Insight for Industry – U.S. Crude Oil Export Restrictions Cause Refining Mismatch and Light Oil Price Discount
The dramatic increase in domestic oil production over the past decade – facilitated by drilling technology improvements – has rekindled the crude oil export debate. Allowing crude oil exports would provide an additional market for light crude derived from unconventional resources. This would increase their value, given the currently limited ability of domestic refineries to process light crude.
Supporters of lifting the crude oil export ban largely emphasize benefits to U.S. geopolitical strength and the domestic economy. They also stress that contrary to public sentiment, oil exports would help reduce domestic gasoline prices by $0.08/gallon despite future price increases attributed to other factors such as increased global demand and unpredictable supply disruptions. On the other side, critics say that transportation regulations and other policy uncertainties must first be addressed to prevent disparate regional impacts and disadvantages to competing domestic refiners.
Despite the Republican-controlled Congress, advocates face an uphill battle in convincing lawmakers in both chambers, partly due to the 2016 political fallout if gasoline prices rise after a policy change. A number of bills have been introduced in the current session, including H.R. 156 – the Crude Oil Export Act, sponsored by Rep. Michael McCaul (R-TX); H.R. 702 – Adapt to Changing Crude Oil Market Conditions, sponsored by Rep. Joe Barton (R-TX); and H.R. 428 – the Export American Natural Gas Act of 2015, sponsored by Rep. Ted Poe (R-TX). These would all repeal the crude oil export ban under the Energy Policy and Conservation Act, including restrictions on coal, petroleum products, natural gas, and other petrochemical feedstocks. However, the bills lack the political capital to make it past both chambers in the near term, and despite the wave of oil and gas lobbyists that descended on Washington D.C. in the last week, an overturn would most likely occur after the 2016 elections.
Domestic Light Oil Supply Glut Outpaces U.S. Refineries
The recent surge in the export policy debate stems largely from U.S. oil abundance attributed to light tight oil production from unconventional resources. Production growth has allowed the U.S. to significantly reduce net oil and petroleum imports (Figure 1). On March 19, 2015, the Senate Energy and Natural Resources Committee held its seventh hearing since January 2014 on lifting the 1975 ban on exporting domestically produced crude oil. The crude oil export ban dates back to the 1973 Arab oil embargo, when the Emergency Petroleum Allocation Act set price controls and allocated oil to U.S. end users. The 1975 Energy Policy and Conservation Act prohibited crude oil and natural gas export with some exceptions.
Over the past 25 years, the U.S. has spent more than $85B to reconfigure its refineries to process heavy oil imported from Venezuela, Mexico, and Canada. Despite having the world’s largest refining capacity with 139 operating facilities, the U.S. refinery system’s limited ability to process light crude justifies selling at the global market price. Gulf coast refineries currently process light, sweet crude (low density and low Sulfur) by blending it with heavier sour crude oils. Even with substantial investments to process more light crude, refiners would be forfeiting significant opportunity costs, as they would not be utilizing expensive, complex equipment designed for other crudes and, additionally, would be producing lesser amounts of high value products, including jet fuel and diesel. To improve profitability while processing greater quantities of light sweet crude, refiners charge a significant discount on oil producers rather than raising costs on consumers.
When domestic refiners can no longer increase light crude processing capacity, they will further increase their discount on their light crude acquisition prices, at the expense of domestic producers. Studies suggest that light oil supply will exceed refining capacity when U.S. oil production reaches somewhere around 11 million bbl/d. Sixteen independent oil companies, including ConocoPhillips and Anadarko Petroleum, have united to form the Producers for American Crude Oil Exports (PACE) lobbying group. Other industry groups, including the American Petroleum Institute and the Independent Petroleum Association of America have also increased their lobbying efforts.
Senate hearing committee panelist Ryan Lance – Chairman and CEO of ConocoPhillips – said that an efficient and immediate solution to the refining challenge would be to allow producers to sell their crude oil in the export market, as can currently be done with other energy commodities such as refined petroleum products, natural gas and natural gas condensates.
But according to those opposed to crude oil exports, such as Charles T. Drevna – President, American Fuel & Petrochemical Manufacturers – the crude oil boom has been a significant factor in keeping U.S. refineries competitive in an increasingly competitive global market. He stated that refiners have started to adapt to increased domestic production by reducing imports, increasing utilization, changing their refining mix, and investing in refinery modifications.
Mr. Drevna also underscored that allowing crude oil export without addressing other policies such as the Jones Act would create disparate regional impacts and put some domestic refiners at a global disadvantage. The Jones Act requires shipments between U.S. ports to use vessels that are U.S. built and flagged; U.S. majority owned; and crewed by at least 75 percent U.S. citizens. Lifting the crude oil export ban could make it cheaper to ship crude from the Gulf Coast to Europe than to East Coast refineries, placing domestic refineries at a disadvantage.
Senate hearing panelist Jeff Warmann – CEO, Monroe Energy LLC – also stressed that lifting export restrictions would deprive input for U.S. refineries, resulting in excess capacity – a situation that has been addressed by the shale oil boom – and enable European refineries that currently have excess capacity to benefit from U.S. crude.
Crude Oil Exports Would Support U.S. Economy and National Security
Supporters of lifting the crude oil export ban, including Senate Committee Chairman Lisa Murkowski (R-AK), cite an improved economy and more stable energy market for the United States and its allies. Oil exports would also enable the U.S. to more effectively spur and lead multilateral actions, including sanctions. Maintaining export restrictions could potentially drag domestic productivity and limit national security benefits from the energy abundance.
Panelist Carlos Pascual – Senior Vice President, IHS – cited data that oil exports would provide economy-wide benefits of $86B in added GDP and $1.3T in revenue from corporate and personal taxes from 2016-2030. States with little or no production, such as Illinois, Washington, Massachusetts, Michigan, and many others, would also benefit due to supply chain interconnections.
Panelist Ryan Lance also stated that crude oil exports would stimulate demand for domestic production and increase economic contributions. In the absence of a market, the value of light crude will decline and the economic investment merits will diminish. A wide discount between U.S. light crude prices and global crude prices (Figure 2) has a disproportionately negative impact on U.S. producers. U.S. crude oil would find a ready market among purchasers seeking reliable supplies, enabling U.S. allies to diversify their energy supplies, thereby strengthening U.S. commercial and geopolitical influence.
Panelist Elizabeth Rosenberg – Senior Fellow & Director, Center for a New American Security – stated that an important security benefit of lifting the crude export ban is the additional flexibility and leverage it will give the U.S. to sustain and expand energy sanctions in the future. Removing the crude export ban would deepen trading ties with strategic allies, including those in Europe and Northeast Asia. European consumers will depend less on Russia, which supplies approximately 40 percent of their oil supplies and has a history of coercive energy supply policies. For East Asian oil buyers, access to U.S. oil would provide new opportunities to diversify away from increasingly unstable Gulf and Russian oil supplies.
Opposing arguments, including those of panelist Jeff Warmann, stress that export restrictions have provided U.S. consumers and businesses with broad-based benefits, including low fuel costs benefiting transportation, petrochemical, agricultural, and manufacturing sectors. Mr. Warmann stated that oil producers not reaping significant profits and temporary dislocations of oil markets do not provide sufficient justification to lift the ban.
U.S. Gasoline Prices More Linked to International Markets, Not Domestic
Exporting U.S. light tight oil would influence the international Brent price benchmark. As new crude supply is added to the global market, the international price of crude will fall, placing downward pressure on U.S. gasoline prices. Panelist Carlos Pascual cited that eliminating the ban would reduce gasoline prices by $0.08/gallon.
Mr. Pascual also stated that eliminating the ban is even more important when oil prices are low as the difference between Western Texas Intermediate (WTI) and Brent (international) prices will be crucial in determining the viability or non-viability of new investments in U.S. oil and gas production. Although gasoline prices are likely to rise in the coming years, this will largely be due to increased global demand, new country risks, and unpredictable supply disruptions, and not as a result of lifting the export ban. Increasing U.S. output would help offset disruptions.
In opposition, Mr. Warmann stated that exports would increase domestic prices by sending crude from the competitive U.S. market to a less competitive global market controlled by unfriendly regimes like Iran, Russia, and Libya. OPEC would manipulate market to maintain high prices and domestic prices would rise to match OPEC-controlled global price.
Originally published by EnerKnol.
EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.
