Exporting Crude Oil

[nevadaexile]

**Quote:
Originally Posted by nevadaexile View Post
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.**

@Damuri_Ajashi

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.

Ahhh…the majority of oil producers in the United States are in fact are either owners of refineries or have close business ties to refineries.
It’s a very incestuous business.

[nevadaexile]

@LonghornDave

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.

You assume that we will be an exporter.

I have worked for five different oil companies and I can state that the way that they treat their refineries tells me that they couldn’t give a crap if they ran or not. They are more the “bastard” stepchildren of the energy industry than they are seen as an integral part of the business.

That’s why Conoco-Philips, Delta Airlines and hedge fund consortiums are purchasing them for a song: It’s the side of the business which no one really wants.

[LonghornDave]

@Damuri_Ajashi

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.

Okay, got it. You’re saying build new refineries located in North Dakota to deal with increased oil production there. The problem with that is that refineries are incredibly expensive to build, and they don’t really have a good profit margin. Basically, it’s a very low IRR proposition.

@Damuri_Ajashi

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?

Actually that is what most of the experts think. Refined retail products are correlated to the global price of oil. If the U.S. adds a source of steady stable supply to the global market that should reduce volatility and reduce the global price of oil. Exporting should also raise the domestic price of oil; however, since refined products are correlated to the global price they should reduce in price.

@Damuri_Ajashi

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

The price won’t drop much because the feedstock is a globally traded commodity that needs to be imported. Refineries aren’t going to import heavy oil and refine it so they can turn around and sell into an oversupplied U.S. market that results in a plummeting price for their product.

@Damuri_Ajashi

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

This is just a different degree of the same thing.

@Damuri_Ajashi

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.

Presumably this would be the elected politicians.

[LonghornDave]

@Ravenman

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.

You’re basically right. One point though: we won’t be importing refined products; we’ll be importing crude oil that our refineries are configured to handle.

[LonghornDave]

@Try2B_Comprehensive

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.

Who is the dictator that’s going to prohibit private companies from drilling on private lands? Is it the same person who is going to be okay with removing the billions of dollars in tax and royalty revenue from the federal, state, and local budgets?

[LonghornDave]

@nevadaexile

Ahhh…the majority of oil producers in the United States are in fact are either owners of refineries or have close business ties to refineries.
It’s a very incestuous business.

If you count selling their product to them as having close business ties then I guess so. Otherwise, not really. The independent producer dominates the U.S. oil and gas industry.

[LonghornDave]

@nevadaexile

You assume that we will be an exporter.

I have worked for five different oil companies and I can state that the way that they treat their refineries tells me that they couldn’t give a crap if they ran or not. They are more the “bastard” stepchildren of the energy industry than they are seen as an integral part of the business.

That’s why Conoco-Philips, Delta Airlines and hedge fund consortiums are purchasing them for a song: It’s the side of the business which no one really wants.

I don’t assume we will be exporter. We are an exporter. With the capex dollars already spent to build out the refinery capacity we have, why do you think we will stop?

You’re also pretty off on your details. ConocoPhillips no longer owns refineries. They spun them off as a stand alone company called Phillips 66 back in 2012. It’s an independent refiner, which I can assure does not want to just cease to exist. Same thing that happened with Marathon. These are independent refiners just like Valero, Tesoro, Holly, Alon, and many others.

[Try2B_Comprehensive]

@LonghornDave

Who is the dictator that’s going to prohibit private companies from drilling on private lands? Is it the same person who is going to be okay with removing the billions of dollars in tax and royalty revenue from the federal, state, and local budgets?

Who said anything about a dictator? Exporting oil is off limits now, and the closest thing this country ever had to a dictator is the Brits. If producers drill too much oil there will be a glut and nobody will be able to sell it for jack squat.

I’m saying the United States does not have to subject its lands and people to the punishment associated with wide-scale fracking in order to supply the world with oil. The United States can supplement its own needs via fracking as it sees fit, and that ought to be the extent of it. The billions are already in the ground where they belong. They should never be sold to foreigners.

[LonghornDave]

@Damuri_Ajashi

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?

I saw this note in a research report that I read discussed the impact of Alaska exports on California refined product pricing that I thought I would pass on.

@JPMorgan Research

One witness testified that the permitting of crude oil exports from Alaska in 1995 caused California’s gasoline prices to rise to a 12-cpg premium to the US national average by 1999, from a 5-cpg premium in 1995. The witness further claimed that the re-imposition of a ban on Alaskan crude oil exports in 2000 restored this spread to its 1995 level. The first problem with this claim is the reported facts are wrong. While the CA-US spread in reformulated gasoline prices (all grades) did rise from about 4 cpg in 1995 to 16 cpg in 1999, in the 14 years since 1999 it has never fallen below 11 cpg, according to EIA data. In fact, in percentage terms (CA/US) the 1995 observation is the low (3%) and the 1999 observation is the high (13%) in the 1995-2013 sample. So, there is a cherry-picking effect masked here. Across the full sample, the average spread is 7%, which is also the value observed in 2000, 2002, 2007, 2010, and 2012. In 2013, the spread was 6%.

The second problem is the premise of causal explanation. The claim implies that the Alaska crude oil export policy caused the surge in this CA/US gasoline retail price spread. This assumption ignores the vitally important fact that the US economy, led by a tech boom in California, picked up sharply from 1995 (the midpoint of the 1991-2000 business cycle) to 2000 (the final year of that business cycle). As PADD 5’s oil product demand surged, PADD 5 refinery utilization was pressed to its limits. EIA data show this progression for PADD 5 average refinery utilization by year: 88.6% (1995), 89.3% (1996), 90.4% (1997), and 92.7% (1998). Refinery utilization peaked at 97.1% in September 1998—a level of maximum and unsustainable strain that has not been repeated during the subsequent 15+ years, not even during the 2003-2008 oil price boom. Moreover, two major refinery accidents in February and March 1999—plus additional unplanned outages and the June 10, 1999 explosion of a gasoline pipeline transiting the Pacific Northwest—caused 6% of PADD 5 capacity and 12%+ of local gasoline production to be offline just as the 1999 summer driving season began. These serious-but-temporary outages caused West Coast gasoline imports to spike to 91 kbd in July 1999 from 0 kbd in July 1998 in order to meet Southern California’s blazing gasoline demand with minimal disruption. The peaking of the tech boom in early 2000 and the subsequent economic recession in 2001 brought a contraction in oil demand. In response, PADD 5 refinery utilization temporarily dropped to 87.2% (1999-2000) before the refining industry entered the next demand-led cycle: 89.0% (2001), 89.9% (2002), and 91.3% (2003). Moreover, all of the above occurred in the context of California’s early adoption of stringent and more costly environmental regulations that led the nation by years. The impact of this regulatory factor is even easier to see in the CA/US retail price spread for No. 2 diesel. From 1995 through 2004, that spread averaged 14% in a range of 10% to 20% (1999–the peak of PADD 5 refinery strain). From 2005 through 2013, it averaged 6% in a range of 3% (2008–the recession) to 9% as the rest of the country followed California in reducing sulfur content in petroleum products. In 2013, this spread was 5%.

[Damuri_Ajashi]

@nevadaexile

Ahhh…the majority of oil producers in the United States are in fact are either owners of refineries or have close business ties to refineries.
It’s a very incestuous business.

That is not the way that the panel of experts seemed to think it worked. They seemed to present this legislation as picking winners and losers between the oil producers and refiners (at least in part).

@LonghornDave

Okay, got it. You’re saying build new refineries located in North Dakota to deal with increased oil production there. The problem with that is that refineries are incredibly expensive to build, and they don’t really have a good profit margin. Basically, it’s a very low IRR proposition.

And doesn’t the crude export ban make them slightly better propositions?

Actually that is what most of the experts think. Refined retail products are correlated to the global price of oil. If the U.S. adds a source of steady stable supply to the global market that should reduce volatility and reduce the global price of oil. Exporting should also raise the domestic price of oil; however, since refined products are correlated to the global price they should reduce in price.

So we either export the crude and import the refined or ban the export of crude and just export the refined. At the most it seems like you are saying that the ban has virtually no effect on the price at the pump. I don’t see how you get to lower prices at the pump by lifting the ban on exports of crude.

The global oil market is not exactly a free market. There is a cartel out there that manipulates the price of oil. Throwing our oil into the global supply to help smooth out oil shocks is kind of silly when so much of the free oil supply is controlled by this cartel. Oil is not one of those commodities where a free marketeer can simply instruct others to rely on the free market.

The price won’t drop much because the feedstock is a globally traded commodity that needs to be imported. Refineries aren’t going to import heavy oil and refine it so they can turn around and sell into an oversupplied U.S. market that results in a plummeting price for their product.

Right now there is captive crude that cannot be exported. That crude must be priced at a level that will allow the refineries to make a profit or the refineries won’t refine. This might result in less domestic production because the price is too low to support the more expensive extractions but assuming that producers and refiners are willing to simply squeeze their profits, why wouldn’t we get lower prices at the pumps?

Presumably this would be the elected politicians.

Pfft!

@LonghornDave

I saw this note in a research report that I read discussed the impact of Alaska exports on California refined product pricing that I thought I would pass on.

Hrmm.

I am starting to wonder if we can accomplish anything short of a quota system on all petro product exports. I am primarily concerned with cheap gas, not because I want to reduce my price at the pump but because I want to reduce our society’s price at the pump. I think cheap gas would be good for our economy.

[LonghornDave]

@Damuri_Ajashi

So we either export the crude and import the refined or ban the export of crude and just export the refined.

I’d like to go ahead a quote myself a few times from this thread. I think a salient point is being missed.

@LonghornDave

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).

@LonghornDave

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.

@LonghornDave

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.

@LonghornDave

You’re basically right. One point though: we won’t be importing refined products; we’ll be importing crude oil that our refineries are configured to handle.

So, just to state it again, we won’t be exporting crude and importing refined. There is no proposal to import refined products. Nobody is saying import refined products. The proposal is export one type of raw material (light crude) and import another type of raw material (heavy crude).

@Damuri_Ajashi

At the most it seems like you are saying that the ban has virtually no effect on the price at the pump. I don’t see how you get to lower prices at the pump by lifting the ban on exports of crude.

I don’t see how you got that from my comment. I specifically said it would reduce the price of refined products, and I specifically said how that would happen by lifting the ban on exports. Here it is again.

@LonghornDave

Actually that is what most of the experts think. Refined retail products are correlated to the global price of oil. If the U.S. adds a source of steady stable supply to the global market that should reduce volatility and reduce the global price of oil. Exporting should also raise the domestic price of oil; however, since refined products are correlated to the global price they should reduce in price.

In other words, you get lower prices at the pump by reducing the global price of crude oil. The U.S. exporting crude oil reduces the global price of crude oil.

@Damuri_Ajashi

The global oil market is not exactly a free market. There is a cartel out there that manipulates the price of oil. Throwing our oil into the global supply to help smooth out oil shocks is kind of silly when so much of the free oil supply is controlled by this cartel. Oil is not one of those commodities where a free marketeer can simply instruct others to rely on the free market.

But OPEC doesn’t exactly operate in a very coordinated way. They set quotas and then turn around and cheat on them. The members all hate each other. Saudi Arabia is really the only country with spare capacity. OPEC has also lost market share, and their combined spare capacity is declining as a share of the total crude oil demand.

@Damuri_Ajashi

Right now there is captive crude that cannot be exported. That crude must be priced at a level that will allow the refineries to make a profit or the refineries won’t refine. This might result in less domestic production because the price is too low to support the more expensive extractions but assuming that producers and refiners are willing to simply squeeze their profits, why wouldn’t we get lower prices at the pumps?

Because we still need to import heavy crude at the prevailing global market price to supply our refineries with the necessary feedstock. As long as that is the case our price at the pump will be based on global crude prices and not the domestic light crude oil prices.

[Damuri_Ajashi]

@LonghornDave

I’d like to go ahead a quote myself a few times from this thread. I think a salient point is being missed.

So, just to state it again, we won’t be exporting crude and importing refined. There is no proposal to import refined products. Nobody is saying import refined products. The proposal is export one type of raw material (light crude) and import another type of raw material (heavy crude).

OK, so we export light and import heavy and net export refined? I could live with that.

I don’t see how you got that from my comment. I specifically said it would reduce the price of refined products, and I specifically said how that would happen by lifting the ban on exports. Here it is again.

In other words, you get lower prices at the pump by reducing the global price of crude oil. The U.S. exporting crude oil reduces the global price of crude oil.

OK, so it sounds like you are saying that the export ban is permitting refineries to sell at larger than normal margins and the lack of an export ban on refined products means that we pay the global price on refined anyways, right? So we could increase export of crude to reduce the price of refined products by a little bit. So why couldn’t we restrict the export of refined products to reduce the price of gas by a lot.

Aside from the desire to have lower domestic energy prices, I am also not enthusiastic about things like fracking if some significant portion of that fracking productions is stabilizing “global” markets rather than just the domestic market. Its one thing to risk poisoning our water so that our economy can benefit, its another thing to risk it to increase the global supply of oil and gas.

But OPEC doesn’t exactly operate in a very coordinated way. They set quotas and then turn around and cheat on them. The members all hate each other. Saudi Arabia is really the only country with spare capacity. OPEC has also lost market share, and their combined spare capacity is declining as a share of the total crude oil demand.

I’m pretty sure its still a cartel. I read a history of OPEC once and IIRC the author made a very good argument that the fall of the USSR was the result of a battle with OPEC and the ascension of Hugo Chavez was the result of the prior regime’s battle with OPEC. OPEC can destroy oil exporting nations if they put their mind to it.

Because we still need to import heavy crude at the prevailing global market price to supply our refineries with the necessary feedstock. As long as that is the case our price at the pump will be based on global crude prices and not the domestic light crude oil prices.

Are refineries incapable of being reconfigured?