Congress to lift US ban on oil exports
Lifting crude export restrictions will have little effect in today’s low-price environment
Congressional leaders in Washington have hashed out a deal as part of a larger federal budget agreement that will end the US’ 1970s-era ban on oil exports, handing producers a hard fought victory and clearing the way for US crude to play a larger role on international markets.
Don’t expect significant exports in the near term though. In recent weeks Brent’s premium over the US WTI benchmark has narrowed markedly, and stood at just $1.50 a barrel as legislators voted on the final deal. That differential is less than it would cost to ship US oil to most places, making oil exports uneconomic in most cases.
That doesn’t mean there won’t be any oil exports. Imports of light sweet oil into the Gulf Coast have fallen to nearly zero in recent months as production from the nearby Eagle Ford shale has pushed out purchases from other light oil producers such as Nigeria, Angola and Algeria. While most of the excess Eagle Ford crude will likely continue to go elsewhere in the US, some could find its way to nearby markets with lower shipping costs. Venezuela, for instance, is ramping up purchases of light oil to use as diluent for its Orinoco heavy crude production.
Still, there is clearly less need for US producers to be looking abroad now in the face of crashing crude prices and declining output. The oil industry launched its lobbying efforts to have the export restrictions ended as far back as 2011, but those calls gained urgency as domestic light tight oil surged by more than 1m barrels a day (b/d) each year from 2012 to 2014. Producers were already seeing their oil sold at steep discounts and worried that they would soon overwhelm the domestic refining system’s ability to process their light crude.
US shale companies that were fretting over finding new markets for their oil a year ago, though, are struggling for survival today with oil prices in the mid-$30s.
There is clearly less need for US producers to be looking abroad now in the face of crashing crude prices and declining output
Refiners, on the other hand, have enjoyed a golden age as they feasted on cheaper domestic crude and sold refined products linked to the higher-priced Brent benchmark at home and abroad. Even with the crude export ban in place, plenty of US oil has made it on to international markets in the form of gasoline, diesel jet fuel and other products. Exports of refined products have tripled over the past decade to around 2.9m b/d today.
Refiners were loath to see the good times come to an end and waged an intra-industry fight against lifting the ban. In the loss, though, they managed to win new tax breaks as part of the deal that should help soften the blow.
Today’s conditions, however, are no doubt temporary, and when the market turns – and shale production recovers – more US oil could find its way onto international markets thanks to congressional action to lift the export ban.
An Energy Information Administration (EIA) analysis, though, cast some doubt on industry claims that lifting the ban will on its own boost domestic oil production, and therefore create many more new jobs. The EIA found in its primary scenario – where oil prices are around $90/b in 2025 and oil production plateaus at around 10m b/d – that lifting the ban makes no difference to production or oil prices because the domestic refining system is able to absorb all of the new output.
Where lifting the ban makes a difference, albeit small, is in a scenario in which US output rises to more than 13m b/d over the next decade. Given the prolific rate at which shale production has risen over the past five years, such a scenario certainly isn’t out of the question. Still, even in this scenario, lifting the export ban only enables around 220,000 b/d of additional output.
The ban will have the most effect on the Brent-WTI spread. US producers have been alarmed in recent years as the spread between the two benchmarks has moved wildly, with WTI at one point trading at a $24/b discount to Brent.
Lifting the export ban should bring an end to such extreme price dislocations, itself a big win for domestic US producers. Any decline in WTI prices compared to Brent should encourage more US oil onto international markets, which will act to both raise WTI prices and suppress Brent, helping to keep the spread to a much narrower band. The EIA says that a Brent-WTI spread of between $6/b and $8/b is inline with the cost of shipping US oil from Cushing to oversees markets.
More than anything, lifting the oil export ban rights a legacy of the 1970s energy crisis, when panicked policymakers were trying to head off short-term fuel shortages, that served no useful purpose in today’s market. Worse, it undercut a fundamental pillar of US foreign policy – the promotion of free and fair global trade.
Getting to the deal wasn’t easy though. Momentum towards lifting the ban started this summer, but only came about thanks to an unlikely confluence of factors and a rare show of compromise between Republicans and Democrats.
A persistent lobbying campaign from the oil industry had pushed the issue up the agenda for Republicans. Democrats, who were mostly ambivalent about oil exports, saw an opening in the Republican push to lift the ban to win important tax credits for wind and solar producers. Low gasoline prices at the pump gave everyone cover to avoid voter blame for raising fuel prices. Together, it created fertile ground for negotiations.
That one of the most important energy legislation deals to come out of Washington in years had to be smuggled through a federal budget deal speaks volumes about the dysfunction in Washington, but ultimately a sound compromise emerged.