A US ban on the export of crude oil is obsolete and should be easy to rescind. It won't be. But tough politics shouldn't discourage the oil and gas industry from pressing the issue. Constriction of crude exports serves the interests only of extremists who want Americans to quit using oil.
With a few, minor exceptions, the export of crude requires licenses subject to nebulous conditions. The requirement evolved from the Arab oil embargo of 1973-74, when anxiety over supply made people think oil produced in the US should stay in the US. The market has changed since then. It's more flexible and transparent now. Production in the US has resumed the growth that ended a few years before the embargo, and the rate is impressive. Supplementing US supply is steadily increasing production of bitumen and synthetic crude oil from the Canadian oil sands. Designers of the export ban could see none of this coming.
Importance of arbitrage
They also had no way to know how important location and quality arbitrage would become. The surge in production from unconventional resources creates logistical challenges. Oil needs to go where it has greatest value. New supply from Canada is mostly heavy and sour. New supply in the US is light and sweet. Heavy, sour feedstocks are most valuable at refineries with conversion capacity—cokers and hydrocrackers able to upgrade heavy products of distillation into lighter, more-valuable diesel, gasoline, and jet fuel. Light, sweet feedstocks are most valuable in refineries with little or no upgrading capacity.
Bitumen produced in Alberta therefore needs to move to high-conversion refineries in the US Midwest and on the West and Gulf Coasts. Otherwise, it needs to reach tidewater for export by tanker to high-conversion refining centers elsewhere in the world. Light, sweet crude needs to move to modestly sophisticated refineries in the Midwest and on the East and Gulf Coasts—or, if allowed, outside the US. Domestically produced light crude is rapidly displacing imports of comparable grades. As production grows from plays like the Bakken, Eagle Ford, and Permian basin and as a massive overhaul of the transportation system approaches completion, other adaptations must occur.
Especially important are changes on the Gulf Coast. In a September report, analysts at Deutsche Bank Securities Inc. predicted waterborne imports of light crude replaceable by domestic crudes will cease by the first quarter of 2014. Gulf Coast refiners then will have to run light feedstock at below-optimum rates. To do so they'll need to blend crudes and adjust and in some cases add equipment. They won't incur the costs unless they can buy light crude at closer to the price at which they obtain the heavier, cheaper crude they'd prefer to run. Light crude thus will have to sell on the Gulf Coast at a growing discount to similar crudes sold elsewhere.
Eventually, the price of light crude on the Gulf Coast will induce refiners to shut down cokers, or it will fall below the marginal cost of production in US unconventional plays, about $75/bbl. Then producers will begin cutting work. In the Deutsche Bank scenario, this happens about 2016. Antioil activists would welcome the slowdown. For everyone else it would mean a preventable weakening in one of the US economy's few areas of evident strength.
The export option
To avert a potentially costly jam, the US should lift licensing requirements on the export of crude. When light oil is surplus to needs on the Gulf Coast, it should be able to flow into tankers and move to refineries needing it. The same applies to heavy blends from Canada, surpluses of which also might develop.
National energy interests are best served when the oil-delivery system works with maximum efficiency. An increasingly important factor of that efficiency is the option to export crude. National interests argue for a lifting of the ban. Only activists hoping to devalue domestic oil supply can favor the national bottleneck otherwise taking shape.