Crude exports would reduce US gasoline prices, RFF paper suggests

US crude oil exports would lead to more efficient use of the country’s refineries, resulting in more gasoline and lower prices, a Resources for the Future issue brief concluded.

“With the increased efficiency of Western Hemisphere refinery operations that would come from lifting the ban, US prices for refined products will be reduced—even if world oil prices increase,” it said.

Most US refineries are configured to process heavy grade of crude and cannot process light crudes from the Bakken and other US tight oil plays, said Stephen P.A. Brown, a visiting fellow at RFF and director of the University of Nevada at Las Vegas’s Center for Business and Economic Research.

Brown and three others wrote the issue brief.

High levels of US light, sweet crude oil production, combined with a general ban on crude exports and transportation bottlenecks, have led to sharply lower prices for crude oil–but not products–in the Midwest because of processing configurations, they noted.

“Lifting the ban would cause the price of light crude oil in the Midwest to rise toward world prices,” the issue brief said. “In addition, the increased supply of crude oil reaching the international market would put some downward pressure on international crude oil prices, assuming [the Organization of Petroleum Exporting Countries] doesn’t respond with matching cutbacks in its output.”

Reduced crack spread

More efficient refining operations and competitive pressures also would reduce the crack spread–the difference between product and crude oil prices–which would slightly boost international demand for crude, putting upward pressure on prices, the issue brief continued.

Relative increases in supply and demand would determine whether global crude prices would rise or fall, it added.

“We find that crude oil in the Midwest is currently priced $14.83/bbl below the price for comparable crude,” the brief said. Lifting the US crude export ban would gradually increase crude production in the Midwest and parts of Canada supplying the Midwest by about 206,000 b/d, resulting in a net global production rise of 204,000 b/d (because lower global crude prices would reduce production elsewhere by about 2,000 b/d), it argued.

“At the same time, competitive pressures and the increased efficiency of Western Hemisphere refinery operations would boost world oil demand, pushing world oil prices upward,” the issue brief said. “Assuming no OPEC response, our estimated net effect is a reduction in the world price of crude oil by about $0.01/bbl and an increase of about $14.83/bbl in the Midwest.”

Before hydraulic fracturing and horizontal drilling opened up tight oil that was previously inaccessible, world oil production had shifted toward heavier crudes, the paper explained.

US refiners reacted by investing in equipment capable of converting heavier feedstock into gasoline, diesel fuel, jet fuel, and other higher-value products.

“Other refiners in the Western Hemisphere and other parts of the world did not invest as heavily in such facilities, and their operations remained more dependent on working with lighter crude oils,” the paper noted.

Two-way bottleneck

The excess lighter crude from new domestic tight oil production is stuck in the US, which “keeps the heavier crudes produced outside the United States from being refined in the US,” it said. 

Lifting the US export ban on crude oil would increase the efficiency of Western Hemisphere refining operations to a point that US product prices would decline by an estimated 2.8-6.9¢/gal, even if global prices rise, according to the issue brief. Midwestern product prices would move with the rest of the country, it added.

“Realization of this price decline may take a few years, depending on how quickly additional oil is produced in the US and how quickly the industry is able to shift its crude oil supplies between refineries,” the issue brief said.

Lifting the US crude export ban also would increase non-OPEC supplies, reducing refiners’ demand for crude from the cartel’s members, and possibly stimulating OPEC members to produce less, it continued.

The net effect still would be higher global supplies, putting downward pressure on prices in a manner similar to the 1980s when North Sea production compromised OPEC’s ability to prop up prices, the paper said.

“On the other hand, if the primary effect of lifting the ban is to increase the efficiency of refinery operations and increase their demand for oil, the demand for OPEC oil (and non-OPEC oil) will increase and become less elastic,” it added. “OPEC would have an incentive to increase its output, but not by enough to prevent an increase in world oil prices. Either way, the changes in oil market conditions will be sufficiently small that the effect on prices will be slight.”

Contact Nick Snow at nicks@pennwell.com

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