Dear Joe, Banning US Crude Exports Would Likely Raise Gasoline Prices... Not Lower Them; IHS Markit

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by Tyler Durden
Tuesday, Nov 16, 2021 - 12:26 PM

While The White House keep telling us it has lots of "tools" (to deal with near record high gasoline prices), it appears in reality their options are limited.

A month ago we detailed Goldman's warning that releasing oil from the US Strategic Petroleum Reserve (SPR) "could perversely prove inflationary instead."

Confirming what Goldman suggested, Stephen Nalley, the head of the EIA, told a Senate Hearing today that an SPR release would bring the price of a barrel of oil down only around $2.

Additionally, instituting a ban on U.S. crude exports has currently been put forward for consideration as a “tool” to alleviate rising U.S. gasoline prices - average price in October up 36% from a year ago. This is one of the notable factors contributing to the surge in inflation, the highest increase in U.S. consumer prices in 31 years.

Gas price at the pump in America, on average, is up a stunning 62% YoY...

But, as IHS Markit details in a new report, the unintended consequences of such a policy would likely increase gasoline prices rather than lower them.

“A U.S. crude oil export ban would make the situation worse—for the United States and the world—at a time when global supply chains are already under exceptional strain,” said Jim Burkhard, vice president and head of crude oil markets, IHS Markit.

Such a ban would disrupt global oil supply chains, run counter to decades of U.S. policy promoting the free flow of oil and gas, lead to inefficient and costly re-allocation of domestic crude oil production, disrupt supplies for allies and discourage domestic production—which would all put upward pressure on U.S. gasoline prices. It would also send an unnerving signal to allies and partners about the reliability of the United States.”

Gasoline prices in the United States are connected to the global oil and gasoline market—and not the price of domestically produced crude oil, the analysis notes. A ban on exporting domestic U.S. crude oil production may lower the price of domestic crude. However, this could discourage production of both oil and natural gas with the result likely being a tighter world oil market—without lowering gasoline prices.

Instead, the disruption to the oil supply chain—both domestically and internationally—would likely increase gasoline prices, the analysis finds.

“Removing the 3 million barrels per day of crude that the United States exports to Europe, Asia and elsewhere would deliver a shock to the world market. The lost barrels would have to be replaced from somewhere else. And it is not clear if all of that could or would be replaced in a tight market,” said Burkhard. “Such a disruption of international crude oil flows would lead to a scramble to find other oil and generate more upward pressure on crude oil prices—and thus increase the price of U.S. gasoline.”

Implementing an export ban would also force a costly and inefficient re-allocation of crude oil supplies to refineries, the analysis says.

A large share of U.S. refining capacity is configured to process a different type of crude than the kind that the United States exports. Refineries in the United States are already operating at high utilization rates. Additional processing of another type of crude—a type that those refineries are not designed for—would only occur with increasing inefficiency, says the analysis.

Geography is also a complicating factor. Oil produced in Texas and the central United States that otherwise would be exported is difficult and costly to move to refining centers on the Atlantic or Pacific coasts. There are no crude oil pipelines to either coast and what rail facilities exist have been out of use. 

“Without the ability to export U.S. crude, you enter a situation where there is a tighter global oil market or U.S. refineries are inefficiently processing types of crude that they are not configured for, or both,” said Kurt Barrow, vice president, oil markets, midstream and downstream, IHS Markit. “This would lead to supply chain and processing inefficiencies and possibly even higher gasoline prices as a direct result of an export ban.”

The most effective supply-side force that could lower oil prices is more oil production, the analysis finds. The United States is currently expected to be the world’s leading source of oil production growth in 2022. The imposition of a crude export ban could place that growth in jeopardy.

“Instituting a crude exports ban would threaten U.S. oil production growth and make the world oil market more heavily dependent on OPEC+ increasing their production to meet demand,” said Burkhard. “This would test the amount of additional production capacity available in the rest of the world.”

So while White House spokesperson Jen Psaki reassures Americans day after day that "they are vigilantly monitoring gas prices" and "have tools to deal with high prices", the fact of the matter - based on the 'scientists' and 'experts' in the energy markets, if you release some of the SPR, you'll get higher oil prices; and now, if they ban oil exports, oil prices will go higher.

Finally, while some have suggested supply chain issues or other problems are to blame, Sen. Tom Cotton (R-Ark.) believes the Biden administration is intentionally working to increase gas prices.

“Most notably, more and more people tell me that they’re not even able to fill their pickup truck tank up for the entire week,” Cotton told Breitbart.

“They’ve got to fill up half a tank and hope that the price comes down by the end of the week. That, in particular, is the intended effect of Joe Biden’s energy policy. It’s not unintended or some accident. They want gas to cost $4 a gallon because they want all of us to get out of pickup trucks and SUVs and get into small electric compacts or bicycles or scooters or whatever else Pete Buttigieg takes to work,” he added.