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Loophole Makes Hilarious Mockery Of US Crude Oil Export Ban

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Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Washington is tangled up in spirited bouts of mudwrestling over exporting US-produced crude oil, which has been prohibited since the Arab oil embargo of 1973. Oil companies, environmentalists, consumer groups, lobbyists, lawmakers – they’re all at it.

Oil companies, faced with lackadaisical consumption and ballooning production in the US, are desperate. They have visions of dropping prices just when exploration and production costs are rocketing higher. So they want to benefit from the higher prices their US-produced oil would bring in other markets – and they want to create scarcity in the US to fire up local prices.

But environmentalists fear general mayhem if crude oil were allowed to be exported. Consumer groups are worried that it would raise the cost of gasoline, diesel, propane, and heating oil – though oil companies have sworn up and down a million times, via numerous studies they themselves directly or indirectly funded, that oil exports wouldn’t impact prices at the pump. Lobbyists of all stripes see in this conflict a mega-opportunity to fatten up their wallets. And lawmakers want to exact their pound of flesh from both sides; elections are coming, and they need to stuff their campaign coffers with money.

Meanwhile, behind the scenes, so to speak, something else has been happening: a breathtaking boom in exports, not of crude oil, which would be illegal, but of refined “petroleum products,” which is perfectly legal, even if it’s refined just enough to circumnavigate the crude-oil export ban.

BP, the British oil mastodon which is still in hot water over the Horizon oil spill in the Gulf of Mexico, figured it out too. It has inked a 10-year deal for at least 80% of the capacity of a refinery being built by Kinder Morgan Energy Partners LP in Houston, Bloomberg reported. The first phase of the 100,000 barrel-a-day refinery is expected to come online in July. It’s designed to refine crude just enough to turn it into a "petroleum product," which then can be legally exported without limits.

To heck with the crude oil export ban.

It’s not just BP. The possibility of legally exporting barely refined “petroleum products” to profit from the price differential overseas has been such an irresistible lure that it has triggered a construction boom of specialized refineries along the Gulf Coast.

An “inexpensive way around the export prohibition” is what Judith Dwarkin, chief energy economist for ITG Investment Research, called the phenomenon. She told Bloomberg, “You can lightly ruffle the hydrocarbons and they are considered ‘processed’ and then they aren’t subject to the ban.”

Specialized refineries, built at a fraction of the cost of full-fledged refineries, can distill the lightweight crude or “condensate” found in parts of the US into various “petroleum products” that often need to be refined further in the receiving country. Production of condensate has doubled since 2011, creating glut-like conditions in some areas. Hence the drive for exports. And the drive to finagle a way around the crude-oil export ban.

This chart by the Energy Information Administration shows the “petroleum product” export boom that is making such hilarious mockery of the crude-oil export ban:

Since 2007, when this boom took off, exports of petroleum products have tripled to a full-year average of 3.5 million barrels per day (bbl/d) in 2013, up 11% from 2012, according to the EIA. And they hit 4.3 million bbl/d in December, the first month ever such exports exceeded the 4 million mark.

Among these petroleum products are “distillates,” the largest category that includes diesel, kerosene, and home heating oil. US refineries increased their production of distillates to an average of 4.7 million bbl/d for the year, and set a new record in December of 5.1 million bbl/d. About 1.1 million bbl/d were exported in 2013, up 10% from prior year, half of it to Central and South America, 400,000 bbl/d to Europe.

Worried about the price of gasoline at the pump? Exports of gasoline (finished gasoline and gasoline blending components) rose 9% to an annual average of 550,000 bbl/d, with December setting a new record of 770,000 bbl/d.

Heating your home with propane? You got snookered this winter. Propane around the country prices nearly doubled since October, though they have started to wind their way back down to earth recently. Meanwhile, propane exports, supported by a new export terminal that came on line in September, soared, particularly in the last quarter, and averaged 300,000 bbl/d in 2013. A 76% jump from prior year!

Whatever the original purpose of the export ban, it wasn’t immensely helpful in keeping prices down – I mean, if I remember right, a gallon of gasoline cost a fraction of a buck at the time. Now the ballooning exports of “petroleum products” and the potential for outsized profits have nurtured along a specialized industry that is piling billions into infrastructure, plant, and equipment, with the sole goal of elegantly dodging the export ban.

What is perhaps the most gigantic loophole in the history of mankind may well obviate that spirited high-dollar mudwrestling show in Washington. Then lawmakers and lobbyists would have to go look for some other cause which they could leverage to exact their pound of flesh. And the industry will continue to use every trick in the book to light a fire under prices – and exporting “petroleum products” is just one of them.

This winter, things have begun to unravel. Natural gas inventories are near their 2003 low. Sure, weather is the main factor, but that's always the case. The truth is that supply has not been able to meet winter demand, period. It's a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever. Read.... Shale Oil & Gas: Not a Revolution But a Retirement Party

 

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Sat, 03/08/2014 - 14:29 | 4525290 Walt D.
Walt D.'s picture

This is the problem with Fascism. Private companies will always try to find a workaround. I seem to recall Marc Rich found an easy way around Jimmy Carter's Winfall Profits Tax on (peanut) oil. At least the government of Venezuela nationalized the oil industry before they decided to give everyone 25 cebts a gallon gas. 

Sat, 03/08/2014 - 11:47 | 4524921 MMcfpd
MMcfpd's picture

OK, so the US consumes ~18.6 MMBO per day and imports ~45% of that. So consumption here demands slightly less than half be imported, but the oil companies "want to create scarcity in the US to fire up local prices" by shipping their products to overseas markets?

Sat, 03/08/2014 - 05:29 | 4524497 supermaxedout
supermaxedout's picture

The fundamental problem for the US is, that they were not able to create a worldwide inflation like in the 1970 following the so called oil shock. This 1970s oil shock was US made and it served as the blue-print for their economic strategy following the orchestrated Lehman event. In 1970s the US were extreme succesful blundering (devaluing) the fiat savings of the rest of the world.

Since 2008 the US in close cooperation with the UK  blackmailed the rest of the world (via wars, sanctions, trade wars, currency wars, CIA actions etc, etc.)  to accept again the devaluation of the US Dollar resulting in worldwide inflation. The oil market is the biggest lever on all economies. But this is not anymore the 1970s. The biggest and most potent energy producers and exporters are not under US control (Russia, Iran, Venezuela). The wars to break the Russia et al. energy dominance failed and also the Ukraine situation is not going to change anything substantial.

Time will tell. There are only two options since China, Russia, Iran  and all the other Brics want to kill the US Dollar by all means. They are completely fed-up and fight for a more balanced world economic/financial  system.

They must not do much, they only have to continue to resist the ongoing US warlike activities. Today the US is not in control.  That leaves only two possibilities for the world:

1) WWIII or

2) US/UK economic downfall which means at the same time the economic rise of the BRICS and Iran but also Germany since the potential costumers for their high tech goods do rise in numbers substantially.

Option 2 means also, that the whole US empire is going to crumble. Less "good" money means lesser expenses for the military in Africa etc, which is the last bastion of US energy and raw materials control. The US is then forced to concentrate on itself, to take care for its own country which is also a victim of the failed US imperialistic policy after the downfall of the USSR.

And finally the now nearly 70 years lasting US occupation of Europe is going to end. This is then going to end also the unrestricted and cost free access to the knowhow of Europe via industrial espionage. Confiscating of European research results under the premise "US National Security Interests" is going to stop too. The brain drain of scientist from Europe to the US is then quickly going the other way round.

In other words, the US does have only the capability to destroy the whole world but this is no option, because there exists no other world for the US 0.1 % to hide and to enjoy their blunders. The logic result is option 2. Unfortunately this means not much for the 0.1 %, they are still continuing to swim on the top of the soup, while the rest of the US is going to suffer.

Sat, 03/08/2014 - 04:24 | 4524466 q99x2
q99x2's picture

Hell is looking for Oligarchs.

Sat, 03/08/2014 - 03:36 | 4524430 ebworthen
ebworthen's picture

Typical; front face says "No oil" while back face says "How much you want?".

Typical two-faced U.S. Crony Capitalism scam while our kids die for nothing.

Hang the fuckers, all of them.

Sun, 03/09/2014 - 15:21 | 4528134 dizzyfingers
dizzyfingers's picture

ebworthen "Hang the fuckers, all of them."

Hangings sometimes fail, double jeopardy ensues. Better to use guillotines.

Fri, 03/07/2014 - 22:20 | 4523845 OpTwoMistic
OpTwoMistic's picture

This is the reason the retail price does not go down. The world is awash in oil and the price climbs. Same thing will happen to nat gas when exported. It will get to a price that Americans can not afford their own gas.

Fri, 03/07/2014 - 22:16 | 4523834 groundedkiwi
groundedkiwi's picture

I can remember some years ago reading about some Israeli billionaire buying up refineries in the USA. Great to have foresight.

Fri, 03/07/2014 - 20:49 | 4523580 Wahooo
Wahooo's picture

Still time to buy the refiners.

Fri, 03/07/2014 - 19:51 | 4523396 SmittyinLA
SmittyinLA's picture

XOM cited the emminent removal of petroluem export bans in NOT writing down a portion of their XTO gas purchase assets(they paid 100% too much based on current US gas prices)  

Fri, 03/07/2014 - 16:27 | 4522632 Flakmeister
Flakmeister's picture

They are just re-exporting refined imported oil...

The US earns a seniorage on it, 10% of domestic oil production is due to refinary gains (i.e. volumetric gains realized from shortening the carbon chains)....

It is also the template for what Keystone is really all about... Except in that case, the profits are tax free...

Fri, 03/07/2014 - 16:13 | 4522562 Fuh Querada
Fuh Querada's picture

The meme "record insider selling by smart money" has been propagated at roughly 3-month intervals since early 2009.

Fri, 03/07/2014 - 16:12 | 4522554 johnQpublic
johnQpublic's picture

motherfuckers

they'd burn the country down so they could sell more fire extinguishers

Sat, 03/08/2014 - 08:09 | 4524599 kurt
kurt's picture

Middle class destroyed one tank at a time. See the cars in front of you? See the ones behind? Sitting in traffic in your car, not rolling forward. If you could see the invisible crap spewing out of his tail pipe, if they dyed it green and you could see it coming out of your air conditioning vent, you would Never sit in traffic again.

But you're stupid and you are not doing anything about monopolistic price manipulation of gasoline. You're about to pay the equivalent of a month of food for healthcare, before you ever go to the doctor. You'll pay more if you do.

You don't even attempt to stop your outright poisoning by the chemical industries via chem trailing or, worse, flouride in you water, yes even your bpa infested plastic bottled water. If you get despondent they give you anti-depressants of which 9 out of 10 have, you guessed it, flouride. Zombie Awake!

Fri, 03/07/2014 - 16:24 | 4522613 SAT 800
SAT 800's picture

Basically, they already are doing just that. they sold the country to China so they could kill off the US economy they planned to get rich off of. And don't we have a clever government; they don"t build specialized refineries in a two month window; how can the zombies in Washington manage not to notice ? And of course, "everyting would be all right if the government just had more controls over everything". . hmm-hmm.

Fri, 03/07/2014 - 19:40 | 4523360 cynicalskeptic
cynicalskeptic's picture

We don't have a 'clever' government, we have a 'bought and paid for' government.  This is just more smoke and mirrors to fool the masses. Lets the pols say:

"We would NEVER allow US crude to be exported......."

small price for the oil companies to pay  keep in mind these same companies were selling gasoline to Hitler during WWII

Fri, 03/07/2014 - 20:21 | 4522470 Jumbotron
Jumbotron's picture

Damn....simply.....damn.

I really like to the point articles like this.  Not that I don't like in-depth ones.  But well written articles that also illuminate hit you like a sucker punch....with just the same attention getting results.

Good job !

"The Spice Must Flow"

Fri, 03/07/2014 - 15:52 | 4522454 shovelhead
shovelhead's picture

"You cannot export giraffes from this country."

"That's not a giraffe. It's a long necked lab rat."

"Oh, OK."

Fri, 03/07/2014 - 23:44 | 4524092 0b1knob
0b1knob's picture

What a disaster!  The US is leveraging its natural resources and unused refinery capacity to MAKE PROFITS for American companies and PROVIDE JOBS for American workers.     All while paying taxes and reducing the trade deficit.

This must be stopped.  All this MUST BE OUTSOURCED AS SOON AS POSSIBLE!

/s

Sat, 03/08/2014 - 13:52 | 4525196 mkkby
mkkby's picture

ZHers supposedly love freedom, but oil companies cannot be allowed to sell to the highest bidder.  Are you libertarian or not?

Sat, 03/08/2014 - 17:39 | 4525627 0b1knob
0b1knob's picture

Being a Libertarian does not mean a person is automatically in favor of using free trade and globalization to destroy US industry.  What is so terrible about moving oil exports upstream to the higher value added (and profitable) petroleum products?   Sounds like a good plan to me.

O couse the government did it by accident and for the wrong reasons. but so what?

Sat, 03/08/2014 - 18:27 | 4525836 Paveway IV
Paveway IV's picture

Here's how that 'good plan' will work out for you:

You will be paying almost as much for gasoline as Europeans pay for petrol -

Enjoy your $9/gal gasoline in Cleaveland or Phoenix so the U.S. taxpayer-welfare oil iindustry can gorge themselves on export profits.

You will also be paying almost as much as the Japanese pay for natural gas - 

Henry Hub prices cracked $5 mmbtu a couple of months ago and will never go back. TEPCO has 2015 forward contracts for Louisianna LNG for north of $15 mmbtu and they keep going north from that point. We wll cross $10 mmbtu this year and $20 mm next winter. Better buy an extra sweater.

Your electric rates will double within a year regardless of international price -

Remember all those natural gas-fired generation plants they've been building to replace coal? Well, they're going to be paying $10 mmbtu next winter when they were able to buy at $4 and change last summer. And what they pay, you pay.

 

Prohibiting export of domestic hydrocarbon production isn't free market in the least. It's a sort of soft-welfare to Americans. The free trade you envision is a double-edged sword, though. 100% energy inflation over the span of one year is suicide. You're going to need a nuclear war to distract people from that kind of pain.

Sun, 03/09/2014 - 00:23 | 4526899 mkkby
mkkby's picture

So you are a fucking socialist.  Get a god damed small car like they have in europe or move closer to work.  Why must I sell you my product when someone else is willing to pay more?

While you're at it.  Get a job, you stinking Obama loving welfare parasite.

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