Recent price history weakens an argument against easing US restriction of the export of crude oil.
The argument says exports above minor amounts now allowed would raise the benchmark US crude price.
Under current conditions, that’s probably so. The domestic marker, West Texas Intermediate, is selling at a discount to its international counterpart, Brent Blend, with which it once traded at near equivalence. The WTI discount appeared in the first half of 2011 and has persisted except for a brief period in the middle of last year.
A reason for the discount is surging North American supply from tight oil plays and the Canadian oil sands. Surpluses have developed at key market centers—first at the trading and storage hub at Cushing, Okla., and more recently at the refining megaplex on the Gulf Coast.
So, yes, if crude produced domestically in amounts above nearby need could be sold profitably outside the US, arbitrage would squeeze the WTI-Brent margin, at least partly by lifting WTI.
But export opponents argue further that a WTI increase would raise the US gasoline price. There, the case begins to fray.
When the WTI price disengaged from Brent in 2011, US spot gasoline prices didn’t follow. They continued to move with Brent.
Market structure explains why. Trade restrictions on US crude don’t apply to oil products. Gasoline, unlike crude, is fully connected to global markets. The price of gasoline is influenced more strongly by broadly traded Brent than by bottlenecked WTI.
So while allowing the export of US crude would allow WTI and Brent values to move back toward convergence, the WTI increase likely to dominate that adjustment wouldn’t automatically mean higher gasoline prices.
The US will remain a net importer of crude oil. Exports, if allowed, would relieve pressures of localized surplus, such as the one developing on the Gulf Coast. They would let a locally produced global commodity compete globally, as it should.
Market efficiency thus would improve. Consumers always benefit when that happens.
(This article appeared first online at www.ogj.com on Feb. 14, 2014; author’s e-mail: [email protected])