Global Economics

The Fight to Export U.S. Oil


The Fight to Export U.S. Oil

Photo Illustration by 731; Photos: Alamy (1), Corbis (1)

To sell abroad or stay at home: Those are the terms of a debate roiling the U.S. oil industry. At the heart of the disagreement is a 1975 ban on U.S. oil exports imposed by Congress when domestic reserves were dwindling and the country was still spooked by the 1973 Arab embargo. Thanks to new technology, oil production in the U.S. now tops 8 million barrels a day, the highest since 1988. That’s prompted U.S. producers to call for an end to the ban so they can serve new markets. Refiners and other companies want the ban maintained to benefit from the cheap prices of the local oil they use to make gasoline, chemicals, and plastics. “This debate is a major slugfest between industrial consumers and producers of oil,” says Michael Webber, deputy director of the Energy Institute at the University of Texas.

A recent development has put a spotlight on the dispute. In late June, the Commerce Department determined that two Texas companies, Pioneer Natural Resources (PXD) and Enterprise Products Partners (EPD), could start exporting an ultralight type of crude called condensate, which occurs naturally as a gas and condenses into a liquid once drilled out of the ground. Condensate is added to heavier crudes to make them easier to refine, and is a basic ingredient for chemicals. Horizontal drilling has unlocked far more condensate than the U.S. can use. Exporting it should relieve the surplus building up. The two companies had asked Commerce if minimally processed condensate could be classified as a refined product, which can be exported. Commerce said it could but insisted the ruling doesn’t open the door to abolishing the ban.

The ruling could be a precursor to rolling it back. In April, Texas Republican congressman Michael McCaul introduced a bill to end the ban, but the likelihood of Congress passing it seems slim, with both houses in near-gridlock and powerful industries lined up on either side of the issue. Democratic Senator Mary Landrieu of Louisiana, chair of the Senate Energy and Natural Resources Committee, is perhaps the person in Congress best placed to lead the effort to kill the ban. But she’s facing a tough reelection this year and has both refiners and oil producers in her state. Two senators, Robert Menendez (D-N.J.) and Edward Markey (D-Mass.), are asking Commerce why its ruling doesn’t violate the ban. And there’s some movement from the executive branch. In May, presidential adviser John Podesta said the possibility of allowing crude exports is “a topic that’s under consideration” at the White House.

The American Petroleum Institute says lifting the export ban would create 300,000 jobs across the economy and cut the trade deficit by $22 billion by 2020. Energy research firm IHS (IHS) is even more bullish: Ending the ban by 2016 would help create about 1 million jobs and boost investment in the oil industry by almost $750 billion. Both say lifting the ban will increase U.S. oil production. Selling U.S. crude abroad, they argue, will lower international prices and make gasoline cheaper in the U.S. “It’s time to unlock the benefits of free trade for U.S. consumers and further strengthen our position as an energy superpower,” says Kyle Isakower, the Petroleum Institute’s vice president for regulatory and economic policy.

Those against ending the ban point to its economic benefits. Having all that crude trapped in the U.S. has lowered the price of domestic oil compared with crude from overseas. Over the past three years, the average price of West Texas Intermediate oil has been $13 per barrel cheaper than the international benchmark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advantage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products. Net income at Valero Energy (VLO), the biggest refiner in the U.S., has more than doubled since 2010. Lifting the ban could erode that edge by raising the price of U.S. oil, which in turn could push gasoline prices upward. Taking that step is also hard to justify with the U.S. importing more than 7 million barrels a day.

A June 10 Goldman Sachs (GS) report suggests keeping the ban in place for a few more years until the U.S. is so saturated in domestic crude that refiners can’t absorb it all. With refiners using about 91 percent of their capacity, there’s room to run. “You will know when the U.S. is saturated when domestic crude trades at a much larger discount to international prices,” says Damien Courvalin, a Goldman oil analyst who co-authored the report. He disputes producers’ concern that the export ban will crash U.S. oil prices and make drilling unprofitable. According to Courvalin, the break-even price to produce oil in the U.S. is $85. With U.S. oil at around $100, producers can make money even if the price slips.

The real threat to the U.S. oil boom isn’t a lack of exports, it’s the lack of efficient ways to move crude around the country, says Philip Verleger, a former director of the office of energy policy at the Department of the Treasury and founder of PKVerleger, a consulting firm in Colorado. Five years into the oil boom, the country is still building pipelines to the new areas of production. The industry has had to rely on oil trains that are proving dangerous and face possible restrictions. “The issue of exports is entirely moot until we fix the transportation infrastructure,” says Verleger. “Even if we do lift the ban and produce an extra million barrels a day, how are we going to move it?”

The bottom line: According to one estimate, lifting the export ban on U.S. oil would create almost 1 million jobs.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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Companies Mentioned

  • PXD
    (Pioneer Natural Resources Co)
    • $223.38 USD
    • -3.74
    • -1.67%
  • EPD
    (Enterprise Products Partners LP)
    • $75.95 USD
    • -0.88
    • -1.16%
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