Lifting the U.S. oil export ban – Who wins?

Jonathan Mogil, Portfolio Manager and Senior Analyst | March 24, 2014

  • Industry participants and elected officials have made recent calls to reconsider the 40-year-old ban exporting U.S. oil.
  • Lifting the crude export ban would strengthen the U.S. oil industry as well as the overall economy.
  • Oil producers would naturally benefit from either a full repeal of the ban or any relaxation of U.S. oil export policies; however, independent refiners would likely see their profitably decline.

The Energy Policy and Conservation Act of 1975

Following the OPEC oil embargo in 1973, Congress enacted the Energy Policy and Conservation Act of 1975, making it illegal to export U.S. oil without a license. At that time, the U.S. was producing 8.4 million barrels per day (mbpd) of oil, and importing 4.1mbpd, representing one-third of its total consumption. Over the next three decades, oil imports more than doubled, and by 2008, during the throes of the Great Recession, the U.S. was importing 66% of its total oil consumption.

Since 2008, U.S. oil volumes have grown faster than anywhere else in the world as a result of the U.S. shale revolution. Oil production averaged 7.5mbpd during 2013 and, according to the U.S. Energy Information Administration, volumes are expected to average 9.2mbpd in 2015; reducing the country’s dependence on foreign imports to just over 40%.

Recent calls for change

Over the past 10 months there have been increasing calls by industry participants and elected officials to reconsider the 40-year old ban. While the discussion on crude oil exports has begun, it seems unlikely that Congress will take any action in the near term, especially ahead of the upcoming November mid-term elections. In the meantime, the industry does have some limited means to export crude under the current law, which could provide some additional relief to the nation’s oil supply problems. The President has the authority to allow crude exports, and, in the past, both Democratic and Republican presidents have issued executive orders allowing for limited exports.

The issue is quality, not quantity

While U.S. crude volumes are expected to continue to grow at a rapid pace, the problem today is that many U.S. refineries are not configured to process the domestic light-sweet crudes that have contributed to the surge in growth. Not all oil barrels are created equally, and most domestic refiners, especially those located in the Gulf Coast, are designed to process heavier and more sour blends from foreign countries. Without the ability to export these lighter barrels, the oil has become “land-locked” and sells for a discount to other seaborne and international blends. As an example, West Texas Intermediate crude, a proxy for U.S. domestic light oil, averaged $98/bbl during 2013, almost $11/bbl less than Brent, a more global benchmark, and has traded at more than a $20/bbl discount on several occasions over the past few years.

Implications of lifting the oil export ban

The primary benefit of lifting the crude export ban or relaxing current trade policies would be a stronger domestic oil industry, which would have a variety of benefits to the overall economy, including more jobs and higher tax revenues. Providing further clarity on export options would also pave the way for additional energy infrastructure investments to be made.

A more liberal export policy regarding oil would also help U.S. foreign policy initiatives. Otherwise we could see increased pressure from our current trading partners to share our energy resources, including oil, much in the same the way we benefit from other countries’ natural resources.

National security and the environmental impact of hydraulic fracturing are some common reasons against changing the existing ban. However, growing U.S. production is arguably the best defense against our reliance on oil imports, and a continuation of current policies runs the risk of reversing the trend of reduced dependence on foreign oil we have seen over the last few years. In the event of an emergency that disrupts foreign oil supplies to the U.S., exports from the U.S. could easily be curtailed to offset lost foreign supplies.

The most politically sensitive issue in this debate surrounds the impact of rising oil exports on U.S. refined product prices such as gasoline and diesel. Prices for refined products in the U.S. are set by global markets and, unlike crude oil, refined products can be exported under current U.S. law. Allowing U.S. producers to export oil would lead toward a convergence of U.S. and international crude prices, but there is no evidence that refined product prices would increase as a result, and, in theory, could actually decline.

Winners and losers

Oil producers, especially those producing lighter barrels, would naturally benefit from either a full repeal of the ban or any relaxation of U.S. oil export policies, as they would receive prices closer to the higher international benchmarks. Further clarity on the issue would also pave the way for more investments in regions that currently have less attractive economics given relatively lower U.S. oil prices. Companies involved in additional energy infrastructure buildout would also benefit.

On the other hand, U.S. independent refiners, which have been the primary beneficiaries of cheaper domestic oil prices over the past few years, would likely see their profitably decline. Currently, most refiners are able to take advantage of cheaper feedstock prices (i.e., U.S. oil), while the finished refined products are linked to higher international benchmarks, enabling higher margins for refiners. Due to the prospect of lower margins, the U.S. refiners could come out on the relative losing end should the export ban be lifted.