Andreoli on Oil & Fuel: To ban, or not to ban exported domestic crude

In the 1970s, legislation was enacted banning the export of domestic crude oil without a special license—and unless Canada is the destination, export licenses are nearly impossible for domestic producers to acquire. With the growing oil glut, the time to lift the ban has come.

It’s widely and accurately understood that the surge in domestic production from unconventional “shale” plays has driven down global oil prices. But as shale oil production has grown, the U.S. export ban has resulted in a glut of domestic crude oil that has pushed U.S. oil prices down faster, and to lower levels, than the global oil price. This has hurt domestic producers, but has not benefitted consumers of refined products.

In response, the chorus of voices urging lawmakers to reconsider the crude oil export ban has grown. U.S. Sen. Lisa Murkowski (R-Alaska), who has been pushing for the ban to be lifted since January 2014, was a vocal advocate even when prices were hovering around $100 per barrel. The oil price crash this year has stimulated these calls to intensify.

On the other side of the aisle, legislators, such as Sen. Robert Menendez (D-N.J.), have argued to keep the ban in place for economic reasons under the false assumption that the domestic crude oil glut is behind the low gasoline prices.

To be clear, unlike domestic crude oil, outputs from U.S. refineries do not face any export restrictions. Consequently, there’s no mechanism in place to ensure that refinery savings are passed on to consumers. This is why the gasoline prices have declined only 25 percent since June 2014 while crude oil prices have declined 46 percent.

Before considering the misguided economic argument against lifting the ban, let’s take an empirical look at the mismatch between the physical characteristics of the oil being produced domestically and the physical characteristics of the types of oil that domestic refineries are tooled to process.

Not all crude is created equal. Only a small quantity of residual fuel oil is present in light crude oil like that produced from domestic shale plays. By contrast, the amount of residual fuel oil produced through primary refinery processes is relatively large for heavy crude streams.
Refineries that have invested in cokers and hydrocrackers are able to convert the low value residual fuel oil into high value petroleum products including diesel and gasoline.

As a bonus, through the conversion process, there is a volumetric gain, which can be on the order of 20 percent.

Two-thirds of the world’s coking capacity is housed in the U.S., and the U.S. is also home to a high percentage of the world’s hydrocracking capacity. Consequently, U.S. refineries strongly prefer to process heavy crude oil.

This preference can be seen in the declining share of light oil imports. Light oil comprised around 30 percent of imports half a decade ago, but now accounts for just 6 percent in December. Judging by the surge in commercial crude oil inventories that didn’t really take off until February, it seems likely that this volume has been reduced to a minimum.

The substitution of domestic shale oil for light crude oil imports is now complete, so domestic demand for additional shale oil will now grow much more slowly than it has over the last few years.

The preference of domestic refineries for heavy oil further explains the why U.S. imports of medium and heavy oil have risen from 6.9 million barrels per day to 7.8 million barrels per day since the first week of January, while commercial crude oil inventories have increased 25 percent from 400 to 500 million barrels.

While light, sweet shale oil is not preferred by complex domestic refineries, it’s a great match for less complex refineries found elsewhere in the world. It seems pointless to insist that domestic producers sell only to domestic refineries when these refineries clearly do not want to process this product—and, in fact, will only purchase it at a steep discount.

There needs to be a compelling reason to maintain the export ban in light of this mismatch between the qualities of crude demanded by domestic refineries and the qualities of the crude produced domestically, but I fail to see any.

Fuel prices won’t rise because they’re benchmarked to the global balance of gasoline supply and demand. In short, the crude oil export ban is mismatched to the realities of the oil and refining market. It does not benefit domestic consumers, but it has negatively affected producers.

In the long run, we should let markets do their work. The export ban has created needless pain.