The Fuse

UPDATE: The Crude Oil Export Debate, Explained

by Matt Piotrowski | September 11, 2015

Momentum for lifting the 40-year-old ban on crude oil exports continues to gain pace on Capitol Hill, with a House panel voting on Thursday in favor of allowing producers to ship volumes overseas. Despite the vote, the likelihood of a repeal under the current Congress still seems far-fetched. Kevin Book with Clearview Energy Partners, for instance, puts the odds at 15 percent because of significant hurdles in the Senate.

The House panel’s vote comes after the Senate energy committee passed legislation in July (see below) that would lift the ban on exports, which was put in place during the 1970s after the Arab Oil Embargo. But there is not sufficient support of 60 votes to pass a floor vote in the upper chamber.

Now that the campaigns for the 2016 presidential election are moving at a quick pace and the possibility of a government shutdown is looming, partisanship will likely ratchet up a notch, meaning any chances for compromise are dimming.

Backers of repeal have received support from the “Blue Dogs,” a coalition of conservative Democrats. But even with this group of Democrats supporting a Republican-backed initiative, the issue is still mostly split along party lines, with skeptics focusing on the potential impact on gasoline pump prices. Now that the campaigns for the 2016 presidential election are moving at a quick pace and the possibility of a government shutdown is looming, partisanship will likely ratchet up a notch, meaning any chances for compromise are dimming. For legislation to pass both chambers of Congress (and for President Obama to sign), Republicans would likely have to foster a concession to Democrats and include repealing the crude export ban in a broader energy package.

Obstacles to legislation to overturning the ban “don’t just include partisanship, time constraints and the ‘Keystoning’ of the crude oil exports issue, but also the challenges Democrats may have in crafting an acceptable bargain with the GOP,” Book wrote in a report yesterday.

While legislation is being debated in both the House and the Senate, advocates for repeal are stepping their media and advertising drives up a notch. The American Petroleum Institute (API) is launching a multi-state campaign to argue the export ban helps oil-producing foes such as Russia and Iran. Groups favoring repeal are also putting forth the economic argument that allowing exports will help producers and lead to more jobs in oil-producing states. At the same time, they say more oil on the global market as a result of opening U.S. exports will bring down international crude prices, benefiting U.S. consumers with lower costs at the pump. Producers have been pushing for ending the ban amid U.S. crude trading significantly under international prices—but the gap has narrowed to just $3.

Those against repeal worry that allowing exports will pull up pump prices for motorists, reduce energy security, and lead to job losses in the downstream sector. Refiners have in particular pushed back against repeal, with Consumers & Refiners United for Domestic Energy (The CRUDE Coalition) being the loudest voice on their side.

This story originally appeared on July 31, 2015

The debate over lifting the ban on crude oil export is heating up again among U.S. policy makers and key industries involved in the fight, and the topic has found passionate voices on both sides. This week the Senate energy committee passed legislation that would lift the ban on exports, and it will move onto the Senate floor at some point. The action in the Senate is a reflection of how far the issue has progressed in just the past year or so—but given how controversial the measure is, it is very clear how far it has to go before a sweeping change is made.

Any serious discussion of sending crude oil overseas would have been unfathomable just five years ago, but the sharp increases in shale production has significantly changed the calculus and given the U.S. a massive surplus of crude oil.

Any serious discussion of sending crude oil overseas would have been unfathomable just five years ago, but the sharp increases in shale production has significantly changed the calculus and given the U.S. a massive surplus of crude oil.

Recent discussions are part of the broader debate on energy security as the country transitions from dealing with an energy deficit to becoming an energy superpower. Against this backdrop, does it appear likely that a president will at some point lift the ban on crude oil exports? If so, how would sending crude to foreign buyers affect the U.S. domestic market? How would the public see such a change?

Who is for lifting the ban, and why?

The main advocates for lifting the ban on crude oil exports are the oil industry and lawmakers from oil-producing states, with Senators Lisa Murkowski (R-Alaska) and Heidi Heitkamp (D-North Dakota) out front. The main argument for allowing exports is that the ban was put in place during the 1970s at a time of scarcity, but now the situation has reversed with the U.S. experiencing a glut of crude as a result of a revolution in drilling technology that has allowed output to soar. In fact, domestic production has almost doubled since 2008 and crude commercial inventories are hovering near all-time highs.

Those in favor of lifting the ban are making both economic and national security arguments to make their case.

Those in favor of lifting the ban are making both economic and national security arguments to make their case. The economic benefits, supporters argue, surround U.S. producers being able to capture higher crude prices—which are roughly a $5 premium to those in the U.S.—by selling to buyers on the international market. Producers receiving more for their crude would help stimulate output growth—crucial now with U.S. prices under $50 and supply is in danger of contracting—and support jobs in the oil patch. These positive effects would arguably ripple throughout the entire economy. The U.S. Energy Information Administration (EIA) says in a study that U.S. Nymex West Texas Intermediate (WTI) would average almost $14 under Brent from 2015-2015, based on a scenario of continued export restrictions and high U.S. production. Numerous other studies from consultancies and think tanks have noted similar wide disparities if the ban is not lifted. “The original rationale for crude export restrictions no longer applies,” said Columbia University’s Center on Global Energy Policy.

The other economic argument is that sending more crude into the international market would alleviate global prices and therefore help U.S. consumers. Although U.S. crude is below other benchmarks, gasoline prices are still linked to the global market because of refined product imports from Europe, which are closely connected to European marker Brent. The Nymex RBOB gasoline futures price tends to move more in tandem with Brent than with the weaker-priced Nymex WTI.

Besides the economic argument, supporters of nixing the ban are also pushing a national security angle to assert the need to lift the ban. The perception that oil is a scarce resource, the mindset that began in the 1970s, called for keeping as much as possible at home and finding as many suppliers as possible outside the country. Now, however, lifting the ban can bolster the U.S. into a global energy superpower and help allies receive stable sources of supply while also undercut any rivals that are producers such as Iran and Russia, according to those who want to liberalize export policy. Senator Murkowski has said that the U.S. government is essentially “sanctioning” U.S. producers by not allowing them to access the global oil market.

Why in the world export crude if the U.S. is still importing large volumes?

The U.S. still imports 7.5 million bd of crude oil. That is down from more than 10 mbd, the peak reached from years 2004 through 2007, but still a very high number. So, it begs the question: Why is there a dispute over exporting crude oil when the country still buys a lot of it from elsewhere? Much of this centers around distortions in the markets for different crude grades. U.S. refineries, particularly those on the Gulf Coast, are geared toward taking in heavy crudes, such as those from Venezuela, Mexico, and Canada. But the quality of crudes being produced from shale fields is mostly light, which means that U.S. refiners do not have a huge appetite for the types of grades that U.S. producers are now pumping out. Against this backdrop, much of this excess light crude is “stranded” in storage tanks, putting extra downward pressure on U.S. prices.

Who wants to keep the ban in place?

The main advocates for keeping the status quo are U.S. refiners. They have reaped the benefits of the oil and gas shale boom. For the most part, U.S. refiners have a strong competitive advantage versus their counterparts in other regions. They can purchase their feedstock at sharp discounts to global prices, while their costs are low due to cheap natural gas. What’s more, while crude oil producers are constrained by an export ban, refiners are not. As a result, they have penetrated markets outside the U.S., sending a steady flow of refined products to Europe, Latin America, Canada, and Asia while at the same time feeding the high-demand U.S. market. They truly have the best of all worlds right now.

While there have not been many studies supporting keeping the ban in place, the voices that are against liberalizing crude export policy have become louder as of late. They have also pointed to both economic and energy security arguments to back their position. In a study published this week, which was commissioned by Monroe Energy and Consumers and Refiners United for Domestic Energy (The CRUDE Coalition), the authors said that both crude and refined product prices will rise if the export ban is lifted. The study says that exports would weaken refinery operations by lifting U.S. crude prices to parity with those on the international market. Allowing exports would also force the U.S. to import more crude and refined products and dampen refinery utilization, which would crimp supply of gasoline, diesel and jet fuel in the U.S.

While this study is obviously being taken with a grain of salt, its conclusions have some merit. U.S. crude prices would rise (that’s likely true, but on the flip side, international prices would theoretically come down) and downstream utilization may very well drop as U.S. refining economics would change if the ban were lifted. Lower refinery utilization could translate into less refined product supply in the U.S. market, a situation that would go against the wishes of U.S. consumers. The best argument this side has is the status quo: Why mess with the current situation that is bringing about low pump prices?

The best argument for those wanting to keep the ban in place is the status quo: Why mess with the current situation that is bringing about low pump prices?

The energy security argument is noted on this side of the debate, too. Although the U.S. is now seeing a sharp rise in domestic crude production and lower imports, there’s no guarantee this state of affairs will continue indefinitely. For the past 40 years, the U.S. has sought to improve its energy security by boosting access to affordable and stable sources of supply. Now that this goal is closer to realization, the question is why the U.S. would want to be seen as possibly compromising gains in energy security, particularly if circumstances may reverse course at some point.

Is the ban likely to be lifted?

Will a U.S. president ever sign legislation that says U.S. producers can freely export crude oil? It’s not likely, particularly in an election year. First of all, a bill may never make it to the president’s desk. Right now, even though the bill passed through the committee, less than a third of the Senate right now is in favor of scrapping the ban. In the House, the numbers are about the same.

The question the public will ask during this debate is not why there is a wide differential between light and heavy crude grades, but why after the U.S. struggled for so long seeking security of supply, the country is now casually shipping volumes outside its borders?

Politicians, even those who tout the benefits of the free market, will likely balk at supporting a bill that allows crude exports, given how sensitive the public is to changes in gasoline prices. High gasoline prices have been noted as a key factor in the past in hurting a president’s approval rating. If the ban were lifted and prices were to rise, no matter what the cause is, any lawmaker or president who supported getting rid of the ban would be vulnerable to attack ads and constituent outrage. There’s also the issue of U.S. foreign policy over the past 40 years so heavily revolving around oil supplies: The question the public will ask during this debate is not why there is a wide differential between light and heavy crude grades, but why after the U.S. struggled for so long seeking security of supply, the country is now casually shipping volumes outside its borders?