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What Lifting the Export Ban on U.S. Crude Means

For the first time in 40 years, U.S. oil producers will have the opportunity to export crude oil to international markets. Experts’ predictions on what this will mean to U.S. oil and gas companies, consumers, and commodity prices vary. Some speculate the long-term impact will be positive for oil producers as the markets adjust to the increase in supply. Some say refiners, who have been increasing capacity to accommodate lighter, sweeter U.S. crude, will suffer as the result of lost supply. While others say the only real winners will be gasoline consumers. What is clear is the opportunity to test the limits and the potential of U.S. producers to meet domestic demand and a growing global appetite for crude.

When the oil export ban was put in play by the U.S. Congress and signed by President Gerald Ford, the U.S. was in an oil crisis. U.S. sales abroad were prohibited as a matter of national security. The American Petroleum Institute, which has lobbied to lift the 40-year-old export ban, provides study after study showing that opening up U.S. oil to global markets will benefit American gasoline consumers, bolster the U.S. economy, and provide greater energy security — all 180-degree turns from the arguments being made in the 1970s.

The biggest concern among most experts has been the negative impact on global crude markets by an additional influx of supply. But despite the recent downward trend of global oil prices, driven largely by Saudi Arabia’s increased production, most experts expect the oil market to tighten toward the end of 2016. Goldman Sachs published research recently suggesting that oil will rebound to the $40-per-barrel level this year.

U.S. Production: Current State, Future State
For decades, supporters of the U.S. oil ban have argued that exporting crude would tighten domestic supply and drive up prices. But the global markets are saturated and storage is reaching capacity. In fact, U.S. production is currently at about 9.2 million barrels of oil a day, with nearly half of that coming from shale production. At the same time, the U.S. imports about 7 million barrels a day. It appears there is not much demand for U.S. crude given the current state of the global market.

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However, U.S. refinery capacity has been a hindrance to producers of U.S. crude, despite the investment in refinery capacity in the U.S. If U.S. oil producers are able to move product to foreign markets, it will likely stabilize the U.S. benchmark prices and possibly increase U.S. gasoline prices, says Tyson Slocum, energy director at the Washington-based consumer advocacy group, Public Citizen.

The equation under the export ban favored processed oil products, which could be sold in global markets. With limited refining capacity domestically, U.S. crude was at a discount to the global price. Refiners could even sell gasoline on the global market if it was more profitable — and they did. Meanwhile, U.S. oil producers have been unable to test the global markets as U.S. refiners have had limited capacity.

Domestic production of U.S. crude (light tight oil, or shale) has grown significantly since 2008, from an average of 152 million barrels per month to an average of 287 million barrels per month in 2015, reversing the production decline dating back four decades, according to a report by ETF Securities. U.S. refineries and domestic infrastructure were unable to accommodate the increased production at home. Though the increased shale production has replaced imports from Africa, refiners were not equipped to handle the lighter crude.

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Although investment has poured into U.S. refineries to process more domestic crude, refinery capacity has hovered around 90 percent at the end of 2015 and January 2016, according to U.S. Energy Information Administration (EIA) data. If U.S. oil producers find greater opportunity in the global markets for their product, it could ease pressure on U.S. refineries to process the light sweet and light tight crude being produced domestically.

How Everyone Benefits From Lifting the Ban
Energy analysts and industry experts agree that lifting the crude oil export ban will not have an immediate impact. But most say opening up U.S. producers to the global market will curb energy prices. Fears of energy dependency stemming from the 1970s OPEC oil embargo have subsided in recent years as U.S. production has increased and global markets have been flooded.

While U.S. oil producers will continue to benefit from selling to U.S. refineries and exporting to Canada (which was allowed under the export ban), they will begin building international supply chains and adding to an already saturated global market. Most experts agree that producers will benefit from competitively shopping their product globally, rather than being restricted to U.S. refineries or the Canadian market. At the same time, energy prices will fall and benefit gasoline consumers, according to a study by ICF International. According to the report:

“U.S. weighted average petroleum product prices decline as much as 2.3 cents per gallon when U.S. crude exports are allowed. The greatest potential annual decline is up to 3.8 cents per gallon in 2017. These price decreases for gasoline, heating oil, and diesel could save American consumers up to $5.8 billion per year, on average, over the 2015–2035 period. … The U.S. economy could gain up to 300,000 jobs in 2020 when crude exports are allowed. Consumer products and services and hydrocarbon production sectors would see the largest gains.”

Similarly, the Center on Global Energy Policy at Columbia University reported that: “Allowing exports would make the U.S. more resilient, not less, to supply disruptions elsewhere in the world.” Given the increased production in the U.S. and investment in domestic refineries, U.S. crude oil competing in the global market will lead to greater energy security.

Texas companies are certain winners in the move to lift the oil export ban. NuStar Energy plans to boost oil-loading capacity in Texas by more than 40 percent to 575,000 barrels a day, The Wall Street Journal reports. And Canadian-based Enbridge Inc. plans to invest $5 billion to build oil terminals between Houston and New Orleans to allow U.S. and Canadian oil to reach the Gulf Coast, according to Oil and Gas Investor. And Enterprise Products Partners announced investing $6 billion to expand the Houston shipping channel.

Conclusion

In the short-term, global oil prices are expected to remain low and the demand for U.S. oil globally may be light (especially after factoring in shipping costs). So testing the export market may take time. It is clear that the U.S. will need to build more infrastructure and that countries that buy from the U.S. will likewise need to increase refining capacity for the light sweet and light tight products. But energy analysts predict that the current climate of depressed oil prices will eventually rebound — largely as OPEC eases its production (meant to hurt high-cost production around the globe). Eventually, the U.S. could become a contender in the global oil market, which isn’t hard to imagine given that it is already the largest exporter of refined oil products.

We also believe that lifting the ban will have a positive impact on the U.S. economy — lower gasoline prices, increased investment in energy infrastructure, more jobs, and greater energy security.