Lifting US Crude Oil Export Ban Would Spur US Production

Lifting US Crude Oil Export Ban Would Spur US Production

IHS Consultants just published a report that lifting the U.S. oil export ban would cause U.S. crude oil production to rise by an average of 1.2 million barrels a day. The study argues that allowing crude oil exports would improve the fit between booming crude production and America’s lack of refining capacity.

The result would narrow the price differential between the U.S. oil West Texas Crude benchmark and international prices in Europe and the Middle East. The increased production is estimated to add a million domestic jobs and cut America’s trade deficit by about 10% by 2018.

Daniel Yergin, IHS vice-chairman, told the Financial Times the United States export ban was first introduced in 1975 to support the U.S. oil price controls of the 1970s but has been redundant since those price controls were abolished in 1981. Yergin added that the near-total ban on U.S. crude exports was threatening to create “gridlock” in the industry, because the shale revolution has led to a growing mismatch between booming production of light sweet (low sulfur) oil, and the refining capacity along the U.S. coastline that was configured to effectively process imported sour (high sulfur) crude. 

The issue of changing the rules on domestic crude oil exports may once have been about making sure that America had access to gasoline, but today it is all about subsidizing U.S. refineries. Domestic producer Continental Resources is in favor of ending the ban, but refiners including Valero Energy want it to be retained. The limited refinery capacity in the U.S. allows refineries to buy U.S. crude oil at about a $7 discount. This has maximized refinery profitability and enabled a boom in U.S. gasoline exports, which are not subject to the ban.

In 1970, the United States had 305 active refineries. That number fell to 259 in 1982 and 139 today. Current law prohibits export of U.S. crude oil except to Canada, which has been growing fast in recent months but still amounts to only about 3% of domestic production. The other 97% is mandated to be refined in the limited number of U.S. refineries. Many of those refiners are already sourcing all the light sweet oil they can process from domestic production, displacing imports completely.

IHS believes that the current refining issues will increase as U.S. domestic production continues to grow in excess of demand from refineries. This will further drive the discounted price of domestic West Texas Intermediate or Light Louisiana Sweet crude relative to the internationally traded Brent Crude benchmark price. The result will be even bigger profits for refineries, but it will put pressure on the finances of some U.S. oil producers and choke off new development projects.

The U.S. government’s Energy Information Administration currently predicts that U.S. oil production will rise from 8 million barrels to 9.6 million barrels by 2019 and then gradually start to decline. But IHS believes production will not peak until 2022 at 11.2 million barrels. That number would be significantly higher with a repeal of the export ban. HIS also predicts that eliminating the ban would “support 964,000 jobs directly, indirectly and ‘induced’ – thanks to the additional investment.”

IHS estimates that the short term cost to the American consumer would be approximately 8 cents per gallon of gas at the pump. But the big increase in production would soon lead to higher domestic production and falling pump prices. 

The Financial Times reported that Obama Administration officials have acknowledged that they are studying the possibility of lifting the ban, and the United States Energy Information Agency (EIA) “is preparing a series of reports on the scale of the problem and the possible effects of a change in the rules, which are scheduled to be published over the next six months.”

IHS disclosed that their study was funded by oil production and service companies including Continental, ExxonMobil, Chevron, ConocoPhillips, Chesapeake Energy and Halliburton, but IHS states that their findings were independent of the funding.

The author welcomes feedback and will respond to comments by readers.

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