Export short-sightedness

March 24, 2014
Opposition by specific refiners to US exports of crude oil should surprise no one. The export ban suppresses the price of domestically produced light, sweet crude oil relative to that of comparable international crude over time.

Opposition by specific refiners to US exports of crude oil should surprise no one. The export ban suppresses the price of domestically produced light, sweet crude oil relative to that of comparable international crude over time. It thus helps US refiners with access to light oil produced in growing quantity from unconventional resource plays in the American interior. That some of those refiners favor a developing bottleneck is only natural. But their position is short-sighted and wrong.

News emerged last week that four independent refiners had formed a group to lobby against removal of the crude-export ban in place since the 1970s. The group, Consumers and Refiners United for Domestic Energy (CRUDE), comprises Alon USA Energy Inc., PBF Energy, Monroe Energy (a Delta Airlines subsidiary), and Philadelphia Energy Solutions. According to media reports, Jeffrey Peck, a lobbyist hired by the group, said the refiners worry that debate about the issue was "pretty one-sided."

There's a reason for that. The export ban is obsolete, imposed by Congress in 1975 to address conditions that no longer apply. It's an antique prohibition generating modern problems. The case for ending it is overwhelming.

Gulf Coast surplus

Surging supplies of light crude from low-permeability reservoirs in the US and of blended bitumen and synthetic crude from the Canadian oil sands have reshaped American oil transportation. Heavy material surplus to the needs of high-conversion refineries in the Midwest is flowing to the Gulf Coast. So is light crude from North Dakota and Texas unneeded by nearby refineries and unable, because of transportation limits, to move east or west. On the Gulf Coast, new supplies of North American oil have displaced imports from outside the continent. Refiners, in fact, increasingly export oil products, a practice not banned.

Eventually, crude oil flowing into the Gulf Coast will exceed the collective ability of refineries there to process it. Crude then will have to move elsewhere. But pipeline flows have been redirected toward rather than away from the Gulf Coast. Outbound rail transport has limits. The Jones Act makes tanker transport to other coastal US refining centers costly. And crude exports are prohibited. If none of this changes, and if production rates in the US and Canada continues to rise, light, domestically produced oil increasingly will compete with heavy oil from Canada on the Gulf Coast. Its value will drop.

US refiners running light oil might see this as extension of a great deal. For most of the past 3 years, US light crude has been available at a discount of varying size to the international counterpart, Brent blend. But the bonanza can't last.

To the extent transportation options allow, crude will find ways to move away from price-distressed Gulf Coast markets. Otherwise, in the worst case, direct competition between heavy and light crudes will depress prices enough to discourage drilling in the US and bitumen output in Canada. North American supply then then would fall quickly, imports would rebound, and refiners who thought they were preserving a competitive advantage by supporting the export ban would pay the same for feedstock as refiners everywhere.

Market needs flexibility

Lobbyist Peck was quoted as saying that ending the export ban would be bad for the American consumer, "who is going to pay more at the pump." He's incorrect. After the price of West Texas Intermediate crude fell below that of Brent in 2011, US gasoline continued to track Brent. Unlike crude, gasoline can be exported and therefore remains connected to international markets.

The US oil market changes rapidly. It demands flexibility. Crude oil must be able to move to where price indicates it is most needed. Restrictions on oil movement, whether they're motivated by shipping protections or by hoarding instincts triggered by a long-ago supply shock, represent rigidity that can do only harm. And no oil company, whether it's a refiner or producer, large or small, integrated or independent, benefits for long from anything that impedes market functions.