Eroding the US Crude Export Ban

By Stephen Rassenfoss 8 Aug 2014

Booming US oil production is beginning to seep into international markets despite the country’s ban on oil exports. One sign of change was the departure in late July of a tanker from Texas City, Texas with 400,000 bbl aboard bound for Asia, Reuters reported. 

While those liquids have flowed from what could be described as an oil well, the condensate on board the BW Zambesi skirted the crude export ban because it was considered to be a refined product, and there is no limit on those exports. Regulators agreed with the argument offered by large gas processor Enterprise Products Partners that because distillation was used to process the material, which is rich in natural gas liquids, it had been refined, according to the Wall Street Journal.

This could open the door to similar sales: what can be coaxed out through fractures in these extremely tight rocks tends to be light hydrocarbons that go through similar processing. This departure happened at a moment when there has been growing talk about whether to lift the US ban on exports. A fight over a change sets up a battle between oil producers, who want to export because the high-quality oil they produce sells in the US for less than the world market price, and refiners, chemical plants, and others who benefit from the low-cost supply.

Politically, crude exports run counter to the popular notion of energy independence in the US, which has seen oil imports shrink from 60% to 30% of US supplies in 2005.

A recent report from the energy consulting firm IHS, though, concludes that limiting exports would have the opposite effect by reducing investment in unconventional production. The thinking is that without international sales, investment will be suppressed by price discounts that run as high as 20%. Demand for US-produced light crude is limited because it is a poor match for the many domestic refiners set up to process heavy grades.

“As a result of the boom in tight oil production, the US is exceeding its capacity to process that type of crude,” said James Fallon, an IHS director that co-authored the report with Kurt Barrow, vice president for downstream energy at IHS. “Current export restrictions mean that light crude has to be sold at a sharp discount to compensate for the extra cost of refining it in facilities that were not designed for it.” 

An important voice in the export debate is US drivers. The ban on exports would appear to favor their interests if lower US oil prices meant lower gasoline prices. The report said, however, that is not likely because US refiners do not face an export limit, so they can seek the best price for their products in international markets.

IHS said US oil exports would allow producers to earn a higher price, leading to greater domestic oil production—from 8.2 million B/D to 11.2 million B/D in 2022. This growth projection assumes the US exports will only slightly lower the value of crude on global markets, lowering gasoline prices by USD 0.08/gal. It predicted US crude exports would find ready markets in Europe and Asia, which now rely on Africa and Russia. Oil from those regions may be reoriented to Asia.

On the other hand, if the exports are tightly restricted, IHS predicts daily production will drop by more than 1 million B/D because of reduced investment. 

IHS’s point of view runs counter to the one offered by users, such as refiners on the US East Coast built to handle those grades of crude who benefit from supplies rolling in on trains from Middle America, or chemical makers who are investing billions in new US facilities to take advantage of this growing supply of low-cost hydrocarbons.

Oil export restrictions are a remnant of economic policies long past. It was part of the US price control system imposed in the 1970s when inflation was surging. The oil export limit was imposed to keep US producers from avoiding price limits by selling outside the country. They drew little notice since US crude production steadily fell between 1970 and 2008 when shale production kicked in. 

 “The 1970s-era policy restricting crude oil exports—a vestige from a price controls system that ended in 1981—is a remnant from another time,” said Daniel Yergin, IHS vice chairman. “It does not reflect the dramatic turnaround in domestic oil production, led by tight oil, which has reversed the United States’ oil position so significantly. 

Stephen Rassenfoss is the Emerging Technology Senior Editor for the Journal of Petroleum Technology.