Kicking Off the Crude Export Debate
One week into the new year, the question of whether to modify the United States’ long-standing ban on crude oil exports is already shaping up to one of the top energy policy topics on 2014. In recent months several oil executives and leading editorial pages have called for a removal of the ban, and Energy Secretary Moniz has indicated his support for such a move. Senators Markey and Menendez have both set down markers opposing any change, citing the potential costs to American consumers and the environment. Today, Senator Lisa Murkowski , ranking member on the Senate Energy Committee, released a white paper framing the issue and gave a speech at the Brookings Institution in which she called on the Obama Administration to use executive authority to relax the ban. We discuss this issue in our new book, Fueling Up: The Economic Implications of America’s Oil & Gas Boom, from the Peterson Institute for International Economics in Washington. We offer selected excerpts below, updated to reflect market developments that occurred after we went to press.
What’s at issue? Onshore crude oil output in the lower 48 has grown by 3 million bbl/d over the past three years, reversing a multi-decade decline, thanks to light tight oil (LTO) production in North Dakota, Texas and other parts of the country. While the US still imported 7.7 million bbl/d of crude on net in 2013, the ability of domestic production to further displace imports is limited by current refinery configuration (oriented towards heavier and higher sulfur international crudes) and foreign producers’ desire to maintain a foothold in the US market. There is plenty of demand for LTO elsewhere in the world, but current law prohibits the export of crude oil, with limited exceptions.
Why now? Oil producers in the US midcontinent are currently earning between $10 and $20 less per barrel than counterparts producing similar quality crudes elsewhere in the world. That has been true for a couple of years now, but until recently was due primarily to a transportation bottleneck between the midcontinent and the coast. Over the past few months, however, the export ban has played a larger role, hence the uptick in industry and media attention.
What’s at stake? The key issues in the debate will be a) whether the ban will meaningfully slow the pace of domestic production, b) the implications of lifting it for refiners and consumers, both in the US and around the world, c) the environmental impacts, and d) the geopolitical and trade policy implications. These are complex questions, which we will be digging into in depth in the months ahead, in partnership with the Center on Global Energy Policy at Columbia University. But current oil market dynamics offer some insight into who wins and who loses.
What’s next? With Sen. Landrieu poised to take over as chair of the Energy and Natural Resources Committee, both Democratic and Republican committee leadership will be crude export supporters. But the Congressional politics of modifying or removing the ban remain extremely challenging, as evidenced by Sen. Murkowski’s call for the Obama Administration to do so through executive action. Expect more smoke than fire on this issue in the weeks and months ahead.
What’s at issue?
While the question of whether or not to export LNG has been the most prominent trade policy debate prompted by the US oil and gas boom, others have been waiting in the wings. The recent decline in US oil demand—the result of weak economic growth, high oil prices, and increased fuel efficiency—has turned the United States into a net exporter of refined petroleum products. The United States exported more than 1 million barrels per day (bbl/d) of refined products on net in 2013 versus net imports of 2 million bbl/d in 2007. This has led some policymakers to call for export restrictions to ensure that US oil is kept within the country. The president has the authority to restrict refined petroleum product exports under the Export Administration Act of 1979, but has not since 1981.
Exporting crude oil, however, is currently prohibited in the United States without explicit presidential permission. Under the Mineral Leasing Act of 1920, to export domestically produced crude oil, the president must “make and publish an express finding that such exports will not diminish the total quantity or quality of petroleum available to the United States, and are in the national interest and are in accord with the provisions of the Export Administration Act of 1979.”  The president must submit a report to Congress outlining the justification for any export permit, and Congress has 60 days to block the president’s decision through a concurrent resolution. The Outer Continental Shelf Lands Act similarly restricts offshore oil production. Past presidents have determined that the export of heavy Californian crude, crude produced from Alaska’s Cook Inlet, and crude released from the Strategic Petroleum Reserve (SPR) are in the national interest. Congress has approved the exportation of oil shipped through the Trans-Alaska Pipeline, and under the North American Free Trade Agreement (NAFTA), crude exports to Canada are permitted, provided the crude is consumed within Canada and not re-exported.
Until recently, the crude export ban has had few tangible market impacts. Rapid growth in oil production from the Bakken shale in North Dakota, the Eagle Ford shale in Texas and others thanks to horizontal drilling and hydraulic fracturing, however, is starting to change that. Onshore crude oil production in the lower 48 states has doubled over the past three years, from 3 million bbl/d to 6 million bbl/d, reversing a multi-decade decline (Figure 2).
While the US still imported 7.7 million bbl/d of crude oil in 2013 (down from 10 million bbl/d in 2007) the crude export ban is already beginning to bite. US oil companies have invested considerable sums of money constructing world-class refineries that can process the heavier, higher-sulfur (also called sour) crude produced in Venezuela and the Middle East. The average US refinery has a Nelson complexity index of 11 (Table 1), compared to the non-US average of 6.1. This is particularly true along the Gulf of Mexico—known in the industry as Petroleum Administration for Defense District III (PADD III)—home to half of US refining capacity. PADD III refineries are among the most sophisticated in the world, with a Nelson complexity index of 12.1 (Table 1), and are among the best suited to process heavy, high-sulfur crudes.
The problem is that the oil being produced from shale formations in North Dakota, Texas, New Mexico, and other parts of the US mid-continent, is light and low-sulfur (also called sweet). While the refineries in PADD II (the Midwest) and PADD IV (the Rocky Mountains) are less complex than those in PADD III, they have only half the capacity combined of PADD III refineries. There are some plans to expand existing midcontinent refineries, and even build a couple new ones, but total additional US refining capacity currently in the works is only 100,000 bbl/d, less than one-fifth of current North Dakotan production. From a commercial standpoint, it may make sense to export light and sweet US production to refineries elsewhere in the world and continue to import heavy sour crudes to take advantage of existing Gulf of Mexico refinery investments. But current policy prevents that from occurring.
We are now several years into the US oil boom. Why is the crude export ban just now capturing policymakers’ attention? Indeed, starting in 2011 a large gap emerged between global light tight oil prices (such as Brent crude) and the West Texas Intermediate (WTI) benchmark in Cushing, Oklahoma. That gap has averaged $15 per barrel since. Until recently, however, this gap has been due primarily to a transportation bottleneck rather than the crude export ban itself. Over the past few months, that’s begun to change. You can track this by comparing the price of WTI to the price of Louisiana Light Sweet (LLS), a similar quality crude produced offshore in the Gulf of Mexico (Figure 3). Offshore production faces the same export constraints as onshore production, but until recently there has been ample demand from Gulf Coast refineries, keeping LLS prices above Brent (Figure 3). The gap was in the WTI-LLS leg due to challenges getting crude from Cushing to the coast. Over the past few months, the WTI-LLS spread has closed, but the LLS-Brent spread has widened sharply, indicating a shortfall in Gulf Coast refinery demand for light sweet crude.
Shipping crude oil from the Gulf of Mexico to East Coast refineries is a possible solution, but is complicated by the Merchant Marine Act of 1920—specifically Section 27 of that act, otherwise known as the Jones Act. Under the Jones Act, all goods transported by water between two US ports must be transported on a ship built, owned, and operated by Americans. This requirement can be waived by the US Maritime Administration, which is part of the Department of Homeland Security, and it has been in instances of domestic fuel shortages that followed Hurricane Katrina in 2005 and Hurricane Sandy in 2012. Absent a waiver, the Jones Act creates cost and capacity constraints to Gulf Coast to East Coast crude flows. As a result, both the crude ban and the Jones Act are becoming increasingly important policy issues for US oil producers.
What’s at stake?
A number of issues are at play in the crude oil export debate. If the export ban continues to result in a disconnect between international and domestic crude prices, what will the impacts be on US oil investment and production growth? The gap between Bakken and Brent oil prices has averaged $17 over the past three years, but high global oil prices over that period mean Bakken producers have still earned $92 a barrel on average – more than enough to incentivize additional investment and production growth. If global oil prices fall, however, that could change.
If the ban is removed or loosened, either through congressional legislation or executive action, what will the impacts be for American consumers? This is likely to be the most contentious issue, and is at the center of Senator Markey’s and Menendez’s opposition. We will be analyzing the consumer impacts of a change in US crude export policy in the months ahead, in partnership with the Center on Global Energy Policy at Columbia University. Thus far the primary beneficiaries of lower domestic crude prices have been midcontinent refiners, not American consumers. Over the past three years, refiners in the Rocky Mountains (PADD IV) have paid 21% less per barrel for crude oil than their competitors on the East Coast (PADD I). Midwest refiners (PADD II) have paid 16% less (Figure 4). But wholesale gasoline prices in the Rockies and Midwest have been only 1% lower than in the East Coast (Figure 5).
There are environmental considerations as well. If relaxing the crude export ban leads to higher US production, then use of hydraulic fracturing will expand as well, which many environmental groups oppose. And higher production could lead to greater global oil consumption (and associated carbon dioxide emissions) if it results in lower oil prices around the world.
Finally, how the US approaches crude exports could have far-reaching geopolitical and trade policy consequences. The US has long been a champion of free international trade, not least in natural resources. Indeed, Washington is currently pressing Beijing to remove export restrictions on rare earths and other resources through the WTO. The US position on crude oil exports will shape our ability to achieve other trade policy objectives. The export ban was put in place to protect US national security so the security implications of modifying or removing it will also loom large in the debate. It’s important to remember, however, that there are geopolitical benefits to allowing crude oil exports along with geopolitical costs. The US has spent much of the past two years trying to convince other countries to reduce purchases of Iranian oil, arguing that there is sufficient alternative supply in the market. That’s a tougher case to make with a crude export ban in place.
One half of the Senate Energy and Natural Resources committee leadership has come out in support of crude exports. With Sen. Max Baucus headed off to China as the new US Ambassador shortly, Sen. Wyden will likely take over as chair of the Senate Finance Committee. That makes Sen. Landrieu of Louisiana the leading contender for Democratic chair of the energy committee (Sen. Wyden’s current job). And Sen. Landrieu is on record supporting crude oil exports as well. Does that mean Congressional legislation modifying or repealing the export ban is on the horizon? Not likely any time soon. The Congressional politics of this issue remain extremely challenging. Even Sen. Murkowski, in her remarks at Brookings, called for the Obama Administration to tackle the ban through executive action, rather than offering to introduce legislation herself. Given reactions to the Senator’s speech, the Administration will likely face political challenges of its own if it attempts to do so. While the crude export debate will certainly be a major energy policy theme this year, actual policy changes are likely still a ways off.
 The one exception is petroleum products refined from Naval Petroleum Reserve crude oil, where an export license is required.
 30 U.S.C. 185(u).
 43 U.S.C. 1354.
 The Nelson complexity index is a measure of how sophisticated a refinery is. See http://www.eia.gov/todayinenergy/detail.cfm?id=8330 for more information.
 The weight of a crude oil is generally measured by API gravity. Heavier crudes have a lower API gravity, while lighter crudes have a higher gravity. Sour crudes are those with a high sulfur content, while sweet crudes have a low sulfur content.