EXPORTING CALIFORNIA HEAVY CRUDE

President Bush should proceed with his rumored plan to test exports of heavy crude oil from California.

The only thing stopping him is the precedent established by a ban on exports of Alaskan North Slope crude. Federal law currently allows exports of crude to U.S. territories, from state waters of Alaska's Cook Inlet, and certain crudes to Canada. Bush merely has to issue a Presidential finding that other such U.S. crude exports will not harm the interests of U.S. consumers.

Already, supporters of a U.S. oil export ban have begun to howl. They want to know how a nation that imports nearly half the oil it needs can afford to export any crude at all. They want to know why, if it can afford exports, the U.S. should lease the Arctic National Wildlife Refuge Coastal Plain and Outer Continental Shelf. They either don't understand or refuse to acknowledge crude oil quality variations and the regional nature of petroleum markets.

CHRONIC SURPLUS

California, large as it is as a market for light products, has a chronic surplus of heavy, low quality crude. The surplus results partly from tough environmental laws that discourage refiners in the state both from processing low quality crudes and from building capacity that would enable them to do so. According to currently prevailing intuition, the solution to the surplus is to move the excess to refineries elsewhere, which satisfies a relic yearning to keep domestically produced oil in the country.

But it's not that simple. All U.S. refiners face toughening air emission and fuel quality standards. They're not begging for heavy, high-sulfur feedstock. After quality discounts and transportation costs, therefore, netbacks to the wellhead are low. Producers think they can do better in non-U.S. markets. Federal policy should not deny them the opportunity to try.

Independent refiners able to process heavy crude understandably disagree. They say allowing exports will raise crude oil costs in California. This may be true. A ban may indeed shield California heavy crude from foreign demand enough to keep it artificially cheap. Allowing exports might, therefore, raise the price in California to some extent. If this is so, however, refiners supporting the export ban aren't really trying to prevent a price hike; they're trying to perpetuate a subsidy. That's good business, but it's not a solid basis for federal policy.

There are doubts about the economics of exporting heavy oil. Some analysts say non-U.S. markets won't be as receptive to California heavy crude as producers expect. They say pipeline transportation out of the state affords higher wellhead netbacks than tanker shipments out of the country would.

Maybe they're right. But assessments like this depend on assumptions about imponderables such as future Alaskan North Slope production and availability of interstate pipeline capacity in California. Furthermore, third party doubts shouldn't keep producers out of export markets in which they think they can compete. If exports don't make economic sense, producers will get the message quickly enough.

VOLUMES SMALL

The President is considering the Commerce Department's recommendation for a 3 year trial allowing heavy oil exports of 15,000 b/d the first year, 20,000 b/d the second, and 25,000 b/d the last. Against the 7.1 million b/d of crude and products the U.S. has been importing so far this year, those volumes mean very little to national energy supply. Representing crudes that refiners are discouraged from processing, they mean even less.

Policies in the U.S. tell California producers their heavy crude is too important to export but too dirty to refine. No wonder they want to test overseas markets. The U.S. has nothing to lose in giving them the chance.