that but please join me in thanking Ted and Sharon