Should the U.S. export crude oil?
Omnium Gatherum / The Schork Report
As mentioned here on Monday, Congress made it illegal to export crude oil, including lease condensate, without a license in the 1970s. The impetus behind this act was:
- Realization of Hubbert’s Peak; when U.S. crude oil production peaked in 1971
- The 1973 Arab oil embargo
The goal of the ban was to conserve a dwindling resource and impede a growing reliance of foreign oil.
35 years later we can safely say that neither one of these goals were ever achieved.
As far as the latest ruling from the BIS goes, all of the excitement is centered on the meaning of crude oil. Per the Code of Federal Regulations, chapter 15, part 754.2:
"Crude oil" is defined as a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities and which has not been processed through a crude oil distillation tower. Included are reconstituted crude petroleum, and lease condensate [emphasis ours] and liquid hydrocarbons produced from tar sands, gilsonite, and oil shale.
It now appears that the BIS is set to codify stabilization (the process that among other things, allows for safer transport of oil via the lowering of vapor pressure) in its definition of distillation, and in return, will allow for the export of lease condensates.
It remains to be seen whether the ruling for Pioneer and Enterprise is a one-off, or if the BIS is set to relax its definition of crude oil.
We have a long way to go and this is a small step, but it is a step nonetheless and more importantly, it is a step in the right direction.
After all, the economics make lifting the ban a no-brainer.
In the summer of 2008, at the height of the commodity bubble, NYMEX WTI was trading on the doorstep of $150/b. At the same time the U.S. was importing over 10 MMb/d of crude oil and producing around 5.0 MMb/d (4.5 MMb/d in the contiguous L48 and 0.5 MMb/d in Alaska).
The national retail price of gasoline averaged $4.114 (AAA) and the personal consumption expenditure (PCE) on gasoline surged to the highest high, 4.48%, since the height of the Iran/Iraq war in the early 1980s.
For comparison sake, the PCE on gasoline averaged 2.79% from the mid-1980s to the mid-2000s.
Since then U.S. production of crude oil has surged to a 25-year high, i.e. over 8.0 MMb/d (7.5 MMb/d in the L48 and 0.5 MMb/d in Alaska) which is 80% of the peak achieved at the climax of Hubbert’s Peak.
Furthermore, the U.S. is now producing more oil than it is consuming with consistency.
Therefore, the two reasons for the enactment of the ban no longer exist.
Based on that alone the ban should be lifted.
In other words, banning oil exports did not lower the U.S.’ reliance on foreign oil, but rather, the market, left to its own devices, has, and continues, to achieve what government fiat could never accomplish.
The surge in U.S. crude oil production has created a bifurcated market for the industry in the U.S. that will, if it has not already, lead to market inefficiencies, which if not addressed, will blossom in the years ahead.
U.S. downstream infrastructure is geared to maximize a heavier, sour oil, rather than the new domestic output which produces a large volume of light oil, inclusive of condensates.
Therefore, the U.S. sits on a wealth of crude oil, but it is not necessarily the right kind of crude oil.
Up through the 1990s intermediate-light oil (>35° API) accounted for 25% of U.S. imports, today this oil accounts for less than 10%. Last April a mere 212 Mbs of light crude oil was imported to the PADD 3 refinery epicenter (0.2% of total PADD 3 imports), as opposed to 39 MMbs (18% of total imports) in April 2006.
Thus, when one posits that U.S. crude oil exports would raise retail gasoline prices, ask them how does the consumer suffer by allowing U.S. refineries to swap out what they do not need (more expensive light oil), for what they do need (cheaper heavier oil)?
To wit, per the BIS’ existing code, an export license will granted as long as the transactions results… directly in the importation into the United States of an equal or greater quantity and an equal or better quality of crude oil or of a quantity and quality of petroleum products is not less than the quantity and quality of commodities that would be derived from the refining of the crude oil for which an export license is sought…
Bottling up burgeoning U.S. output will only retard investment and impede further growth. That is to say, producers will be left with the unenviable choice of leaving the oil in the ground or selling it at an artificially low price.
In both of these scenarios oil will be withheld from the market… and no one, not the producer, not the refiner and most importantly (given that consumer spending accounts for two-thirds of U.S. economic growth) not the consumer will benefit from this.
Additionally, the U.S. is already exporting a tremendous amount of crude oil… we just choose to call these exports by their technical name, e.g. gasoline, diesel, fuel oil, and ― get ready for it ― plant condensate. The last product does not differ much in composition from lease condensate, outside of the fact that, for reasons which are not entirely clear, the BIS defines lease condensate as a ―crude oil‖, but plant condensate at a petroleum product.
Therefore, this debate has less to do with petroleum per se and more to do with nomenclature.
According to the U.S. Census Bureau, in 2013 U.S. exports of petroleum products were valued at $61 billion or 4% of total U.S. exports. When combined with exports of fuel oil, $64 billion, energy was the U.S.’ largest export last year, accounting for 8% of total exports and besting the perennial top export, civilian aircraft, by 125 bps.
In fact, energy has been the U.S. lead export for the last three years. In return, the U.S. trade deficit with OPEC ended 2013 at a four-year low and at the second lowest level since oil imports peaked in 2005.
Now ask yourself, who benefits from the ban? The consumer? Hardly.
After all, the consumer is already paying a price in accord with the global price of crude oil. On the other hand, some U.S. refineries are not paying a global price, because they can buy cheaper domestic crude oil, and then turn around and export the refined crude oil.
This is akin to barring hops growers for selling their crop to Guinness, but allowing Anheuser Busch to export refined hops (technical name: beer)
Thus, the U.S. consumer is already competing with exports without driving gasoline at the pump higher. For example, U.S. petroleum exports have been growing by 1½% per month since 2006, from 1.1 MMb/d to 3.9 MMb/d, and retail gasoline, adjusted for inflation, in no more expensive today than it was then.
As goes the argument… we should not export crude oil because we still have import oil, goes… really? Does this mean the U.S. auto industry should be banned from exporting because we are still importing cars from Europe and Asia?
Heck, even the center-left Brookings Institute is on board:
Lifting the ban on crude oil exports could also stimulate additional domestic crude oil and some associated natural gas production, bringing additional royalties to the Treasury. Some will oppose this new fossil fuel development, arguing that additional carbon emissions will occur and that there are higher risks of environmental damage. We believe, however, that accompanying a lifting of the ban on crude exports with renewed calls for a carbon tax—with some of the revenue allocated back towards research on advanced renewable energy technologies, carbon capture and sequestration of CO2…
Finally, given the dismal state of U.S. employment, any measure that will attract further investment in U.S. oil and gas interests is an investment in jobs.
The unemployment rate in key oil and gas producing states (North Dakota, Louisiana, Texas, Oklahoma and Wyoming) averaged 3.2% at the start of the recession, peaked during the recession at 6.8% and is currently down to 4.5%.
To this effect, the oil and gas extraction industry added over 8,000 jobs during the recession and has added nearly another 50,000 during the recovery. This is a good thing in that jobs are being created in an industry that pays twice the salary, ≈$1,700 per week, than the average of the total private sector.
Bottom line, the White House’s self-appointed Minister of Energy, Tom Steyer 1, might not like it, but the ban should be lifted.