Ending the US ban on exports of crude oil would hurt refiners now profiting from low feedstock costs but help producers and consumers, says an analyst at the Federal Reserve Bank of Dallas.
In a July report, Michael D. Plante, senior research economist in the bank’s Research Department, describes how transport constraints have created localized oversupply, lowering regional crude prices in relation to global prices of similar crudes.
With the transportation system adjusting to new production from unconventional resources in the US interior, oversupply is developing rapidly on the US Gulf Coast.
“If the export ban were not in place, this would not be a problem,” Plante writes. “The extra oil would be shipped to other countries with the appropriate refining capacity for light crude. Crude oil prices in the US then would reflect global prices.”
Complicating the problem is a quality mismatch. Many refineries on the Gulf Coast, location of more than of US refining capacity, are designed to process heavy crude. Most of the new US production is light.
“Refiners [on the Gulf Coast] lack the ability to process all the newly discovered oil, raising the specter of an oversupply that could persistently depress US oil prices,” Plante writes, noting that oil on the Gulf Coast has begun selling at small discounts to comparable grades traded globally.
While the discounts boost profit margins for refiners with access to the depressed crude, they don’t help consumers. US prices of oil products, Plante explains, “are determined in the global market, whereas crude oil prices reflect distorted local market conditions in the US.”
If the ban on crude exports ceased, gross margins would shrink for refiners running relatively low-cost crude.
But crude prices now depressed in the US would realign with competitive global grades and stimulate drilling, which would raise oil supplies overall.
“Over the longer term, US crude oil producers would receive higher prices,” Plante writes. “In response, they would produce more oil than they would have if the ban were in place.
“With greater amounts of oil available globally, more gasoline and diesel would be produced, reducing their prices and benefiting consumers.”