Relaxing Oil Export Ban is Bad News for US Consumers

EconMatters's picture

By EconMatters  



US Energy Boom


The US is producing much more energy domestically the last decade in all forms from natural gas to crude oil with a myriad of boutique products along the way, and so it is natural for producers to want to maximize profits by expanding their marketplace.



Free Markets haven`t been Free for a long time


This would be the free market response, and that would be a great principle in theory, but nothing has been ‘free market’ in this country, and the world we live in for decades; that nostalgic business ideology has been replaced with corporate cronyism, powerful lobbying, state sponsored agendas, and closed door deal-making. 


Petroleum Products versus Natural Gas


We have seen the inevitable outcome of any lifting of this ban by looking at the products markets, namely gasoline. There is an abundance of cheap domestic oil (would be a lot cheaper without excessive QE Stimulus & Artificial Demand created by refinery Exports of Products) but still domestic oil production, and oil production in North America is at multi-decade highs, and yet gasoline prices are at record highs for this time of the year, and this is after coming down considerably from earlier highs in 2013.


An Abundance of Natural Gas & Oil Subsidizing Gulf Coast Refiners


Why is this the case? It is because the highly profitable export market for end products like gasoline where refiners along the gulf coast have expanded capacity to take advantage of cheaper North American oil, and low natural gas prices that enabled lower petro manufacturing costs. 



These cheaper input costs made US fuel and other derivative petroleum products very competitive on a global price basis which had the effect of higher prices for US consumers as supply markets were much tighter than they would have otherwise been without a robust export market during the last five years of this US Energy resurgence. 


Lower Prices Good for US Economy


Natural Gas is the energy market that has helped domestic businesses and consumers with lower prices which has benefited the overall US economy, while the domestic oil market which should be helping US consumers and businesses more, is being pegged higher due to the exporting of products. This gets even worse for US Consumers and businesses if the Oil Export Ban is relaxed. 



Somebody Wins, Somebody Loses


In effect, this results in the following scenario: US Consumers & Businesses pay higher prices, US Domestic Oil becomes more expensive due to widening the marketplace for exports, and Global Oil becomes cheaper for international consumers. This process just becomes a giant wealth transfer, another tax, a business subsidy from the US Consumer & Businesses that utilize domestic energy to foreigners and companies exporting said products to these international consumers.


Let`s just be consistent: Lift all Exporting Bans


While the government is at it let us just lift any Natural Gas bans on exporting, and just raise costs all along the energy input continuum for 2014. I am sure Dow Chemical will love this outcome and open up more manufacturing capacity here in the United States. Profits will be great for those who benefit from the aforementioned changes to energy export bans. But those business interests who rely on energy input for operations will be hurt from this legislative change, and so will US Consumers. 


I am sure these same gulf coast petro-refiners will have no problem with also lifting the export bans on any natural gas products so that their manufacturing and operational costs will rise along with higher natural gas prices which will eat into their operating margins and thus transfer this wealth to the natural gas industry players.


Market Correlations & Paradigm Shifts 


One can see the positive correlations in the charts between the increased production of domestic natural gas, thus leading to much lower input prices for refiners; and the takeoff in petroleum products exports from a pretty stable baseline previously , starting to gain steam around the 2005 to 2006 timeframe.  



This export dynamic for petroleum products along with high oil prices relative to the economy due to QE Stimulus liquidity and potential Middle-East instability inflated commodities and oil specifically thus further incentivizing US Domestic Oil Production along with new and cheaper technological drilling techniques in the energy industry activating the rebound around 2010 for the increased Domestic Oil part of the equation. 


This led to the Gulf Coast refiners expanding capacity and seeking cheaper transportation methods of this increased North American and Domestic Oil via pipelines, rail, and barges. The US domestic Oil production was the definite laggard in this US energy boom renaissance.


It will be interesting to see how this all plays out from a market standpoint, i.e., will US Domestic Oil production continue to trend higher without a robust export market like Natural Gas or will the recent trend reverse itself with production shutdowns in domestic Oil production projects? 


Another interesting dynamic to watch is what price is needed for the marginal cost of production for these domestic oil producers? Some refiners close to the fields are currently paying $25 below the WTI price for Oil – this is telling in how inefficient and costly our oil transportation system currently is, and that the actual market price needed for oil projects is much lower than the rhetoric thrown around in the media.  


When you factor in alternative opportunities for capital use, the oil industry has been quite attractive for investment over the last decade at these prices; that ought to tell you something given the contraction in most other industries. 


Consequently what happens when the Oil production market gets too frothy relative to demand, and what happens if there is a major pullback in oil prices which has been built into many market intelligence scenarios at the big oil companies? 


Moreover, would cheaper oil prices be all bad as this could lead to an improved economy both domestically and globally causing demand for consumption to rise thus soaking up some of these increased production gains of the last three years. 


The energy markets will be fascinating to watch over the next ten years as the big players fight for production share and lucrative revenue streams on a global scale from Iran and Venezuela to the United States and Canada.


Self-Interests Problem & Power


If this comes down to a self-interest problem which it usually does then one would think that the vote would fall along the lines of a 2-1 constituency vote against lifting the export ban on these domestic energy resources, but US Consumers haven`t had a vote at the table for a long time.


It probably will come down to which corporate lobby is stronger, and has more sway with the politicians in the decision making process. If past history is any indication, consumers usually get taxed with higher prices in the end, so the exports ban probably has a bunch of complicated and opaque loopholes added that provide enough cover for the politicians, and increased profits for the oil exporters.


But the lobbyists better get going and influence the politicians on this issue ASAP because once the next presidential election comes around higher gas prices seem to matter a whole bunch to these same politicians - see Barack Obama during the last election cycle.



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Duude's picture

No matter how you look at it, oil will trade at world crude prices no matter what. By restricting the export of oil products we aren't going to experience lower crude oil prices on account of a higher domestic supply.  On top of that we have additional costs due to refining and transportation.  The main problem with the US market is our 50 US states use more than 50 differerent gasoline formulations during the year. That increases costs considerably especially when we haven't built a refinery in 30 years and expanding an existing refinery costs billions with all the new EPA regulations. For the world gasoline market our refineries can produce a far larger batch for any number of nations with only a few formulations.  If we could get our act together and decide upon only a few formulations we'd see the added cost of refining drop due to economies of scale. Better yet, if like the Europeans we used diesel fuel more for the family car, we'd see 30% better fuel economy and would likely see the cost of diesel drop due to greater economies of scale in its production. In theory, diesel fuel is actually cheaper to produce than gasoline due to less refining needed. But because we've limited the use of diesel to the trucking industry, we aren't achieving the sort of economies of scale making diesel cheaper. The greater issue with gasoline prices in the US isn't due to oil companies exporting it, the greater issue is the fact our 50 states have state legislatures that operate their own states like sovereign nations. 

pitz's picture

"haven't built a refinery in 30 years"  -- isn't true.  The equivalent of a number of additional refineries has been added in the United States through "debottlenecking", improvements to maintenance practices, control systems, and operational practices. 

Agree with you 100% on the different petrol formulations for different states.  Trade barriers drive up the cost to the consumer in a most undesirable way. 

Flakmeister's picture

No, the Californian's decided that sucking smog was not in their best interests.... 

moneybots's picture

"Relaxing Oil Export Ban"


I thought the point of drill, baby, drill, was supposed to be to make us enegy self sufficient.

pitz's picture

It certainly helps, to offset long-term depletion, but still a heck of a long ways to go to filling the ~10M barrel per day gap between production and consumption. 

pitz's picture

Export bans just increase market innefficiency.  And the US is not anywhere near a net exporter of crude oil, and probably never will be barring a total collapse of the economy. 

Flakmeister's picture

Do you always blindly say what ever self serving ideological claptrap that come to mind before thinking or learning anything about the situation?

pitz's picture

In the practical sense, it may make more sense to import oil from Canada through the Keystone Pipeline from the Fort McMurray area, than it does to import oil from Alaska.  As Canada would have to then build infrastructure to export to China.  Much better to just export the Alaskan production to the Asian importers who are in closer proximity, and import from the Canadians.

An export ban makes this impossible.  The market innefficiencies show up in the cost to consumers.  This is not ideology, this is common sense!

Flakmeister's picture

You are making shit up...

For years, there was crude exported from Alaska to Asia with the caveat that the exported must replace imports elsewhere (along with some other fine print)....

Note the correlation with Prudhoe production and decline here:

Like I just said, go back to sleep...

pitz's picture

I am most certainly not 'making shit up'.  And my sleeping patterns are none of your business. 

Plenty of Alaskan crude ends up being imported to the mainland.  Many of those imports could be replaced with Canadian.  With the Alaskan stuff exclusively shipped to Asia in lieu of building infrastructure in Canada.  A trade-barrier free oil market allows oil to find its most efficient consumers, and maximizes efficiency throughout the system.  Trade barriers promote innefficiency and innefficient capital investment.  These are simple facts, not adherance to any sort of ideology.

Flakmeister's picture

The best thing for the Canadians to do is to refine in Alberta and export any products... But we know why that isn't the case don't we? Or do we?

You're playing the ideologue card, yet again... 

pitz's picture

Refine in Alberta?  Are you joking?  When there's idled refinery capacity all across North America, and no demand growth in the United States? 


Flakmeister's picture

You clearly missed the point....

pitz's picture

I beg your pardon?

USA = 18.3 million barrels per day consumption

USA = 6.5 million barrels per day production

So the export ban doesn't do a lot of good in terms of suppressing domestic prices until production > consumption.  For which there is still a good 10 million barrels per day gap. 

So please, do some research before resorting to accusations of being ridden with "ideological claptrap" or whatever you want to call it. 

Flakmeister's picture

You have no idea what you are babbling about...

Oil is not fungible.. There is currently an excess of LSC where is there is no refining capacity, this in turn is leading to lower prices in the mid west for gasoline...

The Keystone XL is designed to bring HSC from Canada to the GC so as to enable export of refined goods (i.e. to the highest bidder)... Suggest you google Valero+Tax+Free+Export+Zone....

Thinking that the market fixes everything *is* ideological claptrap...

pitz's picture

LSC is the easiest stuff to refine, relatively speaking.  Its the heavy stuff that needs extensive hydrocracking/desulphurization.  Refineries have spent billions installing hydrocrackers to handle the heavy stuff, but that's not to say that most of them couldn't run light/sweet if available and economic.

And yes, the market does fix everything over time.  The export ban is just yet another constraint on the ability of suppliers to match production with the demand.

Flakmeister's picture

Hint: for starters, it ain't economic.... 

Now, you really should go back to sleep as it is clearly past your bedtime...

It is also clear that you put corporate profits above all else...

pitz's picture

Its certainly not a great utilization of the upgrades they spent billions of dollars on, but light/sweet crude is easier to process even at refineries that have been upgraded than the heavy stuff. 

As for the rest of your comments, you sound pretty much out of touch.  And I don't see what corporate profits has to do with this.  Greater efficiency in the energy markets is good for everyone. 

new game's picture

suite and ties are not welcome!

new game's picture

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wild west til bust!

Flakmeister's picture

The E&P desperately want the WTI Brent spread to vanish and they want the sheeple to pay the international price...

BTW, roughly 1 mmbpd of "production" is volumetric gains from cracking heavy imported oil. In other words, Smoke and mirrors...

At the heart of this is that the CG refiners are optimized for Heavy sour crude and all the recent production gains from the EFS and Bakken are ill suited as feed stock as they are lighter sweet, and as in the case of the EFS, mostly API>45 condensate....