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What would lifting the crude oil export ban mean for pump prices and energy independence?

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Jonathan Thompson | Jan 13, 2014 05:20 PM

Sometimes it seems as if the energy industry wants to turn the New World back into a resource colony for the rest of the globe. First, coal companies, seeing a reduction in demand domestically, tried to sell more coal overseas. Then, thanks to the shale gas glut, the fossil fuel industry has been trying to get liquid natural gas terminals approved and built, so it can sell its goods to Japan, China and Europe.

AnethOilField
A pumpjack grinds away in the Aneth Oil Field in Southern Utah. Photograph by Jonathan Thompson.

Now, they want to hock all that newfound bubblin’ crude — oil, that is, black gold, North Dakota Tea — on the shelves of the global supermarket. That would enable the companies drilling the West’s oilfields to sell more of their product at a higher price. But the only way to do that is by lifting the ban on crude exports that was put in place during the 1970s energy crisis in an effort to insulate Americans from the volatile price swings of the global market. ExxonMobil and ConocoPhillips broached the subject of lifting the ban, and most recently Sen. Lisa Murkowski, the Republican from Alaska, joined them and other Western oil state congressmen from both sides of the aisle.

OilProductionUS
Domestic oil production has increased substantially in recent years. Source: US Energy Information Administration.

On the one hand, the idea of exporting oil makes perfect sense. All the other big world oil producers do it, and thanks to advances in hydraulic fracturing and horizontal drilling, we are now a big oil producer. We sell Coca-Cola and Chevrolets and corn to the rest of the world, so why not crude?


Finding an answer to that question requires navigating some slightly twisted logic. But I’ll do my best:

Energy Independence

Many of the same folks who are now crying for increased exports have been the biggest pushers of the energy independence myth: If we drill for more oil at home, we’ll reduce our dependence on foreign oil, and that will help us transcend price swings at the pump that result from instability in the Middle East and elsewhere. In reality, domestic markets have proven to be closely tied to global prices no matter what. Fueled in part by the energy independence myth, we’ve drilled like crazy and now produce more crude than we have in decades. The Energy Information Administration believes that oil will continue to bubble out of the North Dakota, Wyoming, Montana and Colorado oil fields at ever higher volumes. Production in 2014 is expected to increase by as much as 2 million barrels per day over 2012.

ImportsvExports
We still import vast quantities of oil. The percentages listed in red indicate how much of what we consume is imported. Source: Energy Information Administration.

Yet in spite of that, we don’t have a surplus of oil in the same way that we have, say, a surplus of coal or natural gas. In fact, we still don’t produce as much oil domestically as we did back in the 1970s and 1980s. And the prices at the pump haven’t exactly plummeted, either. Though our reliance on imports have decreased a lot in the last few years, we still import a whopping 8 to 9 million barrels of oil and other petroleum products per day. If we start exporting significant amounts of crude, then we’ll have to make up for it by, you guessed it, importing more oil. More drill rigs will go up around the West, our dependence on imports will remain and the energy independence myth, and a lot of oil, will go up in smoke (and increased greenhouse gas emissions).

Price

This is really the crux of the argument for and against lifting the ban. For a long time, the ban didn’t do much to insulate us from global oil price instability. The Western Texas Intermediate, or WTI (domestic), price of crude walked hand in hand with the London Benchmark, or Brent (global) price. If unrest in Syria caused the global price to shoot from $95 per barrel to $101, the domestic price also jumped to $101. But around 2011, a few years into the shale oil boom here, the global and domestic prices diverged somewhat*, so that the WTI price has hovered around $10 lower than the Brent.

That’s in part because a lot of the new oil production is a sweet, light crude, and many U.S. refineries are not equipped to process it. That’s resulted in a sort of oversupply situation, and has depressed prices. It’s this “problem” of low prices that the oil companies want to “fix” by lifting the export ban.

But for a handful of refineries that are able to process the crude, the current situation is no problem at all. They’ve been buying up the oil at the relatively low price, refining it into gasoline and jet fuel and other value-added products, and then selling them overseas — refined petroleum products are not subject to the ban — at a high profit margin. That’s why those refiners have aligned themselves with environmentalists and politicians who want to keep the ban in place.

ExportFinishedPetroleum
U.S. refiners have been able to take advantage of low domestic oil prices to make a hefty profit off of exporting refined fuels, which are not subject to the crude export ban. Source: Energy Information Administration.

Those politicians include Democratic Sens. Ed Markey of Massachusetts and Robert Menendez of New Jersey. Their concern is that as the WTI price goes up, so will the price at the pump here at home. In a letter to President Obama, Menendez wrote:

“… why would we want to export oil and raise American oil prices to match the world’s oil price? Big Oil clearly wants to pad their record profits and fetch a higher price for their oil. But considering that the five largest publicly traded oil companies made $118 billion in profits last year, I think they are doing just fine. I believe we should be more worried about the bottom line for American families … Crude oil that is produced in the U.S. should be used to lower prices here at home, not sent to the other side of the world.”

That gas prices would increase if crude exports increased isn’t a given. But it’s a safe assumption that they would. And that could be good for the environment. Over the last few years we’ve learned that domestic demand for gasoline is elastic. That is, as prices go up, demand decreases. Only a decade ago, gas prices were half or less than what they are now, and in 2005, Americans hit their gas-guzzling peak. But after that, as prices shot upward, consumption dropped and then leveled off. Carbon emissions and air pollution have decreased as a result. If exports were to cause prices to increase, we could safely expect Americans to drive less and seek out more efficient cars.

Of course, that’s not exactly a solid argument for lifting the export ban. High global oil prices will keep the drill rigs going up in the West no matter what, and the oil companies will find some way to get all that crude onto the market, and into gas tanks — if it’s not here at home, then it will be in China or Japan. If you don’t want that oil to burn, you’d best just keep it in the ground.

*Though WTI and Brent prices have diverged, domestic prices do tend to follow the same patterns and swings as the global price of oil. So the apparent “independence” of the WTI price from the Brent price is really just an illusion.

Jonathan Thompson is a senior editor at High Country News. He tweets @jonnypeace.

Note: This post was updated on 1/16/14 to correct an error. We previously stated that the US imports 1.1 million barrels of oil per day. In fact, the US in recent months has been importing between 8 and 9 million barrels of oil per day. We apologize for the error.

Kirk Hohenberger
Kirk Hohenberger Subscriber
Jan 15, 2014 08:07 AM
I agree with all of your concerns you mention. Oil and gas, is not Coca-Cola, it is a finite resource, that leaves a big imprint, both on how it is extracted, and burned.We should minimize this impact and conserve the resource for the future, oil exported today, is oil gone, not available for your kids ,does anyone care,Instead we want to race to get as much of it out of the ground as fast as we can,leaving a larger foot print, so those few can make as much money as they can, cost us more at the pump, to heat our homes and businesses ,and then the resource is depleted sooner.There does not seem to be conservation in our form of capitalism.

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