Congressional leaders have reached a deal to lift the 40-year-old ban on exporting U.S. crude in a symbolically important move that could give domestic oil producers much more flexibility in future. There is no immediate prospect of large-scale oil exports from the United States because domestic refineries have increased their processing of U.S. crude while domestic oil output has leveled off thanks to the slump in oil prices.
With WTI trading at less than $1 per barrel below Brent, allowing exports will not do much to ease the intense pain being felt by domestic oil producers. But it is possible that a surplus of domestic crude and big discounts could re-emerge in the future if oil prices eventually increase and shale production begins to rise again.
The best way to ensure the United States continues to enjoy a healthy domestic oil industry is to allow both oil drillers and refiners to sell their production at market prices free from unnecessary restrictions. Surging domestic production has reduced U.S. reliance on imported crude from unstable countries in the Middle East and Latin America.
For the first time since the 1960s, U.S. foreign policymakers and diplomats do not have to worry about hostile governments cutting off oil supplies or creating a spike in oil prices.
Rising output has given U.S. foreign policy an important extra degree of freedom. For that reason it is worth removing unnecessary barriers to domestic energy production.
YEAR-END BUDGET DEAL
The deal is contained in the Consolidated Appropriations Act, 2016, an omnibus bill that runs to more than 2000 pages and would fund federal government operations in 2015/16.
The bill must survive a complicated series of votes in the House of Representatives and the Senate in the next few days before it can be sent to the president to be signed into law. But assuming the bill survives it would lift restrictions on U.S. crude exports in exchange for an extension of tax credits for wind and solar energy producers and tax relief for independent refiners.
Domestic oil producers made lifting export restrictions a major priority, which was taken up by congressional Republicans.
Wind turbine and solar panel makers, as well as environmental groups, made extending expiring tax credits for installation and power production a key demand, taken up by Democratic lawmakers.
And independent refiners have secured tax relief to cope with their transportation costs after complaining that ending the ban would leave them at a disadvantage to foreign rivals, unless shipping restrictions were also lifted.
Under the Merchant Marine Act, 1920, commonly known as the Jones Act, U.S. refineries are required to use U.S.-built, flagged and crewed vessels to transport crude while foreign refineries are free to use cheaper vessels built, flagged and crewed from overseas.
The bill therefore represents a classic congressional compromise in which all major interest groups achieve action on their top priorities while giving ground on lesser issues. Because the provisions are part of must-pass annual budget legislation they are unlikely to be vetoed by the president.
ARBITRAGING AROUND THE LAW
Domestic oil producers began lobbying to have export restrictions lifted in 2011 when surging output from shale coupled with pipeline and storage constraints sent the price of U.S. oil to a deep discount compared with international grades. But the discount for WTI compared with Brent has steadily narrowed in recent years. From a record $24 per barrel in September 2011, the discount has shrunk to an average of just over $2 per barrel so far this month (http://tmsnrt.rs/1JbITQa).
In the short term, it is unlikely any significant volumes of U.S. crude will be exported, other than to Canada and Mexico, where exports are already permitted under current regulations.
With WTI trading at such a small discount, it is not profitable to charter a tanker to take U.S. crude to other destinations.
U.S. law has allowed limited amounts of crude oil to be exported since the 1980s (http://tmsnrt.rs/1QoY00w).
But over the last four years, the market has successfully arbitraged around the remaining export restrictions by building more pipelines and storage tanks; increasing refinery throughput; swapping foreign for domestic crude; exporting more crude to Canada; exporting more ultra-light condensate; and boosting exports of refined fuels.
Net crude imports have dropped from 10 million barrels per day in 2007 to just 6.8 million barrels per day so far in 2015. At the same time, the United States has shifted from being a net importer of 2 million barrels per day of refined fuels in 2007 to a net exporter of 2 million barrels per day in 2015.
Domestic gasoline and diesel prices are already linked to international fuel prices, and therefore the cost of Brent rather than WTI, via exports. As a result, lifting the restrictions on U.S. crude exports is unlikely to have any impact on pump prices for motorists or the cost of heating oil for home owners.
The proposed legislation also contains a “safety valve” permitting the president to re-impose controls for up to one year at a time if exports cause a sustained increase in domestic oil prices above world market levels and price increases have or threaten sustained material adverse effects on employment in the United States.
OUTDATED AND UNJUSTIFIED
Some commentators have suggested the deal is mostly symbolic since it will have little impact on exports or prices in the short term but that understates its importance in the longer run. Lifting the restrictions on crude oil exports would remove an antiquated and unjustified provision of statute law that no longer serves any useful purpose.
The export ban was put in place in the mid-1970s after Saudi Arabia and other Arab countries embargoed crude oil sales to the United States in protest at U.S. support for Israel. It was introduced at a time when U.S. oil production was falling, oil imports were rising, and there were widespread fears that U.S. oil reserves were running out.
But the world in which the export ban was introduced no longer exists. Even if the ban served a useful purpose in the 1970s, which is controversial, it no longer serves any rational purpose in 2015.
U.S. oil production has risen to more than 9 million barrels per day, up from 5 million in 2008, the fastest increase anywhere in the world since the beginning of the modern oil industry.
U.S. proved reserves have increased to more than 36 billion barrels, up from 19 billion in 2009, the highest level since 1970. U.S. refineries are producing so much refined fuel they have become major net exporters of diesel and gasoline to countries across Latin America, Europe and Asia.
The export ban does not protect U.S. consumers from fluctuating international oil prices since the price they pay for gasoline and diesel is already set on international markets.
The only effect is to transfer money from domestic crude oil producers to domestic refiners. Subsidizing refiners at the expensive of oil producers makes no sense at the moment.
Refiners are currently enjoying near record profits as a result of strong demand for gasoline while oil producers are struggling because of the slump in crude oil and natural gas prices.
Removing the ban will allow oil producers to realize the best value from their output and maximize economic efficiency by allowing them to sell it to whoever is willing to pay the highest price.
The United States generally advocates free trade in oil and other products as a means to increase prosperity and international security.
The export ban has exposed the country to charges of hypocrisy. Removing it will strengthen the moral authority and intellectual arguments of U.S. trade negotiators.
More generally, the economic wellbeing and national security of the United States and its allies around the world are best served by flexible energy markets which are able to cope with any unanticipated interruption in supply.
Source: Reuters / Editing by David Evans