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Must-know: US oil industry reaction to the loosening export ban

Must-know: US oil industry reaction to the loosening export ban (Part 1 of 11)

Overview: Key factors that led to the export ban of US crude oil

A brief background about the export ban

In the 1975, under the Energy Policy and Conservation Act, Congress made it illegal to export crude oil that was domestically produced, in the absence of a license.

Two reasons are usually cited for the export ban. First, in the 1970s, several price controls were slapped on crude and refined products. This was done so as to avoid inflation. The export ban was further proof of the governments’ fear of inflation. Second, Alaska’s North Slope was a newly-found oil discovery, and to prevent it from being sent to the higher-priced Japanese markets, instead of the U.S. West Coast, the export ban was a suitable choice. Therefore, the ban was put in place to conserve domestic oil reserves and discourage foreign imports.

However, in the early 1980s, oil price controls were abolished and so was the ban on exporting gasoline and other refined products. The ban on exporting crude oil though, remained. To export oil, producers needed export licenses from the Commerce Department, but these have been sparse over the past years. Exports of crude oil peaked at 104 million barrels of oil in 1980, but have since fallen to 43.8 million barrels in 2013.

Until 2005, when domestic oil production was declining and the U.S. was in fact importing almost 60% of its total consumption, there was no reason to re-examine the export ban. However, since 2008, oil production has significantly surged.

Crude Oil ProductionEnlarge Graph

The U.S. Energy Information Administration (or EIA) forecasts that 2014 crude production will be 8.42 million barrels per day. This significant surge in oil production has initiated several discussions regarding the lifting of the export ban as oil producers are of the opinion that they will benefit from exporting oil to countries where they might receive better prices for their production.

Oil-weighted names such as Continental Resources (CLR), EOG Resources (EOG), Oasis Petroleum (OAS), and Pioneer Natural Resources (PXD) are few companies who would with benefit from the loosening of the export ban. It’s important to note that most of these companies are a part of the Energy Select Sector SPDR ETF (XLE).

In this series, we’ll discuss the factors that have led to the loosening of the export ban and the effects that it will have in the oil  industry.

The Realist Discussions

  • GC

    Some arguments contradict one another. You state “Even if the refineries do handle light oil, they would make less profit”. Yet condensate trades at a discount to WTI, and a significant discount with Brent. Many refiners are already blending condensate into their feedstock, and are making significantly more profit when they sell or export finished products.

    • Kshitija Bhandaru

      Importantly, refiners try to come up with the best crude mix
      to maximize profits given a set of product prices. Refiners choose their inputs
      based on prices and what they want to produce.

      Refiners blend condensates into their feedstock as long as
      condensates are justifiably priced given what products they can yield. But
      condensates yield lighter products like naphtha and gasoline. These products
      are less valuable due to growing demand for heavier distillates like diesel.

      If any input (like condensate) becomes more expensive,
      refiners will move to the next most optimal blend. Allowing condensate exports might
      remove the “excess” availability of condensates, raising prices. If
      condensate prices increased enough to make them unfeasible as a feedstock
      blend, refiners would decide whether to still include condensate in their
      feedstock.

      Refiners can’t determine the effect of this price change on
      feedstocks based on the price change alone. The decision depends on several
      other factors, including condensate prices, other input (crude) prices,
      refining configuration, and prevailing product prices. But, all else being
      equal, a price increase for an easily available input (condensate) should raise
      refiners’ feedstock cost. This, in turn, should compress refiners’ margins.

      Plus, if the government also loosened export bans
      incrementally for U.S. crude, the effect on refiner profitability would be more
      direct. The Brent-WTI spread would narrow. This would reduce the advantage U.S.
      refiners currently enjoy.