Urgency in Lifting the Crude Exports Ban

Mark Green
Posted March 27, 2015

Add the heft of Rice University’s respected Center for Energy Studies to the weight of scholarly analysis urging an end to America’s four-decades-old ban on domestic crude oil exports. In a new study, the center lays out a case for U.S. crude oil exports that builds on the findings of IHS, ICF, Brookings, the Aspen Institute/MAPI and others – saying that lifting the ban would result in significant economic and foreign policy benefits to the U.S. The study explains that:

• The export ban already is presenting a “binding constraint” on the domestic market, leading to “discounted” pricing for lighter crudes produced by America’s energy revolution.
• Large volumes of lighter domestic crudes, in excess of what the U.S. refining sector can use, with no access to other markets, are discounted compared to global crude prices.

The Rice study:

We find evidence that the export ban already presents a binding constraint on the domestic market, and has done so for a while. … The US refining sector has already backed out imports of light crude oil and is now backing out imported crude oils that are heavier than WTI (West Texas Intermediate) and light oils from shale. This is where the discount arises – the domestic crudes, regardless of quality, must compete with medium quality crude oils as the only market outlet is domestic refiners. As more oil is displaced, the competitive margin for domestic production will increasingly be a heavier crude oil, which will drive steeper discounts until a new arbitrage mechanism is introduce …

Bottom line: The discounting of domestic lighter crudes versus the global market prices is a disincentive to energy investment and production in this country. A key finding in the Rice study, according to author Kenneth Medlock, is that the negative effects of the export ban on domestic oil production are heightened in the current situation where crude prices are low. The study:

The results indicate that the current export ban matters even in a relatively low oil price environment. In fact, in a low price environment the need to address the export ban is heightened as it could eliminate the current price discount thereby supporting profit margins and upstream activity.

This same point was made by IHS’ Daniel Yergin during a CSIS event this week on his group’s recently released study on the potential positive impacts of lifting the crude export ban on the U.S. energy supply chain. Yergin:

“… the impact of the (global crude) price collapse makes it much more urgent now than it was … to lift this ban because of the impact the discount creates for domestic production – and the difference between world prices and U.S. prices can be the difference between the viability and non-viability of a great deal of investment.”

More Yergin:

“The (global) price collapse increases the sensitivity to the discount. Over the last 30 days the discount has been between $9 and $10. That’s a very big discount. And when prices are lower, the negative impact on jobs and the economy are more, not less. … A $3 change in a $50 (per barrel) environment can have the same effect as a $10 change in a $100 environment. This brings us back to the export ban because, of course, because of the export ban that’s why we have the discount. It reduces U.S. oil production, supply chain activity … and job growth …”

Certainly, we’re seeing the question of viability playing out in the energy space right now, with a number of U.S. producers trimming operations in response to global prices – the situation exacerbated because lighter crudes have no access to competitive global markets because of the export ban. Lifting the ban, as the Rice study and others note, is integral to sustaining the renaissance in U.S. energy production. ConocoPhillips Chairman and CEO Ryan Lance spoke to this during a recent congressional hearing:

“By any measure, our nation has been on a transformational journey – one that must continue if America is to fully realize our energy potential. The task ahead is to fully understand today’s realities and to make the appropriate policy decisions for these realities. In doing so, we can all play a part in sustaining this energy transformation, enhancing our energy security, and spurring economic benefit for our nation and for the American consumer.”

The Rice study finds that lifting the ban would prompt more production by allowing the sale of domestic crude oils into the international market “where prices reflect differences in crude quality and therefore would be higher for the light crude oils being produced from shale plays.” The study:

This would, in turn, incentivize investment in the midstream aimed at moving domestic crude oils to the coast – through pipelines and other means – for export through port facilities, where additional investment would also be required. Therefore, the current ban on crude oil exports is also leaving investment in infrastructure unrealized.

Indeed, this is the main thrust of the recent IHS look at the impacts of lifting the export ban on the U.S. energy supply chain – the materials suppliers, machinery manufacturers, support services, technology providers and more. IHS found that:

• Lifting the export ban could add $26 billion to $47 billion to U.S. GDP and support 124,000 to 240,000 jobs per year on average during the 2016-2030 time period. The broader U.S. economic impact is $86 billion to $170 billion additional GDP and 394,000 to 859,000 additional jobs.
• The economic benefits of oil and natural gas activity far exceed benefits to industry itself, with every new production job creating three jobs in the supply chain and another six jobs in the broader economy.

IHS’ chart:

A final point: The new Rice study – like others before it – points to foreign policy benefits for the U.S. from exporting domestic crude. The study stresses that exported U.S. crude would help stabilize global supplies, which it says contributes to greater security:

Greater stability lessens price volatility. Since it is well-documented that heightened volatility is associated with macroeconomic malaise to the extent that US crude oil exports increase fungibility and dampen oil price volatility, it will transmit an energy security benefit to US consumers. Longer term, the US can lead a transformation of the global oil market that could see North American and Western Hemisphere production capture a larger portion of a growing international market. This would carry tremendous benefits for US foreign policy endeavors in the US’ dealings with hostile oil producing nations. It would also, more generally, provide stability to the global oil market and convey benefits more broadly to the US and its allies.

Again, the weight of thoughtful analysis implores policymakers to lift the outdated ban on domestic crude exports – for America’s own economic prosperity and energy security, as well as greater security across the globe.

It’s time. Yergin:

“Where did this crude oil export ban come from? Obviously, it came out of the tumult of the 1970s, but there is a very specific reason for it. And the specific reason is because we had price controls, and if you have price controls you didn’t want to allow people to export oil because that would circumvent and undermine the price controls. But the price controls were abolished in January 1981. … The ban on crude oil remained there and it didn’t matter for a couple of decades that it was there. Well, it matters now.”