The U.S. Congress is talking about allowing unfettered oil exports for the first time in almost four decades. Its timing couldn’t be worse.
There’s space in the global market for 1 million to 1.5 million barrels a day of U.S. crude if the ban vanishes, Energy Information Administration chief Adam Sieminski told a congressional subcommittee at a Dec. 11 hearing. That would be less than 2 percent of worldwide demand. With prices sliding amid a glut, the figure is bound to be even smaller, according to consultants including Wood Mackenzie Ltd.
As members of Congress promise more hearings on repealing the restrictions on oil exports, the world is awash in the stuff. Global prices have fallen by almost half since June to the lowest in five years amid slower demand growth and rising supply. What’s more, the kind of crude flowing in record volumes from U.S. shale plays is already abundant in the market.
“If they dropped the export ban today, how much crude would get exported?” Harold York, vice president of integrated energy research at WoodMac in Houston, said by telephone. “Today? I say none. At these prices, why would a barrel leave?”
Global crude prices have fallen 48 percent to below $60 for the first time since 2009. Producers say the U.S. shale boom may falter if they can’t reach overseas markets, while refiners fight to keep the limits, which have reduced domestic costs and allowed them to export record amounts of gasoline and diesel.
‘Lower End’
Brent, the global benchmark, fell as much 91 cents, or 1.5 percent, to $59.10 a barrel on the London-based ICE Futures Europe exchange before trading hands at $59.44 at 12:04 p.m. Singapore time. The U.S. marker West Texas Intermediate lost 98 cents to $54.95.
Congress will hold more discussions on repealing the law in 2015, Representative Ed Whitfield, a Kentucky Republican and chairman of the House Energy and Power Subcommittee, said at the Dec. 11 hearing in Washington.
Sieminski said his export estimates, which come to about 15 percent of U.S. production at most, were based on demand at foreign refineries for light oil. About 15 percent of global refining capacity is designed for light oil, compared with about 30 percent of production, York and his colleague Michael Wojciechowski said by e-mail.
During the meeting, Sieminski described the amount of potential shipments abroad as being “more to the lower end than to the upper end” of the range.
Price Discount
“The kind of oil we have in surplus here is a light, sweet crude, and the market for that is not unlimited,” he said. “So the question is, how much of that could you put out on the global market” before it’s saturated, he said.
Light Louisiana Sweet, the benchmark price for light oil on the U.S. Gulf Coast, would need to sell for several dollars less than Brent, the global marker, to attract foreign buyers to charter ships and send it abroad, York said. The discount has averaged $1 a barrel this month, down 79 percent since May.
“LLS is selling close to parity with Brent, so it can’t fetch a higher price somewhere else,” said York. “That said, the debate we’re having on oil exports is still worth having even if the opportunity to export isn’t commercial today.”
Once the U.S. starts shipping more crude oil, it will put more supply on the global market and leave less in the U.S., shrinking the price difference further and making it less economic to export, said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Congressional Hearing
Congress is debating whether the U.S. still needs export restrictions passed in 1975 on the heels of the Arab oil embargo that caused gasoline shortages and long lines of cars at retail pumps. Horizontal drilling and hydraulic fracturing have pushed U.S. oil production to the highest in 31 years.
Sieminski told the subcommittee that U.S. output may soon hit an all-time high, surpassing the record of 9.6 million barrels a day set in 1970, while gasoline demand is down 4.4 percent from the peak in 2007 and likely to fall further because of more stringent fuel economy standards.
Current exceptions to the ban include shipments to Canada and re-exports of foreign oil. The U.S. has sent abroad 314,000 barrels a day this year, on pace for the highest annual level on record. The U.S. also gave permission in March to companies to export ultra-light crude after lightly processing it.
Representative Joe Barton, a Republican from Texas, introduced legislation last week to end the export ban, saying the domestic oil boom has rendered the law outdated.
Jones Act
Jay Hauck, executive director of Consumers and Refiners United for Domestic Energy, a group opposed to lifting the ban, said the benefit of exporting U.S. oil doesn’t outweigh the damage done to refiners, who are sending 3.6 million barrels of petroleum products a day abroad, the most in the world.
One way to ease the pain to refiners would be to grant more waivers to a law that forces companies to use U.S. ships to transport cargo between two American ports.
Known as the Jones Act, the law makes it more expensive to ship Texas crude to New Jersey than to Montreal. That would put coastal refiners in the U.S. at a disadvantage to foreign counterparts for oil from the two largest shale fields in the U.S., the Eagle Ford and the Permian Basin.
Refiners don’t expect a full repeal of the shipping law, said Stephen Brown, a lobbyist for Tesoro Corp. (TSO), the largest refiner by capacity on the U.S. West Coast. Waivers for coastal fuel shipments would be a compromise, he said.
“Refiners will be at the table for any discussion of relaxing the crude export restriction and reform of the Jones Act in that context will need to be part of that conversation,” Brown said in Washington after the hearing.
