OIL EXPORTS REDUX
December 1, 2014 § 1 Comment
The November 24, 2014 issue of the Wall Street Journal has a point counterpoint piece on this issue. Tyson Slocum of Public Citizen speaks against the notion of lifting the oil export ban and Jason Bordhoff of Columbia University is in support. They both discuss the popular issues: effect on gasoline price to the consumer, national energy security and the environmental threat of continued shale oil production.
Source: Energy Information Administration
The Domestic Oil Glut: Good for Us?
Slocum raises an issue that is new to me, that the glut is beneficial. He recognizes that keeping the export ban and thereby keeping US oil out of the world marketplace is a factor in West Texas Intermediate (WTI) oil price running below Brent, the benchmark for the rest of the world. The differential has been as much as $20 per barrel. It was not always so. Looking back the last five years, the split is coincident with the run up in production in Eagle Ford in 2011 and then later the Bakken. One could comfortably conclude that the differential was caused by US shale oil production and the inability to put it out on the world market. Of further interest is the fact that Bakken crude fetched a price lower than WTI for much the same period (late 2010 until the present). This was occasioned by the fact that the shale oil has a light sweet (sulfur less than 0.4 %) character. While seemingly a reason to rejoice for refiners, this presents a vexatious problem for them. They spent enormous capital on equipment to process heavy and mostly sour crude from Canada, Venezuela and Mexico. They also can buy this crude at a significant discount to WTI because of the relatively high proportion of carbon that cannot be converted to a useful fuel or chemical. Now they were being asked to substitute this discounted imported crude utilizing their expensive capital with domestic crude at WTI price that would idle said equipment. They responded by offering a lower price than WTI. This sort of market based pricing is normal. However, in this instance the market is being manipulated by the export restriction. US producers are not in a position to spurn the US refineries and sell for higher prices elsewhere.
Slocum argues that this is good for the country. He maintains that the resulting glut in US supplies “helps insulate the American economy from the uncertainty caused by oil supply disruptions abroad. Opening exports would remove that protection, which would be disastrous.” In other words he thinks maintenance of a supply glut in perpetuity through a policy action is a good remedy for the occasional burps in world supply. The national Strategic Petroleum Reserve (SPR) was created for just this scenario and no further policy action is needed in support. 30 million barrels of the reserve was released in 2011 in response to the Arab Spring related disruption. I have also opined elsewhere that the SPR could be drawn down quite a bit in recognition of the fact that shale oil can be brought on stream very rapidly. Proof for this assertion is that US shale oil production has increased by 1 million barrels per day (bpd) over each of the last two calendar years.
Effect upon Gasoline Pricing.
Both Slocum and Bordoff address this issue. The public in general appears to be in Slocum’s court in believing that exports would cause the gasoline price at the pumps to go up. Bordoff argues, in my opinion correctly, that gasoline is a world commodity and that prices are generally set by Brent pricing. He ascribes this to a finding by the US Energy Information Administration (EIA). I also agree with his view that allowing US crude on the world market is likely to have some downward pressure on Brent pricing, and hence gasoline. Of note, though, is that US crude would add light oil to the market increasingly dominated by heavier crude. So the main destinations would be “simple” refineries not the complex ones such as those that spurned it in the US. So a factor would be the number and locations of these. It is known that several such refineries have been mothballed in Europe. Incidentally, at least two small simple refineries previously shut down have now been reopened in Texas. One new one has been permitted in the Bakken, the first new refinery permit in decades.
Curiously, neither of the two authors speaks to the effect of the policy to allow export of refined products, including gasoline. These account for 3.5 million bpd. In my view, the fact that gasoline can, and is, exported, is a factor in gasoline prices remaining high simply by supply and demand arguments. In theory, however, a simple refinery located close to oil production could produce gasoline relatively cheaply and pass on the savings to the consumer locally. But this is not likely to be a large effect. Each of these refineries is less than 20,000 bpd, compared to world scale ones up to and over a million bpd. So their cumulative impact is relatively small. But if the trend takes a hold, and in my view it ought to, much of our oil could be processed in these highly distributed small refineries. Pipelines would be minimized, with a positive environmental footprint as a result. Today the Bakken is moving a million bpd crude oil in largely unregulated trains already shown to be prone to derailment and attendant damage. Local refining would be a welcome alternative.