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Momentum builds for end to US oil export ban

A deal that would lift export restrictions is possible later this year as debate over crude export restrictions heats up

The Senate Energy and Natural Resources Committee approved a bipartisan package of energy measures on 30 July that includes lifting the ban on oil exports. US crude producers are hopeful that the 1970’s-era US oil export ban will be lifted this year, while refiners – who have been raking in the arbitrage – are lobbying against the lifting.

Only crude is affected: exports of other hydrocarbons – natural gas, coal and refined products – are all allowed.

The surge in US oil output, which rose by more than 1m b/d a year from 2012 to 2014, has transformed the world’s oil market. Although still a significant importer, the US has become far less reliant on foreign oil. And surging shale production is pushing a wave of very light oil into the US market, while the country’s refiners have invested heavily in plant to process heavier and sourer Middle East and Latin American crudes.

“The administration is likely to stress that its overarching position on a broad removal of the ban has not changed. In fact, we believe that this ruling means that absent Congressional action, this administration remains reticent to approve a change to the law”

Shale producers worry that if the ban remains in place, they will see domestic crude prices fall to levels that don’t justify investment.  Rising exports to Canada, which have reached 500,000 barrels/day, and condensate exports have helped to ease these concerns. Still, the distortions can already be seen in the steep discounts in local crude grades around the Bakken and other shale plays.

US refiners have been pushing in the opposite direction as they are enjoying some of the highest refining margins they’ve seen in many years. Tesoro, for instance, said in the second quarter of this year that its refining margins had jumped 46% from a year earlier to $19.13/barrel.

Congress has been slow to respond to these changes, but there appears to be growing support for lifting the ban.  

Republicans, in particular, have lined up to end the ban. Alaska Republican senator Lisa Murkowski, who is sponsoring a bill called the Energy Policy Modernization Act, has argued that it is time for legislation to catch up with changes in the market. “Our energy renaissance has taken us from a position of energy scarcity to one of energy abundance, but current law rarely reflects that fact,” she said. Lifting the ban, she and others argued, will allow the US to use its new oil bounty more strategically on the world stage.

House Republican leader John Boehner has also come out in support of lifting the ban, and said that the House would take up energy legislation after the August break, which could pave the way for a deal later this year. “Lifting the ban,” Boehner argued, “would help bring down prices at the pump for consumers. And it would be good for our allies. If the administration wants to lift the ban for Iran, certainly the US should not be the only country left in the world with such a ban in place.

Democrats are more divided over the issue. Some, like environmentalists, oppose lifting the ban as it will encourage more oil production and keep the US dependent on oil. Others fear that ending the ban will drive up domestic crude prices, hitting consumers at the pump and US industry. Some opponents also argue that lifting the ban would compromise US energy security.

Their fears may be misplaced, though. A study last year from Columbia University’s Center on Global Energy Policy found that lifting the export ban would, all other things being equal, reduce prices at the pump because it would encourage more US oil production. At the same time, the authors argue, greater integration with global oil markets would reduce supply risks, not increase them as opponents fear.

The White House’s position has been somewhat muddled. It has not thrown its support behind lifting the ban, but it has taken steps short of that which have allowed some US crude to be exported. It has, for instance allowed processed condensates to be exported, which has provided some relief for producers.

And most recently, it has approved a crude swap with Mexico’s national oil company Pemex, under which Mexican heavy oil will be sent to the US in exchange for light oil crude. Few details of the agreement have been released, but most expect the swaps to be around 100,000 b/d, providing a modest but important additional outlet for US crude.

The decision, however, probably doesn’t represent a change in thinking in the White House. “The administration is likely to stress that its overarching position on a broad removal of the ban has not changed. In fact, we believe that this ruling means that absent Congressional action, this administration remains reticent to approve a change to the law,” argues Michael Cohen, an analyst at Barclays, an investment bank. Still, opponents of the ban will be encouraged that the administration appears open to the idea of oil exports.

The locus of action is now set to move back to Congress where there is space open for a broad-based energy deal that includes a lifting of the oil export ban.

 

 

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