New twist in convoluted US oil exports debate

Limits on the export of American crude have been in place for many years but a rising tide of political pressure has put the issue in the spotlight. Change, however, will not be easy.

Lisa Murkowsky, a Republican senator from the oil-producing state of Alaska, has been a vocal supporter of lifting the American ban on crude exports. Andrew Harrer / Bloomberg

The political drum beat for an easing of longstanding restrictions on US crude oil exports has grown louder this year.

That is adding to concerns such a move could worsen the world oil market glut and further hit investment in the industry and oil-dependent economies.

The debate is a convoluted one, however, with many conflicting interests, even within the US oil industry, and the outcome is far from certain.

Advocates for lifting the export restrictions gained a powerful voice this year when Lisa Murkowsky, a Republican senator from the oil-producing state of Alaska, became the chairman of the senate energy and natural resources committee. She has made it clear she will use her position to push hard for a change in the law.

Last week, she said in Washington DC she will launch a bill this week to lift restrictions, which date back to laws enacted in the wake of the 1970s Arab oil embargoes, when it was thought strategically prudent to keep domestically-produced oil in the home market.

“I am going to be looking for every opportunity we might have to advance [the bill],” she said, adding that the bill would at least force debate on the issue.

Those in favour of lifting the restrictions, which include the American Petroleum Institute, the domestic oil producers’ lobbying group, argue that the situation has radically changed in recent years. Dependence on oil imports has declined sharply as domestic oil output has climbed to its highest level in more than 40 years thanks to the fracking revolution.

The case for easing export restrictions is not an easy one to put, however, as evidenced by a speech last week to the US chamber of commerce by Douglas Suttles, the chief executive of Calgary-based Encana, which has shale oil operations in the United States.

Encana is one of 16 prominent oil producers – the largest of which is ConocoPhillips – whose chief executives have formed a group to lobby for a change in the law.

“Today, largely because of the export ban, a barrel of American crude oil sells for about US$10 less than the global oil price,” Mr Suttles said. “It is absurd that other countries can sell their crude into US markets while US crude is essentially locked out of global markets.”

A straightforward point, but Mr Suttles went on to argue that allowing US crude oil exports "would help to increase global supply, putting downward pressure on global prices" and thus putting downward pressure on US gasoline prices.

The logic of that argument is a little hard to reconcile; easing oversupply in the domestic market but increasing it abroad would result in lower US petrol prices?

Perhaps, but in any case, the strongest lobby against an easing of exports is the US oil refining industry, which is not looking for any downward pressure on petrol prices that would hit their margins.

“It’s an emotive topic and that’s why it doesn’t strike me that there is much chance of change, even though [Ms] Murkowski is lobbying hard for it,” says Sean Cronin, chief analyst at Argus, an oil data and analysis outfit.

“There is consistently a bigger pool of lawmakers who come into play if it gets beyond where it is now,” Mr Cronin adds.

That includes senator Robert Menendez, from New Jersey, which is a big oil refining state, and senator Ed Markey of Massachusetts, who has the backing of the American Fuel & Petrochemical Manufacturers, a lobbying group for oil refiners.

Last month, Mr Markey made his position clear when he said “if we were to lift the export ban, we would send US refining jobs overseas along with our oil.”

There is no ban on refined oil products and already petrol exports have surged to record levels, according to the Energy Information Agency.

A symptom of the restrictions on US crude oil imports is the gap that has developed in recent years between world benchmark North Sea Brent crude oil and West Texas Intermediate (WTI), the domestic US benchmark price.

All through the 1990s and much of the early part of this century the difference in price between the two would rarely fluctuate by more than a couple of dollars per barrel, reflecting transport costs and the ups and downs of demand in the US Gulf of Mexico refining hub.

But since the surge in US oil production began five years ago, WTI has consistently been at a substantial discount – nearly $30 per barrel at some points – and this year has been between $12 and $6.

That big discount for WTI reflects not only rising US oil production, says Tom James, an energy expert at Navitas Resources. It also reflects the way the US oil industry infrastructure is set up, which is another barrier to easing oil export restrictions.

“Due to the export ban and the lack of infrastructure, all pumps and pipelines were built to bring crude oil [to the refiners] but not the other direction,” Mr James says. “Crude oil could not escape even if the law did not prevent it from doing so; you couldn’t reverse the pumps and the flow so easily.”

As Ms Murkowski indicated in Washington, there are changes short of a full lifting of the ban that could see more US oil on the world market. Already, some crude – Alaskan, California heavy, re-exported foreign crude, including Canadian – can be exported as well as lightly refined crude in the form of condensate.

The terms applying to condensate were eased by the department of commerce last year and Ms Murkowski says she will push for that definition to be expanded. In Washington, she noted that last year’s commerce department report concluded that “one man’s ‘heavy condensate’ is another man’s ‘light crude’”.

The pro-exports lobby also will be pushing the “geopolitical” case.

As Mr Suttles told the chamber of commerce, “When we walk into discussions with policymakers from both sides of the aisle, many remind us of something we in the oil industry hadn’t considered – the geopolitical implications of the US becoming a steady and reliable global oil supplier.”

The House energy committee heard that case in March from a number of experts, including Amy Myers Jaffe, who heads an energy think-tank at University of California, Davis.

She told the committee: "Our current policies of limiting natural gas exports and banning crude oil exports must be considered in the context of the US international leadership role and not just in the confines of US domestic political priorities."

She said lifting the ban would help support US foreign policy, such as containing Russia and Iran, which she argued was partly behind Opec's decision last year to keep pumping oil and let prices fall where they may.

Also, she argued, hoarding oil at home would send the wrong signal to trade partners – especially allies in the Arabian Gulf – and was the kind of thing that led to the 1970s oil crisis in the first place.

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