Exporting Crude Oil

Great Debates
1

An issue that will soon come to the forefront is the potential easing of export restrictions on crude oil.

For those that don’t know, primarily as a result of the wage and price controls of the Nixon administration, the U.S. is generally prohibited from exporting crude oil. These export restrictions (which come from several different statutes) relied generally on the idea that the U.S. was resource scarce with growing demand. With low prices, domestic demand grew and our production declined resulting in a situation where we were importing something like 60% of our crude oil.

Now we are faced with a complex situation where it makes sense to remove these restrictions. Behind the scenes the Obama administration is likely in favor of easing these restrictions, but they will tread lightly as this is a sensitive and misunderstood problem.

Misunderstandings generally arise because the public has been hearing for 40 years how we are resource scarce. It is confusing why we would need to export when we are still a large net importer.

Last week the Senate Energy Committee held a hearing on Crude Oil Exports. An archived video of the hearing can be found here. I was impressed with the tone and bipartisanship as well as the intelligent viewpoints and questions demonstrated in the hearing. Specifically, I thought Senators Wyden, Landrieu, and Murkowski were all very impressive in their ability to keep the meeting on point and generally void of typical BS talking points and one-liners.

The general issue is as follows. We allow without restrictions the exporting of refined petroleum products, but we do not allow the exporting of crude oil. The U.S. refinery system is geared to run on heavy crude oil. Much of the oil being produced as part of the shale plays is light. We now have a glut of light crude, which will soon grow to a point where we can not handle it in our refineries. We also have issues where we have regional gluts causing market distortions as the transportation system has not kept pace with the production gains. The primary beneficiary of this system are the refineries. Refined products such as gasoline and diesel are generally more correlated to global crude oil prices. Our situation in the U.S. is leading toward artificially low crude oil prices (U.S. crude being well below international crude prices). This has led to increased profit margins for refineries.

Following the midterm elections, I expect Obama to make a few minor changes. For example, crude oil condensate that is a byproduct of natural gas processing is allowed to be exported. Condensate separated out at the field level is not. On a molecular basis there is no difference, so the disparate treatment under the law is nonsensical. Obama can change this and likely will via executive order. Major change, however, requires legislation. I certainly do not expect the Obama administration to take a policy position on this prior to the mid-term elections, but I believe they ultimately will come out in favor of easing these restrictions.

I thought I would start this thread as a general debate topic to talk about the easing of exports of crude oil.

2

The U.S. is importing 8 million barrels of crude a day.
http://www.eia.gov/dnav/pet/pet_move_wkly_dc_nus-z00_mbblpd_w.htm

So in no way do we have a surplus of crude. With the possible exception of Canada I don’t see how it can be cheaper to export crude and re-import refined products than to simply refine the crude in the U.S.

3

For the past seven I have worked as a planner/scheduler at refineries around the US, mostly in the Midwest and on the East Coast.

Most of the oil companies are looking to get out of the refining business. The legacy costs, coupled with ever-expanding environmental regulations have made it less profitable for many of them to own their own refinery so they are selling them to companies like Conoco-Phillips Marathon and to consortiums created by hedge fund investors who are buying up refineries and then “streamlining them” to make as much profit as they can from them.

I recently worked on a project in NW Indiana which developed a major refinery into one which can accept Canadian bitumen and turn it into usable distillates. This refinery is currently owned by a large corporation who (rumor has it) plans on selling out and ending its ownership of large refineries in the US.

Frankly, most oil companies want to be in exploration as they can reap greater profits from that end of the business without having the fixed costs that owning a refinery entails. WHile this is good for them, it’s bad for the consumer as if fewer companies own refineries, there are likely to be fewer refineries and greater potential for massive corporate failures if/when those few companies get in financial straits.

My opinion: Exporting crude to other countries (it’s never explicitly stated which they would be, although India and China have both completed construction of massive refining complexes) and importing refined products is a pipe dream used by accountants and hedge fund managers to create larger profits for investors.

Since refineries outside of the US are vulnerable to civil unrest and potential nationalization and counting ships to transport products when climate change is going to make storms in the oceans more severe, it’s a very foolish idea for the US to depend upon refining facilities outside of its borders to take care of its needs.

4

You are correct that we are a net importer. I stated that and no one disputes that. Also, no one is saying we need to import refined products. We’re currently a big exporter of refined products. We’re saying export certain types of crude oil (lighter) and import other types (heavy).

5

Again, no one is saying we should exit the refining business. We are a big exporter of refined products. No one foresees a need to import refined products. No one wants the U.S. to be an importer of refined products.

The topic is exporting crude oil. This would primarily be light sweet crude oil that has outgrown our refining capacity, which is weighted toward the heavier crudes.

6

I heard that hearing on CSPAN radio and I thought it was one of the very few substantive senate hearings I have ever heard.

Off the top of my head, what I took away from the hearing was:

Oil exploration and drilling creates more jobs than refining. Refining is capital intensive and the profits go largely to the owners of capital.

Our refineries are configured to accept particular grades of oil. As the oil mixture we produce changes, we either need to change how our refineries are configured or we need to export the crude.

Refineries are seeing large profits (and very few market entrants despite these large profits, why WOULDN’T you get into the same business that made the Koch brothers two of the richest men in the world?).

Exporting crude oil will increase our prices at the pump.

The export of refined prducts mitigates much of the resource hoarding effect of the export ban on crude oil.

Even Al Franken recognizes the economic benefits of oil and gas to the economy.

Why not restrict our export of refined products as well? In exchange we could open up some federal lands to more drilling (all that stuff will be worthless anyways when our cars stop using gasoline). How we parcel out the oil leases should be subject to a lot more scrutiny.

Why not build more refineries? And if we’re going to build more refineries anyway, I would MUCH rather have refineries that are built under an Obama type administration than a Bush type administration.

7

Allowing the export of crude makes sense. Building more refineries in the USA also makes sense, especially now that we have a glut of oil from shale. But, needless to say, there are groups that will scream bloody murder and do everything possible to block the construction of new refineries. Given the state of politics in this country, it’s unlikely that we’ll see any new refineries anytime soon.

8

Well, the two are linked, obviously. Reduce the ability to process the oil in the US and you’ll have to export crude oil to get it refined, right?

9

Exactly. The US needs to increase refinery capacity.

Just not here in San Antonio, OK?

:wink:

10

What makes the most sense is to put the refineries near the oil fields. The only reason people want to pipe the oil to refineries on the gulf is so they can export teh refined products. Shorter pipelines and you don’t have to pipe oil down to Texas only to pipe refined products all the way back to Mineapolis. You can refine it in the sparsely populated northern plains states and ship the refined products from there. But right now, I think people want to build refineries near shipping ports so they can ship refined products. If we restricted the export of refined products, people would build ther efineries closer to the oil fields.

11

I think you’ve got a very mistaken view on why refineries are located where they are.

  1. Refineries have been built near oil fields. The Gulf Coast is the largest producing area of the country, onshore and offshore.

  2. They’ve also been built near ports because this is where crude oil has been imported, not a desire to export refined products.

  3. They’ve also been built near major population areas. This is because these major population areas are major users of refined products.

The end result is that we’ve got a lot of refineries located in the Gulf Coast, California, and the Northeast.

12

??? Who is saying we should reduce the ability to process oil in the U.S.?

13

This is certainly a disputed point. Those in favor of exporting claim retail gasoline prices will be helped by exporting. Those against claim the opposite. At least one part of the equation is obvious: allowing exports will shrink the differential in pricing between U.S. crude prices and global crude prices. Will this differential shrink because global will come down due to added supply or because domestic will rise to match the global? Likely a bit of both. However, from a retail refined products standpoint, I find the pro-exporting arguments more plausible. Domestic retail prices are already priced off of the global crude market since refined products are a global commodity. Why would domestic retail prices rise?

See the comment from Amy Jaffe’s testimony.

[QUOTE=Amy Jaffe]
The chart below, compiled with data from the U.S. Energy Information Administration (EIA)
highlights that Midwest gasoline consumers are not, as has been reported in the media, reaping
huge benefits from the crude oil discounts enjoyed by Midwest (PADD II) refiners compared to
Gulf Coast (PADD III) refiners. The crude oil feedstock discounts enjoyed by refiners with
access to mid-continent landlocked U.S. production (as illustrated by the blue line which shows
the value difference in the crack spread between Midwest and Gulf coast refiners) did not lower
the wholesale price of Midwest petroleum products compared to prices linked more closely to
international markets, nor did they lower the retail prices of gasoline or diesel fuel prices in the
Midwest markets served by PADD II refiners relative to the markets served by coastal refiners
that do not enjoy these discounts. Since petroleum products are freely traded in a global market,
U.S. petroleum product prices reflect international crude prices, not lower-priced domestic crude.
[/QUOTE]

This seems like a strange thought to me. Why would we restrict our ability to export refined products when we’ve already invested the capital to build out refinery capacity that exceeds domestic demand? Wouldn’t that be just a destruction of value?

You seem to be all over the place with your comments. You want to ban exporting of refined products and build more refineries? To what purpose? We’re already refining more product than is used in the U.S. If we banned exporting then our utilization rate of the existing refineries would have to decline. Why would we build more refineries then?

14

Thanks, I know what the topic was/is.

And if you think light sweet crude (Texas Intermediate) would be the ONLY product that companies would export, then you aren’t aware of how the oil industry works. If they are allowed to export unrefined oil, they’ll export ANYTHING which they can to make a profit.

When you hear that someone is supporting any kind of legislation it’s always a good idea to check behind the scenes to see what’s in it for them.

15

I think you are misreading what I am saying.

And I’m saying that it makes sense to build them near the new oil fields for many of the same reason they were built near the old oil fields.

Are you saying that competitive pricing pressure doesn’t exist in the oil business the same way it exists in almost every other business?

We have been here before, we can look to history. We had a ban on the export of Alaskan oil that was lifted in 1996 and oil prices on the west coast (where most of this oil ends up) went up. People seemed to think there was a link between the two. Things may not work out exactly the same here but I don’t think anyone is making the case that lifting the export ban would reduce gas prices, are they?

Oil and gas demand is not inelastic. When prices drop, people consume more.

I didn’t say ban, I said restrict. And as prices drop, consumption increases.

AFAICT, so far this has been a battle between oil producers and refiners. I don’t know if there is an advocate for consumers or the economy as a whole.

16

I’m sometimes kind of dense about subjects, but I’m still not following this point: if there is a glut of a particular type of oil in the US that isn’t being refined for whatever reasons, what is the case for not allowing that particular type of oil to be exported?

I’m given to understand that transportation costs for gasoline are actually pretty minimal. I’m not sure why, if we have a bunch of stocks that our refineries can’t handle, that exporting that and importing refined products would mean a significant rise in the cost of a gallon of go-juice.

17

The law sounds like it’s a form of protectionism. By forbidding the export of crude oil to overseas refineries, you’re propping up American refineries.

18

Why isn’t drilling less oil an option? We’re not Saudi Arabia- we don’t owe oil to the world. We aren’t resource scarce? Good, let’s keep it that way, for this country’s future. I don’t much like fracking to supply our own needs. I really don’t want to do it at all for other countries.

19

[zzzzziiiiiiippppp] Ready to export crude oil, baby . . .

20

I’m disagreeing with the part where you think exporting will lead to importing refined products. This isn’t an issue of wanting to export crude and import refined products. It’s that we don’t have the refinery capacity to refine the huge increase in lighter crude. We still have the refinery capacity to refine the heavies. We’ll still be an exporter of refined products.