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End ban on U.S. crude oil exports?

🕐 6 min read

 

Brad Plumer (c) 2014, The Washington Post. The United States can export coal, gasoline and (sometimes) natural gas. But, for the most part, U.S. companies aren’t really allowed to export crude oil. That’s the law.

Is it time to lift that ban on crude exports? Some people think so — especially now that the United States is producing more oil than it has in decades. Overturning the ban, in theory, would allow companies to sell even more oil and keep expanding.

On Tuesday, Sen. Lisa Murkowski, R-Alaska, gave a speech at the Brookings Institution calling on the Obama administration and Congress to loosen restrictions on crude oil exports in order to boost domestic production. “We need to act,” she said, “before the crude export ban raises problems and hurts American jobs.” Jack Gerard, the head of the American Petroleum Institute, expressed similar sentiments later in the day.

But not everyone’s convinced. Sen. Robert Menendez, D-N.J., has argued that the export ban was put in place in the 1970s to “protect U.S. consumers from volatility and price spikes.” Allowing more exports, he said, might cause U.S. gasoline prices to rise and hurt American consumers. And some environmental groups are leery of boosting fossil-fuel production even further.

This debate is beginning to attract more attention. So here is a broad overview:

Are U.S. companies really banned from exporting oil?

Yes, for the most part. The relevant laws here date back to the 1975 Energy Policy and Conservation Act, which directed the president to ban crude oil exports except in select circumstances.

The exceptions: Over the years, the Commerce Department has handed out export licenses for certain types of oil. Crude from Alaska’s Cook Inlet gets a pass. So does oil that goes through the Trans-Alaska Pipeline. So does any oil that’s shipped to Canada for consumption there. So does heavy oil from certain fields in California. There are also exceptions for re-exporting foreign oil and for small swaps with Mexico. But all this added up to a modest 67,000 barrels per day in 2011.

Meanwhile, there’s no ban on exporting oil once it’s been refined into gasoline or diesel fuel. In fact, U.S. refineries are shipping record amounts of gasoline and diesel abroad.

But very little crude oil gets exported. Basically, under current law, oil producers have to send their crude to a refinery to be processed into fuel before it can be shipped overseas.

What was the point of the ban?

It all dates back to the 1973 OPEC oil embargo. World oil prices were soaring, and Congress was trying to limit U.S. exposure to the global crude markets. So lawmakers enacted a bunch of conservation measures (including fuel standards for cars and trucks) as well as restrictions on exports. The idea was to keep more crude oil at home, limit the nation’s reliance on imports and sidestep the volatile global markets.

Many analysts are skeptical that the ban achieved those goals. U.S. oil imports did drop in the late 1970s and early 1980s, but then rose sharply again. And the United States has been highly vulnerable to swings in oil prices over the past few decades, even with the ban in place.

So why do people want to lift the ban today?

A paper by Blake Clayton of the Council on Foreign Relations lays out the basic case: The energy landscape today is very different from the 1970s. Domestic production of crude oil is now on the upswing, thanks to shale fracking and other improved drilling techniques in places such as North Dakota’s Bakken formation or Texas’ Eagle Ford formation.

Right now, Clayton notes, the export ban is actually hurting these upstart producers. Companies in North Dakota and Texas are producing lighter, sweeter types of crude oil and can’t find enough refiners to process it. That’s because many Gulf Coast refineries are set up to process heavier types of crude. What’s more, it’s not easy to ship that oil to the refineries on the East Coast that can handle lighter oil (there aren’t enough pipelines, and the Jones Act makes shipping by water more expensive).

That bottleneck ends up depressing crude oil prices for the producers. And that, in turn, puts a constraint on production. Eventually, new infrastructure could come online to alleviate the logjam. Or more Gulf Coast refineries could retool to favor lighter crude (that’s happening slowly). But, Clayton says, it would be much easier to just let producers export their oil to willing buyers abroad. That would remove a market distortion.

Other oil companies, such as Exxon Mobil, ConocoPhillips and Continental Resources, are in favor of revisiting the ban. “The world needs the crude,” ConocoPhillips chief executive Ryan Lance said in November. “And there are places where we could export that crude into existing refineries.”

What are the arguments against lifting the ban?

There are three common objections.

First, opponents such as Menendez have worried that lifting the export ban could raise the price of U.S. gasoline. Many consumers in the Midwest benefit from the current refinery bottleneck, because it artificially depresses the price of crude. If oil producers can sell abroad, prices would presumably rise.

Second, there’s the environmental argument. A recent report from Oil Change International agreed that lifting the export ban would probably allow U.S. companies to drill for more oil. But, the report added, this would be a bad thing because it would increase overall greenhouse-gas emissions.

Third, many U.S. refineries like the existing state of affairs just fine — since they can buy oil at artificially low prices and then export the gasoline and diesel abroad at a markup.

How much oil would actually get exported?

Here’s one estimate from Blake Clayton: “Were the ban overturned today, crude exports would immediately rise by several billion dollars a year, according to industry executives, likely surpassing 500,000 barrels per day by 2017.” To put that in perspective: That’s about 5.2 percent of the 9.5 million barrels per day the U.S. is expected to produce by then.

What effect would lifting the ban have on U.S. gasoline prices?

This gets a bit complicated. Right now, there are essentially two different oil prices in the United States. Crude oil in the Midwest tends to sell for less than oil on the global markets. You can see this in the difference between West Texas Intermediate (that is, the oil benchmark in Oklahoma) and Brent prices (the benchmark in London). Ever since the shale boom, WTI has been significantly cheaper.

So what happens if exports are allowed? In the short term, crude prices might rise in those parts of the United States that are facing a refinery bottleneck. After all, if oil producers have more options for selling their product, they can command a higher price. But analysts disagree on whether this would translate into higher gasoline prices at the pump or simply lower refinery profits.

But that’s not the whole story. Analysts at Citigroup have argued that lifting the export ban would cut the price of Brent crude. And that, in turn, could benefit Americans who rely on Brent — like those on the East Coast. Others, such as ConocoPhillips’ Lance, have said that all consumers will ultimately benefit from market efficiencies.

It’s not clear how this all shakes out. A recent note by Sarah Ladislaw of the Center for Strategic and International Studies concluded that lower gasoline prices are “undoubtedly a possibility, but not a certain one.”

How, exactly, could the ban get lifted?

The Obama administration has the ability to waive the ban if it’s deemed to be in the national interest. Otherwise, Congress could simply change the law.

Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

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