Bloomberg News

U.S. Considers Exporting More Oil for First Time Since ’70s

June 18, 2013

Americans Exporting Oil First Time Since ’70s Seen on Production

Exports must expand to sustain the boom that increased U.S. production last year by the most since the first commercial well was drilled in 1859, said Robin West, chairman of the oil consulting firm PFC Energy. Output is putting the nation on pace to surpass Saudi Arabia as the world’s largest producer by 2020, according to Energy Department data. Photographer: Patrick T. Fallon/Bloomberg

The U.S. oil boom is moving Congress closer than it has been in more than three decades to easing the ban on exporting crude imposed after the Arab embargo.

Advances such as hydraulic fracturing are leading to record production that may outstrip refinery capacity within 18 months to three years, said Benjamin Salisbury, a senior energy policy analyst at FBR Capital Markets Corp. in Arlington, Virginia. Net petroleum imports now account for about 40 percent of demand, down from 60 percent in 2005, according to the U.S. Energy Information Administration, the Energy Department research unit.

Congress has limited oil exports since the 1973-74 Arab oil embargo triggered shortages that pushed up prices and led to long lines at gas stations. An increase in domestic production last year by a record 766,000 barrels a day is challenging a notion that Americans need foreign oil, while setting up a debate policy makers may be reluctant to begin.

“Americans are unbelievably politically sensitive to oil and more specifically to gasoline prices,” Salisbury said in an interview. “For politicians to do anything, the pain has to come first. You have to see the rig count fall and then and only then can we have a decision about whether we want to export crude.”

Canadian Exports

The U.S. sends about 120,000 barrels of crude a day to Canada under a Commerce Department license. Congress allows exports from Alaska’s Cook Inlet and for consumption in Canada, along with sales determined by the president to be in the national interest.

Exports must expand to sustain the boom that increased U.S. production last year by the most since the first commercial well was drilled in 1859, said Robin West, chairman of the oil consulting firm PFC Energy. Output is putting the nation on pace to surpass Saudi Arabia as the world’s largest producer by 2020, according to Energy Department data.

“It’s a fairly short period of time, it’s a couple of years, before we effectively hit the wall,” West said at a June 12 conference in Washington. “That will start affecting price, which in turn will start affecting production.”

Refiners agree they need to educate policy makers on the issues related to limited capacity as U.S. production nears that of Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries, said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, the industry’s Washington-based lobby group.

‘OPEC NOPEC’

“We haven’t really had the time to get the infrastructure going to catch up with the vast increase in domestic production,” Drevna said in an interview. “We have to educate the folks to say, ‘Look, we could be that swing producer.’ We have the capability here in the United States, in North America, to make OPEC NOPEC.”

Since 2007, oil imports have fallen, with heavier crude taking up a larger share as domestic production of light oil from Texas and North Dakota has increased, according to Energy Department data. U.S. refineries designed to process heavy oil run less efficiently when handling light crude.

To process more light crude, “refiners would need to readjust refinery crude runs, revamp refinery equipment to run a higher percent of light crude, or reduce the use of heavy crude upgrading equipment, which may have adverse impacts on operations,” according to the Energy Information Administration. “Each of these alternatives carries a cost.”

Sweet Crude

The oil rush, spurred by technology that makes it cheaper and easier to extract oil from rock formations, has boosted U.S. stockpiles of light, sweet crude, which is less costly to process than high-sulfur grades pumped by Saudi Arabia and Venezuela, making it more profitable for export. Landlocked by the ban and limits on transportation, U.S. light oil trades at a discount to the European blend that sets prices for more than half the globe’s oil.

“If you have an opportunity to export the more expensive product and import the cheaper one, why not do it,” John Felmy, chief economist with the Washington-based American Petroleum Institute, said in a telephone interview. “It’s something that we as a country need to take a look at.”

Still, Americans may balk at the idea of sending oil overseas because they’re concerned it may lead to higher gasoline prices, said David Goldwyn, president of Goldwyn Global Strategies LLC, a Washington-based energy consultant.

Gasoline Prices

“That’s the baseline political reaction that you get,” Goldwyn said at the conference. “You’ve got to have an answer which is either it’s going to bring down the price at the pump by a dime if we let this happen or some other positive.”

Lower gasoline prices may result from removing limits on crude exports, said Adam Sieminski, head of the Energy Information Administration.

“The ability to export excess production has actually allowed refineries to operate at higher utilization rates,” Sieminski said at the conference. “The net result of that is to keep product prices for consumers actually lower than they would otherwise be.”

Lawmakers should be cautious in evaluating the oil export policies, said Stephen Brown, a lobbyist for Tesoro Corp. (TSO:US), an oil refiner based in San Antonio.

‘Thoughtful, Legislation’

“Congress jumping into such a sensitive and complex issue will always make the oil industry nervous because the words ‘thoughtful’ and ‘legislation’ are not always found in the same sentence,” Brown said. “It is safe to say that this is an issue watched very carefully on a daily basis.”

A similar debate has emerged over record gains in U.S. natural gas production. The fuel’s users such as Dow Chemical Co. (DOW:US) are concerned that too much gas for export will push up prices, wiping out a competitive advantage U.S. energy producers have over foreign companies. Producers including Exxon Mobil Corp. (XOM:US) want the market to determine how much is sold overseas.

“This is very simply a game of market power,” Philip Verleger, once an energy adviser to former President Jimmy Carter and founder of the consulting firm PK Verleger LLC in Carbondale, Colorado, said in an interview. “Prices in the United States for petroleum products are not going to be any different whether we export crude or not. But limits on exports of crude are going to allow refiners to squeeze producers, boosting refining margins.”

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net; Jim Snyder in Washington at jsnyder24@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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