Jones Act Amendments Should Precede US Crude Oil Exports

on February 03, 2014 at 12:00 PM

FL Gov. Rick Scott Tours Dredge Site At PortMiami

The Brookings Institution, a think tank in Washington D.C., recently published “Big Bets & Black Swans – A Presidential Briefing Book” with policy recommendations for President Obama in 2014. Among a plethora of issues addressed, Tim Boersma and Charles K. Ebinger also discuss lifting the ban on U.S. oil exports.

Let’s briefly assess the validity of some of their arguments. First, the authors argue that lifting the ban on U.S. crude oil exports would be consistent with supporting free trade in a global economy. They cite industry reports projecting substantial economic gains of “up to $15 billion annually” and not to mention the overall economic benefits along the entire oil production value chain: unrestricted oil exports would lead to increased investments in energy infrastructure and thus, in turn, to companies ramping up domestic oil production while generating income, jobs and taxes in the United States. However, these exports – they say – may not benefit everyone equally citing as an example that “some refineries may see a decline in revenues, because some domestically-produced oil will be exported without first being processed.” While the overall economic benefit is hard to quantify due to the volatility of commodity prices, the latter part of their argument is accurate because under current U.S. law, which does not impose export restrictions on refined products, the only way crude oil gets out of the U.S. – disregarding here the by law permissible small amount of oil exports to Canada – is in the form of refined products such as diesel, gasoline, and kerosene. Note, refiners’ profitability depends on the difference between crude oil input costs and refined low-margin product sales prices. According to the EIA, as of January 1, 2013 there are a total of 143 operable petroleum refineries in the U.S., while the ‘newest’ refinery began operating in 2008 in Douglas, Wyoming. The EIA, however, points out that the ‘newest’ refinery with atmospheric distillation capacity greater than 100,000 bpd began operating in 1977 in Garyville, Louisiana. This illustrates the fact that refineries today are more cost effective outside of the North American continent due to cheaper labor along with lower overhead costs and less stringent environmental regulations.

This leads right into the next argument. Most U.S. refineries are designed to process heavier crude oil from Canada, Venezuela or Mexico rather than light domestic crude oil. This mismatch between type of crude oil supply and existing absorptive refining capacity constitutes a major constraining factor with impact on domestic (WTI) oil prices. Basically, over-supply will lead to lower prices for domestic producers. Oil prices that are “too low”, in turn, will negatively influence both investment flows into the U.S. oil sector and oil output over the longer term. Now, this has to be viewed together with perhaps the most important argument for lifting the ban on U.S. crude oil exports the Brookings authors put forth. Domestic production of crude oil from shale rock formations continues to surge with projections foreseeing a peak in production by 2020 and a production plateau afterwards. The authors stress that “without export markets for domestic crude, there is only so much absorptive capacity in the United States.” On its face this two-fold argument is valid. However, the following chart illustrates how much crude oil the U.S. is still importing from abroad.

Major Oil Exporters to the U.S.


Source: U.S. Department of Energy; from

In this respect, T. Boone Pickens makes a valid point by charting a different course of action. Instead of lifting the ban on crude oil exports, the U.S. should focus on reducing its dependence on foreign oil imports, especially from the Middle East. “I am not too keen on exporting when we are importing 9 to 10 million barrels a day,” Mr. Pickens said, speaking at the World LNG Fuels 2014 conference in Houston. He went on to say that “when you are buying from OPEC, some of that money gets in the hands of the Taliban and Al-Qaeda,” referring to the political instability in those countries.

Meanwhile, as for national security, the Brookings authors do not see the lifting of the ban on U.S. crude oil exports as weakening U.S. energy security. They express the widely held view that “U.S. domestic supplies are large enough to make the country self- sufficient in the coming decades.” The premise here being that lifting the ban “would most likely incentivize further expansion of the pipeline network (Keystone or alternative pipelines) in order to facilitate a larger flow of oil from the upper Midwest and Canada to the Gulf Coast.” Given the slow progress on the Keystone XL pipeline with environmental concerns around it, the above premise is at least questionable. If the anticipated scenario plays out – ban on oil exports stays in place while U.S. domestic crude oil production continues to increase – U.S. light sweet crude oil will indeed become a “quasi-stranded commodity” leading to further downward pressure on the WTI price.

This would also have a severe impact on Canadian oil sands production, making it less profitable. As reported by the Canadian newspaper the Globe and Mail, Western Canada Select heavy blend crude for February 2014 delivery sold for $19.50 (U.S.) a barrel less than the U.S. benchmark West Texas Intermediate (WTI) light crude based on data from the oil broker Net Energy. Even though this compares with price spreads of more than $40 in 2013, Canada may be way better off to go ahead and both plan and build the necessary infrastructure in order to export their heavy crude oil to higher priced Asian markets. For Canada this may be the only way to stay ahead of the curve and allow Canadian oil sands producers to remain profitable, which, in turn, will generate revenues for Alberta. Even if Keystone XL were not to materialize, Canadian heavy oil would still reach the Gulf Coast refineries via rail for the time being, until perhaps Mexican production ramps up.

Overall, the above arguments – as valid as they may be – seem to overlook the fact that not all refineries can process both types of oil – heavy and light – and that reconfiguring a refinery to process light from heavy and vice versa would require huge capital investments as well as years to complete. The U.S. is currently a 17.7 million b/d market in terms of operable refining capacity with current domestic crude oil production of 7.5 mmb/d. It is important to understand that about half the overall U.S. refining capacity can be found in the U.S. Gulf Coast, with 4.7 mmb/d in Texas and 3.2 mmb/d in Louisiana. The following maps depict the major U.S. refining centers with their respective capacities. According to the EIA, refining capacity in the Gulf Coast has large secondary conversion capacity with hydrocrackers and desulfurization units. Those refineries are predestined to process heavy, high sulfur (sour) crude oils – from Mexico, Venezuela, Saudi Arabia and Canada. This type of oil typically sells at a discount to light, low sulfur (sweet) crude oils like Brent (Blend), the Bakken Blend and Louisiana Light Sweet. Therefore, as far as heavy crude oil is concerned, the biggest growth market is clearly PADD III. Due to the fact that East Coast refineries tend to have less secondary conversion capacity, they are predominantly geared towards processing lighter, lower sulfur crude oil.


Source: National Energy Board, Canada

U.S. Refinery Map


Source: Ivey Business Review, 2013


Source: Intellectualtakeout

It is exactly at this point where any serious contemplation of lifting the ban on U.S. crude oil exports actually has to start. Given the steadily and rapidly growing inland crude oil production from the Bakken and Eagle Ford shale formations, these inland crude oils have been selling at a discount to U.S. waterborne imports of light crude oil on the Gulf Coast. Those waterborne crude oil imports command a premium price on world markets as reflected in the current spread between WTI and Brent. So this provided refiners in the region with a further incentive to switch to domestically-produced crude oil when available and, above all, whenever possible. Unfortunately, due to the fact that most refiners in the Gulf Coast are geared primarily towards heavier crude oil, there tends to be a glut of light sweet crude oil in the region. This over-supply is expected to worsen in the future. If we stop with our observation right here, the arguments for lifting the ban on U.S. crude oil exports would make absolute sense.

However, we cannot look at the Gulf Coast in total isolation from the East Coast with its existing refining capacity for light sweet crude oil, the major population centers in the Northeast and the fact – as Mr. Pickens pointed out – the U.S. is still importing between 9 and 10 mmb/d. In addition, there are no crude oil pipelines connecting the Gulf Coast to the East Coast. Consequently, the glut of light sweet crude oil should be shipped from the Gulf Coast to U.S. refineries in the Northeast by tankers in order to further reduce U.S. dependence on foreign oil imports. However, this is difficult due to another longstanding regulatory roadblock called the ‘Jones Act’- a section of The Merchant Marine Act of 1920. The Jones Act requires that any ship that carries goods or commodities in U.S. waters between U.S. ports be built and registered in the U.S., and owned and crewed by U.S. citizens or permanent residents. While the objective of the Jones Act was to restrict the activities of foreign-flagged vessels carrying goods between U.S. ports in the past, this Act cannot be regarded as timely in an age of globalization. Moreover, the Jones Act actually burdens the very same entity it set out to protect; namely, the United States and its citizens. What an irony that the U.S. with all its current and in the future projected crude oil production actually helps to keep oil revenue streams for countries like Venezuela, Nigeria and Saudi Arabia in place. And all this is in no small part also thanks to the Jones Act.

Instead of discussing the ‘all-out option’ of lifting the ban on U.S. crude oil exports, the U.S. would be well advised to repeal the Jones Act first and reduce its dependence on foreign oil imports further. Once East Coast refiners are able to eschew imported Brent-related crude oil and run domestically-produced light, sweet crude, the next logical step can be taken; namely, lifting the ban on crude oil exports.