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November 19, 2015

U.S. Should Counter Russia With Mexico, Canada Oil Alliance

  Investor's Business Daily

The House of Representatives' recent vote to end the 40-year-old ban on U.S. crude oil exports was a major step forward in countering one of Russia's latest ploys to use energy as a power-grabbing tool.

But analysts have overlooked an important strategic and economic result of Russia's decision to prop up Syrian President Bashar Assad: It lays the groundwork for creating a petroleum-exporting bloc that could be used as leverage to promote a nefarious political agenda.

According to the International Energy Agency's September 2015 Market Report, Saudi Arabia is the largest crude oil exporter, at 6.5 million to 7.0 million barrels per day (mb/d), and Russia's estimated 6.25 mb/d comes in a close second.

After years of neglecting its energy infrastructure, Iran's crude oil production has climbed to about 2.9 mb/d, and its exports stand at about 1.0 mb/d. But now that President Barack Obama has begun the sanctions-lifting process, Iran expects to increase both its production and its exports, especially if it can attract outside investment and technology — which Russia will provide.

The third player in Russia's new geo-energy game is Iraq. Baghdad has already reached out to Russia (and Iran) for help in fighting ISIS. And Iraq appears open to cooperative efforts in other areas, including energy production and sales.

Iraq has been able to increase its crude oil exports to about 3.02 mb/d from its southern Basra area and another 50,000 barrels from the Kurdish region. But with a little help from Russia and Iran, Iraq could produce much more.

And then there's Syria, a country that produces very little oil today but which a decade ago consistently produced about 500,000 b/d.

Combine those four countries' exports, and you get a little more than 10 mb/d, about 50% more than the Saudis' current export level, with a lot of upside potential.

Iran, Iraq, Syria and Saudi Arabia together span the heart of the Middle East. And Russia's military involvement — including having fighter jets that can now cross Israel's border with Syria — will fundamentally alter the region's political balance.

If Russia is successful in exploiting an oil-exporting alliance, it could shape, if not control, much of the crude oil market. Lots of countries, including U.S. allies, might have to go hat in hand to Russia in order to get the oil that they need.

The way to counter such a development is twofold. First, repeal the 40-year-old ban on exporting U.S. crude. The House has taken that step; now the Senate should do likewise.

Critics claim that oil is important to the U.S. economy and that we need to keep what we make; but food is important, too, and we do our best to export agricultural products.

In addition, critics say that the U.S. is still importing oil, so what difference would ending the ban now make?

For one thing, many U.S. refineries are not configured to efficiently process the light sweet crude being produced from most shale plays. It's a lot less expensive to import heavier sour crude and export our light sweet crude to countries with refineries designed to process them.

Also, the U.S. Energy Information Administration (EIA) lists the U.S. as the largest producer of petroleum and other liquid products, besting Russia by more than 3 mb/d in 2014. And the agency estimates that the U.S. will produce enough to meet its own needs by 2020.

But establishing the infrastructure and entering into export contracts with other countries will take some time, and no oil-producing company is going to move forward unless it knows for sure that Washington will allow exports.

Finally, the U.S. should form its own crude oil export alliance with Canada and Mexico. The EIA lists Canada as the world's fifth-largest crude oil producer, and Mexico is 10th.

Together, the three North American countries are producing about 21 million barrels per day. And while the U.S. isn't producing more than it uses, the other countries are.

A free-nation oil-exporting alliance could lay the groundwork for a serious challenge to a Russian-led Middle East bloc and give our allies a viable energy alternative to Russia's effort to create an energy stranglehold.


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