US has multiple options to mull on oil exports

A debate rages in the US on whether to allow exports of domestically produced crude oil or keep the ban which has been in place since 1975, when rising oil prices drove petrol prices higher and renewed supply security concerns.

This has caused alarm in producer circles and a short-lived rise in US oil prices at a time when they have been under pressure on account of surging supply there. Needless to say if US crude oil enters the international market with additional supplies, then oil prices will be pressed further. In reality, there has always been some crude oil export from the US, but regulations governing them ensured volumes remained modest.

Crude oil of US origin can be exported in special circumstances if it is too heavy and viscous such as some of that in California. Others are actually re-exports of foreign oil imported to the US originally. This mostly went to Canada on the provision that it is consumed there.

But the news that the US Bureau of Industry and Security (BIS) authorised limited re-exports of foreign crude to Europe by granting two licences each to the UK and Italy with another pending approval to Germany has raised hopes of some companies that the ban could be lifted. I estimate the volume involved in these licences at about 75 million barrels, which over the time it will be delivered may amount to a small daily volume.

Granting of licences is not easy as the applicant has to demonstrate that the transaction is “in the nation’s interest and the oil cannot be sold for a reasonable price in the US” and that exports will be terminated in cases of emergency. Another way to get a licence is to swap the exported volume by an equivalent volume of better quality or quantity oil or products.

As US production from shale oil increases, producing companies are increasingly in favour of lifting the ban, especially as oil in the US is selling at a discount to international prices. On the other side of the debate are refiners who are afraid of appreciating US oil prices due to exports and losing the advantage of current discounts.

There are limitations as to the penetration of shale oil in US refineries either due to logistics of transportation or the quality and the need for extra processing due to its waxy nature. Therefore if shale oil volumes increase, exports become more viable to Europe in modest volumes until refiners there can cope with the difficulties of refining it (provided that it can be easily brought to the exporting terminals which is not the case now).

Daniel Weiss of the Centre for American Progress said in a recent testimony before the US Senate Committee on Energy and Natural Resources that “the Energy Information Administration predicts that the growth in oil production will peak in 2019 and domestic production will slowly decline after that”. He recommended the ban be maintained as lifting it will raise gasoline prices and hurt US consumers.

He added: “EIA predicts that in 2014 the US will consume 5 mbd, of oil and liquids more than we produce. This gap between demand and supply will continue at least through 2040, ultimately growing by 13 per cent..”

Blake Clayton, adjunct fellow for energy, said in a statement released by the Council on Foreign Relations in July 2013 that “removing all proscriptions on crude oil exports, except in extraordinary circumstances, will strengthen the US economy and promote the efficient development of the country’s energy sector.”

He pointed to the logistical difficulties of refining too much shale oil, which could be solved over time, but added, “A simpler, more cost-effective solution would include allowing US crude to be exported.”

The reality of US crude oil balances of supply and demand is that by any forecast, US imports, reduced from few years back will eventually start increasing again. Therefore export, re-export or swaps will not change this situation.

An interesting article by Steve Andrews, a contributing editor for Peak Oil Review, draws parallel with UK export of its North Sea crude oil which lasted between 1980 and 2005 when oil prices were low. Since then it imports on average of about half a million barrels a day at prices more than four times when oil was exported.

He asks: “My question to the Brits: if you could turn the clock back, would you allow all your oil to be produced at the maximum possible rate?”