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US producers call for the export ban to be lifted

Outdated rules stop US producers from exporting crude oil to most countries - exporters believe a change is overdue

As weak domestic oil prices squeeze their margins, the US’ producers are looking abroad – and hoping Congress at last lifts the four-decade-old ban on crude oil exports.

US crude reserves in storage have risen 11.5% in the last year, if the US strategic petroleum reserve is included, while overall production is edging lower, reflecting the inability of the domestic market fully to absorb output generated by the recent shale boom.
 
At present that extra oil cannot be exported as crude to most countries, thanks to legislation introduced in the 1970s at a time when the US was becoming increasingly reliant on imports to meet domestic oil demand and an Arab oil embargo was threatening supply. Exports of refined products are allowed, but many US refineries are designed for and largely dedicated to the processing of imported heavy oil, not the lighter grades of tight oil now swelling the country’s pipelines.

“With abundant resources, restrictions on exports created in response to the 1970s energy crises are no longer needed, and exports would boost US economic and job growth while benefiting friendly nations,” researchers from Harvard Business School (HBS) and Boston Consulting Group (BCG) said in a report released in June. They were just the latest observers adding weight to calls from the oil industry to remove the ban.

More jobs

Authors Michael Porter of HBS and David Gee and Gregory Pope of BCG concluded that permitting crude exports could add $23bn to US GDP and create around 125,000 new jobs in the country by 2030.

Proponents of lifting the ban also argue that the it would let the US meet strong demand for light grades elsewhere in the world.

The loss of Libyan production in recent years, for example, has periodically lifted Brent prices giving US producers of similarly light oil an arbitrage opportunity the ban has prevented them from taking.

Republicans in Congress have been leading the charge to remove the ban. Senator Lisa Murkowski, head of the Senate Energy Committee, has introduced a bill that aims to overturn the ban before the end of this year. But energy security worries linger, despite the surge in US oil output. It is still not clear if Murkowski’s bill will get the votes it needs. A report prepared by the senator’s staff, published in late June, argued that failure to remove the ban would let Iranian oil capture markets that would otherwise be targets for US producers, if international sanctions on Iranian oil exports are eased in coming months.

While the White House has so far resisted supporting a wholesale lifting of the ban, it took a small step in that direction at the end of 2014, when President Barack Obama’s administration said it would approve the export of ultra-light oil condensates that had been only lightly processed before shipping by two companies. The move was, in part, an attempt to find a market for a flood of ultra-light supply from the Eagle Ford play.

The price difference between WTI, the US oil benchmark, and Brent, the main international one reflects the isolated position of US producers restricted largely to the US and Canadian markets. In late June, Brent was trading just above $63/b while WTI was trading at just below $60. In recent years the differential has often been much wider.

Economists wonder whether lifting the ban would make a difference. If US exports are allowed to hit the global market in bulk, the exit of light grades from the US should lift WTI prices.

But at the same time, the entry of this light oil into international markets would put pressure on Brent. In theory, prices for Brent and WTI would converge somewhere in the middle of the differential.

Cash flow woes

In economic terms, the impact would be muted as the arbitrage window shut. Nonetheless, for legions of smaller American drillers struggling for cash flow to reboot their well programmes, an extra couple of dollars for a barrel of oil would certainly help.   

That’s also why some consumers want the ban to stay in place. With the US swimming in oil, why increase its price? Fans of the ban say lifting it would lift gasoline prices too. But that’s wrong. Processed products, including gasoline, can be exported, so US gasoline products are already part of a global market. And much of the US’ imported oil is already priced against Brent anyway.
 
Above all, though, to keep the US market well supplied drillers need decent margins. Lifting the ban would help the country’s energy security, not hinder it.

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