Cap-and-trade’s impact on refining

From Environmental Capital:

Energy and climate legislation in Congress will create plenty of winners and losers, but one group in particular looks to get battered: U.S. refiners.

That’s the finding of a new report by energy consultants Wood Mackenzie, which says that cap-and-trade legislation will cost U.S. refiners about $100 billion a year by 2015 and put them at a competitive disadvantage to refiners in Europe. (The refining industry’s already warned about pain from climate legislation.)

There are still plenty of uncertainties about how climate legislation would affect the refining industry. Wood Mac’s analysis, for instance, is of the House version of climate legislation; the Senate version has even tougher rules for refiners right now.

It’s also not clear if refiners would be able to pass on the cost of carbon legislation to consumers. If they do, it would add 45 cents to the price of a gallon of gas, Wood Mac says.

But refiners may not be able to pass on the additional costs because of the threat of a flood of cheap gasoline imports from Europe. Current legislation leaves a loophole in which imported gasoline wouldn’t be subject to the same restrictions.

Which means that the government’s environmental plans could end up undermining another administration goal—energy security—by increasing the share of imported fuels.

True (and others - such as Geoff Styles, repeatedly - have noticed) but this would be fairly easily fixed by a border tax on imported gasoline, no?

(Hmm, I have pretty vocally opposed "border adjustments" before – is this position inconsistent? I'm afraid it might be...)

Would a refined products embargo let Iran reduce fuel subsidies?

A few weeks ago I posted a few times on the proposed embargo on refined product imports on Iran (here, here, here) with the help of a knowledgeable friend; that friend now passes on an interesting rebuttal from NIAC on "Why petroleum sanctions only make things worse." The highlight:

A gasoline embargo actually benefits the government of Iran.

- A gasoline embargo would enable the government to eliminate burdensome subsidies and place all the blame on the United States.
- Iran has to import roughly 40 percent of its domestic gasoline consumption at market prices and then resell it at a subsidized price of about 40 cents per gallon.
- These subsidies cost the government of Iran between 10 and 20 percent of GDP, annually.[i] The Iranian government has tried several times to eliminate the subsidies, but has been stymied by popular opposition. An embargo would provide the excuse they need, and free up the government to spend the money elsewhere.

Eliminating subsidies with perfect timing would be a tricky thing to pull off - the removal of 40% of supply alone will send prices skyrocketing, which removing subsidies would only make worse. Furthermore, if sanctions were removed, the government would be hard-pressed to not reinstate the subsidies. But the opportunity is undeniably there. Yet another reason why this particular lever on Iran is probably not the best.

Informed thoughts on Iran refined products embargo

On the topic of a refined products embargo on Iran, an anonymous and knowledgeable source writes:

A petroleum product embargo on Iran would be devilishly difficult to achieve -- too many porous land borders, especially with Turkmenistan, Afghanistan and Pakistan -- and very liable to escalate to full-scale conflict. That said, I support the effort by Congress to add that particular card to the President's hand because Iran's petroleum product imports is one area in which the United States has considerable leverage. The very threat of such action could effect change in Tehran's strategic calculus.

The idea makes sense from an economic perspective in that Iran spends quite a bit to subsidize petrol consumption (these price controls are the reason the Iranian refining sector endures chronic underinvestment). A petroleum product embargo would raise the price of petroleum products such that the Iranian treasury would be drained of funds at a greater rate. Tehran could enact stricter rationing of petrol, as is already the case, but this could provoke substantial domestic unrest (as it has in the past). Alternatively, Tehran could slacken its petrol subsidies, causing higher prices at the pump for Iranian motorists, but this is also unlikely to make people happy.

I pushed this person on the feasibility of smuggling:

Granted the land borders you mentioned are porous, but Turkmenistan and Afghanistan are themselves effectively landlocked, and I can't imagine they're long refined products... and if I remember correctly Pakistan is also a net importer of gasoline and diesel. So it seems that, until the new port at Gwadar is online (not sure when that is), the most likely sanction-breaking smuggling path is via Karachi and across Baluchistan, which doesn't strike me as a particularly easy route (particularly with recent unrest in Baluchistan)... and if we are talking about anywhere near 40% of Iran's refined products (which is what I heard they import), that is a huge volume to push through a long, unstable and illicit supply line.

... and they pushed right back:

Your thinking is on the mark. But I wouldn't underestimate human ingenuity. Iraq also subsidizes petroleum products, which has been the source of a great deal of smuggling -- purchase petrol or diesel in Iraq at a low price, re-sell in Turkey, Syria or elsewhere for a large profit. If Iran were under some kind of onerous petroleum product sanctions, there are probably large networks of Shia in Iraq sympathetic to Iran which would smuggle petroleum products across the border for an even larger profit.

As for the Baluchis, they need money to fund their insurgency as well. Getting in on the smuggling business could be very lucrative for them. To a certain extent, I am making the assumption that large shortages of petroleum products in Iran plus long porous borders plus a ton of opportunistic (and economically self-interested) actors in the region will lead to large-scale smuggling. The refined petroleum products will be able to find their way.

So not only difficult to implement, but the military threat to the Strait of Hormuz is substantial:

Think small motorized skiffs, something like the Somali pirates in the Gulf of Aden, with rocket launchers or rocket-propelled grenades swarming more cumbersome US naval vessels and/or oil tankers. (There was a war game to this effect and the virtual Iranian forces handed a serious defeat to the US Navy.)

Finally, one more subtle option would be to put pressure on the banks that finance petroleum product importers - apparently "this is what the US has been doing with regards to North Korea for years."

Iran imports refined petroleum products

In the NYTimes today:

The Obama administration is talking with allies and Congress about the possibility of imposing an extreme economic sanction against Iran if it fails to respond to President Obama’s offer to negotiate on its nuclear program: cutting off the country’s imports of gasoline and other refined oil products.

The option of acting against companies around the world that supply Iran with 40 percent of its gasoline has been broached with European allies and Israel, officials from those countries said. Legislation that would give Mr. Obama that authority already has 71 sponsors in the Senate and similar legislation is expected to sail through the House.

The fact that Iran imports refined products like diesel and gasoline may come as a surprise to the general public, which sees Iran as an "oil producer" (in the Persian Gulf region which of course supplies "all of our oil") under "economic sanctions." Turns out refined products are exempt from the sanctions - at least until now.

However, given Iran's likely retaliation - they've threatened "cutting off oil exports and closing shipping traffic through the Strait of Hormuz, at a moment that the world economy is highly vulnerable" - these extreme sanctions seem too risky for the U.S. to actually push, which reduces their credibility as a threat and negotiating tool.

Update: FP Passport ponders whether the threat of nuclear Iran might convince China to join.

... Beijing surely sees the unacceptable danger in risking its existing Saudi oil supply for an as-yet nonexistent Iranian oil supply.

Right, but in light of the Strait of Hormuz chokehold, would Beijing be willing to risk short-term Saudi oil supply to "assure" long-term Saudi oil supply through sanctions which may or may not dissuade Iran from becoming a nuclear power?