On August 14, 2015, the U.S. Department of Commerce (DOC) Bureau of Industry and Security (BIS) announced the approval of licenses for limited exchanges of crude oil between the U.S. and Mexico; namely, swapping Mexico’s heavy grade crude with lighter grade U.S. crude. The decision addresses the mismatch between the light sweet crude oil produced in the United States and its refinery configuration that is better suited to process heavy crudes. Additionally, the oil swaps could enable Mexico’s state-owned company, Petroleos de Mexico (Pemex), to achieve higher gasoline yields from their refineries, which are configured for light crude processing. This could potentially displace Mexico’s imports of refined products.
The decision to approve swap transactions does not represent a change in law and is based on language in the 1975 Energy Policy Conservation Act, which directs DOC to consider historical trade relations with Canada and Mexico when limiting crude exports. The BIS regulations have long permitted U.S. crude exports to Canada, and to date, the domestic light crude oil glut has been absorbed by the U.S. refining industry and Canadian exports. But the new U.S.-Mexico swaps approval underscores the growing pressure to ease the ban on U.S. crude exports given the growing glut of light sweet crude produced but not fully processed in the country. This mismatch has been the driving force in the debate: while some argue that lifting the export ban would stimulate the U.S. domestic economy and its geopolitical standing, others fear higher crude prices could hurt those U.S. refiners who benefit from lower feedstock costs.
The exchanges with Mexico, however, fall far from an overall ban in crude exports: the BIS allows only barrel-for-barrel swaps, to be processed exclusively in the U.S. or Mexico. Although the initial volumes are uncertain yet, Pemex has said it would swap up to 100,000 barrels per day when engaging in talks with the DOC in December 2014, or roughly 0.5% of the daily volume of oil refined in the U.S. in 2015. Given the limited amount of exchanges—which do not increase the total supply of oil—the swaps are unlikely to have any significant impact on the price differential between WTI and Brent. While the approval could boost the productivity of Mexican refineries slightly and help some U.S. producers with a surplus of light crude, its real significance remains to be seen depending on whether this symbolic decision leads to a wider repeal of the export ban in the future.
Originally published by EnerKnol.
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