New tightening of a logistics squeeze on US oil producers gives Congress the chance to show bipartisan judgment by scuttling two obsolete laws. One is the decades-old statutory ban on most exports of crude oil. The other is the even older law prohibiting trade within the US involving foreign-flagged ships. Together, the laws keep crude oil from moving to buyers that value it most. They thus lower the value of affected crude at the wellhead.
As has been argued here many times, the crude-export ban and protectionist shipping law, known as the Jones Act, have outlived their purposes. The oil market is broader, deeper, and vastly more flexible now than it was when Arab oil-exporting nations imposed targeted embargos in 1973, wrecking a rickety system of point-to-point trade corseted by long-term contracts. In a market now vastly more fluid than it was then, supplemented by resurgent production from the US and Canada, the export ban is a rigid relic. The Jones Act similarly impedes market functions by restricting oil shipments between US ports.
Inside the bubble
Also since these restrictions took effect, the refining system has increased in complexity. High-conversion refineries, many on the Gulf Coast, operate most efficiently with crude slates heavier than the oils produced in still-growing abundance from shales and other low-permeability reservoirs in the US interior. Partly because Gulf Coast refineries continue to need heavy feeds from abroad, and partly in response to price patterns reflecting surplus, the amount of crude in storage, much of it light, is setting records. And crude oil produced inside the export-ban bubble is losing value relative to crude from elsewhere.
Eliminating export and shipping restrictions wouldn't end the surplus. Doing so would, however, balance competition and enhance processing efficiency. And it would enable crude produced in North Dakota to compete outside the US with crude of similar quality from the North Sea or Nigeria.
Supporters of the export ban thus are correct when they argue that the change they oppose would increase prices of US crude. But they don't tell the whole story. The move also would tend to lower prices of crude produced outside the US while helping high-conversion refiners optimize crude inputs, which would ease cost pressure on product prices.
What cannot confidently be argued is that US product prices would leap if crude exports were allowed. This is the most politically potent case made against lifting the ban, and it's weak. Because oil products can be exported, their prices reflect global product values, which track global crude markers such as Brent. When bottlenecks create local surpluses of comparable crude in the US, the export ban prevents the arbitrage that otherwise would balance the values, and US crude trades at prices well below Brent.
The WTI discount
That discount became prominent in the market beginning around the start of 2011. The reason then was a rapid inventory build at the pipeline hub at Cushing, Okla., as inbound supply growth overwhelmed outbound transport capacity. By the middle of last year, pipeline reversals and construction, augmented by increased rail movements, had eased the local surplus and moved the price of West Texas Intermediate crude back toward closer alignment with Brent. But the surplus mostly just shifted to the Gulf Coast and now is backing up into Cushing. While the WTI discount to Brent has reemerged, US gasoline prices continue to more closely track the European marker, undermining assertions that gasoline prices would follow WTI upward if crude exports were permitted.
US consumers won't suffer-and probably will benefit-if the export ban is lifted. As long as the ban remains in place, though, US producers will have to grapple with what amounts to official suppression of oil's value, the slump of which has begun to curb growth in US production. That's hardly what a shortage-shocked Congress wanted when it passed the law 40 years ago.
