Oil Export Ban Hurts US Oil Industry By STEVE AUSTIN for OIL-PRICE.NET, 2014/02/03

The United States of America, land of entrepreneurship and innovation, is a major campaigner on the world stage for free markets and liberalized economies. So, few Americans would believe that their government actually prevents a US industry benefiting the economy through exports. Indeed, the oil sector, one of America's iconic industries is prevented by law from exporting crude oil. With the advent of fracking and new discoveries of more reserves, producers are calling for this ban to be lifted. But Environmentalists support the ban as part of their campaign to reduce the oil industry's exploitation of the environment. America's refining industry has lined up with the environmentalists to keep the ban in place. Why would major players in the oil industry be lobbying to keep restrictions in place?

History

The crude oil export ban was a reaction to the 1970s oil crisis brought on by the OPEC oil export embargo. It was toothless tit-for-tat legislation which had no effect while the US was a net importer of oil. The ban formed a part of a range of measures meant to increase America's oil independence and ensure that foreign powers could not bring the US to its knees by denying access to energy. These measures were bundled together in the Energy Policy and Conservation Act (EPCA), which came into force in December 1975.

The EPCA does not place restrictions on the import of crude or refined oil. Nor does it restrict the export of refined oil. This means oil producers are the only operators in the oil business who are restrained by the act. According to the EPCA, oil pumped out of the ground in the USA can only be processed at American refineries. The oil refiners of the United States, however, can choose to source their raw materials either in their own country or abroad. This creates a distortion in the supply and demand equilibrium that can only be detrimental to the seller and beneficial to the buyer.

Price

Europe and the Middle East follow the Brent crude price index when striking oil purchases. US oil producers, located mainly in Texas and the Midwest follow a different index called the West Texas Intermediate, or WTI index. A refinery on the East coast of the United States pays the Brent crude price on imports from the Middle East, but the WTI price to US producers. These two indices, therefore, should be in synchronization, as they are both used on supplies to the same customers. However, since 2010 the two indices have diverged. At the maximum point of that divergence, in August 2012, the monthly average price of the Brent crude index was $23 higher than the WTI index. Economists would point out that such an anomaly highlights inefficiencies and imbalances in the oil pricing mechanism. That imbalance is greatly to the detriment of oil producers in the United States.

Imbalance

The marked difference between the monthly average prices of the WTI and Brent indices occurred because a major US oil refinery went offline for maintenance in 2012. This resulted in a glut at the source of the oil in the Midwest. The WTI index is based in Cushing, Oklahoma and the excessive supplies and storage of oil in that location depressed the oil price. However, the Brent index is based on world-wide supply and demand, which did not change significantly during this period. Had US producers been able to sell abroad at this point, the glut would have dissipated. Selling abroad, US producers would have obtained the international price for their product and the WTI and Brent indices would have returned to parity.

Infrastructure

Distributing oil from its point of origin to its point of need can be made economically viable within the US if oil producers build pipelines to refineries located on the East coast. However, the producers will not invest the large amounts of money needed if those pipelines cannot also supply tankers taking oil to foreign markets. This is because the export ban makes domestic refiners the only market for US oil producers. This places too much power in the hands of the refiners who have already shown that they can squeeze the margins of producers. The lack of pipeline capacity to transfer US crude to East coast markets forces that transport onto the railroad network. This is a much more expensive method of transport than importing oil by tanker from abroad. Thus, in order to match the prices at the point of need offered by foreign suppliers, US oil producers have to accept a lower margin for their crude.

The crude oil export ban removes the incentive from oil producers to invest in delivery systems. More efficient delivery systems would increase the availability of oil within the US at lower prices. This in turn would reduce costs for transport and reduce the prices of all goods available to consumers as well as motorists, a large component of inflation. Foreign suppliers gain access to US markets because they are able to deliver their goods with lower transport costs. Thus, US oil producers have lower margins and make less profit. In turn, the home states of oil producers and the federal government receive less tax revenue on the profits of US oil producers than they would gain if US crude could be exported.

Capacity

The logic of the export ban is based on the false assumption that all the oil in the ground in the US will one day run out. Under that scenario, it is better to reserve all the US's natural resources for American use to make sure the country is not pumped dry for the short-term benefit of creating over-supply and lower prices to foreign manufacturers. However, estimates of reserves have consistently risen as investment in exploration, detection and extraction technologies improved. Oil companies will not invest further in exploration or extraction in the US if they cannot export the excess they create at a fair international market price.

The feasible level of production within the US is much lower than the demand of the country because of geographical imbalances and lack of infrastructure. Even US owned oil producers would prefer to invest in other areas of the world if they cannot find a market for their US oil output. This means the profits from US oil production will not be used to create jobs in the US, but in other countries.

Efficiency

There is no moral or financial benefit to the USA in restricting the markets of oil producers while giving refineries a free hand. The crude oil embargo simply shifts some of the potential profit from one group of companies to the shareholders of another group of companies and encourages processors to source their crude abroad, thus losing dollars to foreign nations. It stifles competition by removing potential rival customers.

If US oil producers were as free to sell to other countries as refineries are to buy from other countries, investment would increase, job creation would rise, profits and tax revenues would increase and prices would fall. Although the embargo was meant to prevent US oil running out, it actually creates that shortage. US oil producers have no incentive to invest in exploration and extraction technology to increase discovered reserves of oil in the USA once their market becomes saturated. Today thanks to the American Shale Oil Revolution, the US oil industry has reached that point, it needs a new outlet to encourage it to achieve its potential.