Overview: Lifting the export ban—will it impact gas price and refineries?

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Effect on gasoline price

U.S. gasoline price follows international oil price and not the price of domestically produced U.S. crude oil. Since the international crude oil price, represented by West Texas Intermediate (or WTI)-Brent, is higher than the domestic crude oil price, represented by WTI-Midland price, this creates a market distortion that puts the U.S. crude oil production at a disadvantage relative to global production. If the ban on crude oil exports from the U.S. is eliminated, an additional supply onto the world market would be warranted, lowering international crude prices and international gasoline prices. Consequently, U.S. gasoline price would be reduced led by the lower international gasoline price. This would create a savings for the consumers.Gasoline and Distillate Price

Current nature of the refinery market

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The U.S. remains a net importer of medium and heavy crude oil, while the demand for domestically produced light crude oil is oversupplied from new growth areas such as the Bakken formation, the Permian Basin, and Eagle Ford. As a result, there has been price distortions where domestic light crude oil is discounted compared to international crude oil of similar quality.

If the current restrictive export policy continues, it is likely to lead to even lower prices for U.S. produced crude oil, while gasoline prices will remain high. The price discounting deepens as growth of the U.S. refinery demand system can’t absorb all the potential growth in production. If low prices for U.S. domestic continues, naturally crude oil producers will have fewer incentives to invest and investments may slow or even decline. Export markets are needed to sustain U.S. crude oil production gains that can’t be absorbed by the U.S. refineries without significant and costly changes to the system.IHS Energy Crude Oil

According to the IHS estimates, ~$85 billion has been spent in the past two decades to reconfigure the U.S. refineries to process heavy oil imported from countries like Venezuela, Mexico, and Canada. As a result, the effective processing to light, tight oil by these refineries are limited.

The idea of easing the restrictions of crude oil exports might be more complex than it appears. Some of the refinery companies are against lifting the ban, such as the HollyFrontier Corporation. On April 2, 2014, the chief executive officer (or CEO) of the HollyFrontier Corporation, Michael Jennings, in a statement to the U.S. subcommittee on Terrorism, Nonproliferation, and Trade, said, “For decades, this country has worked to become energy secure or even energy independent, and now just recently, the expansion of production from both traditional and non-traditional sources has allowed the country to make great progress toward that goal.”

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Those who appear to support the change in the policy are also ambiguous in their approach. U.S. Senator Lisa Murkowski, while broadly in favor of lifting the ban, is looking for a wholesome change. “I believe that the Commerce Department retains the authority to modernize its regulations and update its 30-year-old definition of crude oil in such a way as to facilitate the export of condensate,” she told the U.S. subcommittee.

If the export ban was lifted and the U.S. crude prices increased while prices for gasoline and refined products decreased, it would be a negative for refineries such asthe  HollyFrontier Corporation (HFC), Tesoro Corporation (TSO), Valero Energy Corporation (VLO), and Western Refining Inc. (WNR). Some of these companies are part of the Energy Select Sector SPDR (XLE), theVanguard Energy ETF (VDE), and the  iShares U.S. Energy (IYE).

 

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