A crude oil export ban primer

All you need to know, and then some, about selling U.S. oil overseas.

 

From the outside, the debate over lifting the four-decades-old ban on crude oil exports that’s currently raging in Congress and beyond, looks clear-cut. Big Oil and its Republican supporters want to lift the ban, opening more markets to the bounty of the so-called shale revolution, and thus prompting more production. That worries environmentalists because it would mean more drilling here at home, and ultimately more climate-changing carbon in the atmosphere. Besides, say the anti-exporters, does it really make sense to send domestic oil overseas when we currently import more than 7 million barrels of oil per day?

Zoom in a bit, however, and the crude export battle reveals itself to be a tangled mess. Big Oil is actually divided on the issue — producers want the export ban lifted, refiners want to keep it in place. Partisan lines aren't drawn clearly on this one, either. To help you untangle it all, we've waded into the mysterious jargon of the crude export debate and translated it into human terms.



The crude export ban was put in place by the Nixon administration following the OPEC oil embargo of 1973 and made permanent by Congress and the Ford administration with passage of the Energy Policy and Conservation Act in 1975. The idea was to force U.S. oil producers to sell their product here at home rather than overseas, thus lessening the nation’s dependence on OPEC and other foreign producers. The ban was just one of many government interventions intended to get us to that ever-elusive energy independence.

For decades, the ban faced little resistance because domestic oil producers could sell their oil at home at a price that was as high or higher than they could fetch in the global marketplace. But as advances in horizontal drilling and hydraulic fracturing opened up huge stores of oil in previously un-drill-able shale formations, domestic producers had a harder time getting a premium price for their product in a limited market. That resulted in significant gap (or spread) between Brent, the global benchmark price for oil, and WTI (or West Texas Intermediate) the benchmark for most domestic oil.

Beginning in 2010, the spread widened as the global prices increased due to worries that geopolitical events like the Arab Spring would disrupt supplies, while WTI remained relatively low. Domestic oil drillers weren’t happy because they were getting paid less for their oil than they could have had they sold it on the global market. Domestic refiners, meanwhile, were psyched to get that light, sweet crude at a discount.



What’s light, sweet, sour and heavy got to do with it? Like fine wine, oil is imbued with terroir. That is, its composition varies depending on where it’s from. Most U.S.-produced oil is tight (from tight shales), light (low density), sweet (low sulfur content) crude that requires less processing than heavy, sour crude. The high quality of the stuff, though, doesn’t make it more valuable here in the U.S.; many domestic refineries are instead equipped to process imported oil, which tends to be heavier and more sour. This limits markets for domestic crude, thereby deflating the WTI price.

To help solve this problem, the Obama administration recently relaxed the export ban slightly by allowing us to exchange our sweet, light stuff for Mexico's heavy, sour stuff, thus channeling different types of crude to the refineries that can best handle them.

Most of the oil imported by the U.S. is heavy, sour crude, and many refineries are equipped for the lower-grade oil. Domestic oil tends to be light and sweet, for which there is less refinery demand.


Refiners love the spread (and thus, the export ban) because they pay less for their raw material. Naturally, that's good for any manufacturer’s bottom-line. Meanwhile, the export ban only applies to crude oil, so any product that goes through a refinery can be sold to overseas customers at a premium price based on the global price of oil. In fact, the U.S. has gone from being the largest importer of refined petroleum products to the largest exporter of them in less than ten years, a boon for the refiners. If we start selling large amounts of crude oil to foreign refiners, it would potentially cut into domestic refiners’ sales, and profits.
The crude oil export ban does not apply to refined petroleum products. Domestic refiners have taken advantage of that fact, and sold a lot of their product overseas, transforming the U.S. from a net importer to a net exporter of such products.


Most analysts on both sides of the debate agree that if and when the crude export ban is lifted, the WTI/Brent spread will disappear. As U.S. oil is added to the global pool, it will abide by global prices. We can expect the WTI price, then, to increase until it matches the Brent price. Domestic drillers will get paid more for their oil. Domestic refiners will pay more for it. Thus the deep rift within Big Oil on this issue.

Less clear is what this will mean for prices at the pump. If domestic refiners pay more for their raw material, we can expect the price of their product — gasoline — to also increase, right? Yes, according to those who want to keep the export ban in place. But those who want to lift the export ban argue that since the U.S. continues to import vast amounts of oil, the price of gasoline is based not on WTI, but on Brent (a claim backed up by the Energy Information Administration). And they argue further that by adding all that U.S. oil to the global market, it will actually lower Brent prices, thereby lowering gas prices.

The environment loses if the crude export ban is lifted, but does get a small victory. Opening up more markets to U.S. oil will lead to more sales and therefore more drilling and production, along with its cornucopia of environmental impacts. If prices at the pump do indeed fall, then people will probably drive more, resulting in more smog and greenhouse gas emissions, a phenomenon we’re already seeing. The environmental victory comes when we send our low-sulfur oil to nations with less advanced refineries than ours, allowing them to produce low-sulfur, less polluting gasoline.
Lifting the crude export ban won’t save struggling oil companies. Domestic oil companies are hurting these days, but the source of their woe isn’t the WTI/Brent spread, it’s low global oil prices. And pumping a bunch of U.S. oil onto the global market sure won’t cause those prices to go up. In fact, Saudi Arabia may see U.S. exports as a grab for more of their market share, and they may respond by pumping more oil, which would bring prices down further, and cause more damage to the U.S.’s high-cost oil producers.


The politics are almost as complicated as the issue itself. Generally speaking, politicians from big oil-producing states — Texas, Alaska, North Dakota — are in favor of lifting the export ban, regardless of party. Labor- and green-minded Democrats, as well as those with big refineries in their districts, tend to be opposed. But with an election year coming up, many Republicans are shying away from strongly supporting the ban because they don’t want to be on the wrong side of a jump in gasoline prices. And Democrats — Sens. Harry Reid, of Nevada, and Michael Bennett, of Colorado, for example — have expressed a willingness to support lifting the ban in return for support of pro-renewable energy legislation.

Jonathan Thompson is a senior editor of High Country News.