The low cost of oil could prove challenging for U.S. crude exports, even if Congress manages to lift a 40-year-old ban on exporting it.
Republicans have made lifting the ban on crude oil exports a high priority this year. The House is scheduled to take up a bill on the floor in October, while the Senate is mulling its strategy.
Although oil producers are holding to their arguments in support of lifting the ban amid a historic drop in the price of oil, analysts and others say lifting the ban at this point wouldn’t do much to improve the situation for shale oil.
“We don’t see any material impact from lifting the ban,” said Stephen Brown, vice president of federal affairs with the large refiner Tesoro, which is one of the few refiners that supports lifting the 1970s restrictions. Tesoro “supports lifting the ban,” he said, because “we are free trade and free market” proponents.
Jay Hauck of the Crude Coalition, a group fighting the push to lift the ban, disagrees with Tesoro. “From a policy standpoint,” he said the argument should be based on what lifting the ban would do at $100 a barrel, “not what it is” going to do at current prices of $44 or lower. Hauck said the trajectory is clear: exporting crude oil means removing more from the U.S. market, making the U.S. more dependent on imports and driving up gasoline prices.
He concedes that low prices “certainly undermine the pro-export side that claims huge benefits to exporting crude.” That’s because “at this very moment in time, if restrictions were instantly lifted, there would be little effect immediately.” But that likely would change as the price spreads between different markets for a more advantageous growth market.
But even that depends on where you are. “Tesoro has taken a fairly agnostic attitude … [that] has a lot to do with its refinery profile,” Hauck said. Refiners have taken different views on lifting the ban for different market reasons. Hauck’s group represents smaller refiners on the East Coast, with access to different markets than those in the West where Tesoro operates.
“If they lift it tomorrow, nothing changes,” Brown said, because the global market is “awash in oil,” and the “oil price [is] not going to shoot up” any time soon.
That’s the rub. Because without prices high enough to support a growing export market, nothing would happen to spur U.S. producers to increase output. But the American Petroleum Institute, representing oil producers, doesn’t agree. Erik Milito, the group’s upstream director, says it matters as much, or even more, when prices are low because producers can lose more money. It gives producers the option of making that money back on the global market. Milito says demand is expected to rise in the coming years, creating increased demand for U.S. crude in Asia and Europe.
But even if prices were higher, analysts say the world is in a state of over-supply that prevents any real movement of crude oil exports from the U.S. “There’s more nuance than [just saying] we are going to open up the taps and off it goes,” said Andrew Lipow, the president of Houston consulting firm Lipow Oil Associates.
It’s not so much about the price of oil being $40 or $100, but “it has more to do with oil prices here and overseas.”
“Oil is awash,” and there is a “very, very small” prospect of benefitting from exporting, Lipow said. “We are certainly not going to ship it to the North Sea or Nigeria,” he added, where the oil market is saturated. Instead, Lipow said there would be more movement in the Western Hemisphere.
The market would resemble much of the same trade seen with the export restrictions in place, with some sales to South America, Canada and Mexico, he said. Not as much to Europe and Asia, if at all.
Guy Caruso, a senior adviser at the Center for Strategic and International Studies in Washington, said he thinks lifting the export ban is a good idea, although it probably isn’t going to bring in tons of cash.
“Right now it wouldn’t be as lucrative … but it’s still the right policy,” he said. Exporting gives the system more flexibility, he said, but he admits that with the supply glut, there isn’t much room for more oil from the U.S.
Caruso and others say the higher-priced light sweet crude coming from the U.S. in the past would have been sold at a premium. But now it has to be sold at a discount. And even though there would be more of the highly prized oil once the ban is lifted, it would run into competition with other forms of light-sweet crude oil from Nigeria that is also looking for a market.
“You got a pretty soft market, high inventories and not a great market for light sweet crude … if you were to have the ability to sell on the international market,” said Caruso, former head of the Energy Information Administration, the Energy Department’s independent statistics arm.
In addition to competition from Nigeria and other African producers such as Algeria, there is also the added volume of supply that Iran is expected to dump into the market next year if sanctions are lifted, with about 500,000 barrels of oil in storage ready to be released, Caruso said.
Brown concurred, saying prices will be low going into 2016 and would stay low for another three to four years after Iran comes online. In addition, Saudi Arabia has been guarding its market share in Asia with Russia doing the same in Europe. If U.S. producers want a piece of the Asian and Chinese markets, which is the only “market to sell this stuff,” they will have to go through them, and the “Saudis will kill them.”
“As long as you see the Saudis out there,” Brown said, there isn’t much chance to carve out a new market for U.S. crude exports.
This article appears in the Oct. 5 edition of the Washington Examiner magazine.
