An arbitrage bubble

Sept. 22, 2014
That a US ban on the export of crude oil receives support from refiners who profit from it makes perfect sense. Arguments for keeping the ban in place do not.

That a US ban on the export of crude oil receives support from refiners who profit from it makes perfect sense. Arguments for keeping the ban in place do not.

Early this year, four independent refiners joined forces as Consumers & Refiners United for Domestic Energy (CRUDE) to resist efforts to allow crude exports. The refiners are Alon USA, Monroe Energy, PBF Energy, and Philadelphia Energy Solutions. Jeffrey J. Peck of the Washington, DC, firm Peck Madigan Jones represents CRUDE. The group doesn't have a web site and has published no statement of position beyond preserving the 40-year-old restriction.

Peck, however, made the case against ending the export ban in an e-mail to OGJ Washington Editor Nick Snow that responded to an article about a related subject, the June decision by a Department of Commerce bureau to allow two companies to export condensate. On behalf of CRUDE, Peck on Sept. 4 had argued in a letter to the Commerce unit that stabilization differed from distillation and that, therefore, stabilized condensate didn't represent an exportable refinery product. Snow's article covered a statement by the Independent Petroleum Association of America opposing the CRUDE position. Peck's e-mail offered comments on the IPAA statement. They're quoted below, without one sentence focused on the condensate question and not the broader question of crude exports:

"It should surprise no one that a lobbying organization for oil producers [IPAA] supports crude oil exports. Equally unsurprising is the group's support for a government regulatory process that allows for more exports by letting one side advocate its position while shutting out any and all contrary views. A policy that the US Congress set 4 decades ago should not be reversed by a thousand cuts under the cover of regulatory darkness....

"IPAA ignores the fact that, despite increased domestic production, the US has not achieved energy independence-our nation's clearly stated goal and one supported by Republicans and Democrats alike for 40 years. The US should not be exporting oil to Middle Eastern and other foreign countries while we are still importing more than 40% of our oil. The more we export, the longer it will be until America achieves energy independence and security.

"If we do start exporting crude, American consumers-never mentioned by IPAA in its statement-will suffer by paying higher prices at the gas pump."

Concerning these points, a few observations are necessary:

• No "regulatory darkness" is at work in the crude-export issue. The discussion is open. The status of stabilized condensate relative to the crude export ban always has been ambiguous. The Commerce unit didn't change policy. It determined processing in two specific cases involved distillation, not just stabilization. Operational and chemical haziness is not the same as darkness.

• Energy independence is a political slogan, not a useful goal of policy. Peck's argument implies the US should export no crude until it imports no crude. Yet even if the US somehow closed its 9.5-million-b/d gap between crude production and refining capacity, it still would need imports for reasons of logistics and crude quality. It should be able to export crude for those reasons, too.

• Allowing US exports of crude would not automatically raise retail gasoline prices. Peck's argument grounds itself in the price discount, wide until recently, of domestic light crude against competitive grades traded internationally. His assumption is that crude exports would make the domestic price jump to international levels and that domestic gasoline prices would follow. But US gasoline, because it can be exported, already tracks international crude prices most of the time. Its price wouldn't necessarily follow domestic crude upward. To the extent margin pressure lowered refinery throughputs, the gasoline price indeed would experience upward pressure. But new crude in trade would tend to lower crude prices overall.

Well-situated refiners have been profiting from an arbitrage bubble created by an obsolete law destructive of domestic crude values. The bubble won't last. The law on which it depends has lasted too long.