It’s Complicated: Effects of Removing Restrictions on U.S. Crude Oil Exports
The U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, earlier this month released a report on the effects of a change in United States policy, which would remove or relax current restrictions on U.S. crude oil exports.
Current U.S. law allows for unlimited exports of petroleum products, but requires licensing of crude oil exports. Interest groups have been agitating for a change in that area. The Obama administration has come under fire for its energy export policy.
According to the EIA, current policies cannot be characterized as a crude oil export ban, since crude oil exports have been rising steadily in recent years.
A key variable in the effect of a change of export policy on U.S. domestic production, and therefore on global oil and product prices, involves the discount of West Texas Intermediate (WTI) crude to North Sea Brent, a benchmark for waterborne light crudes. A six- to eight dollar per barrel discount is necessary to cover shipping costs from Oklahoma to overseas markets where WTI might compete with Brent.
In cases where the Brent-WTI spread grows beyond that range, “removal of current restrictions on crude oil exports would result in higher wellhead prices for domestic producers,” said the EIA report, “who would then respond with additional production.”
An increase in domestic crude oil production that is not offset by reduced production abroad, in turn, would increase global crude oil supplies and places downward pressure on global crude oil prices. Under that scenario, gasoline prices in the U.S., could be “slightly reduced.”
As far as exports are concerned, the proportion of crude oil exports in the mix of total oil and oil product exports would increase if export restrictions are removed. Total exports of oil and petroleum products would also increase in that case, according to the EIA.
Oil refiners would also benefit from higher margins in cases where the removal of export restrictions increase the Brent-WTI spread. An increase in that spread, and the resulting production hikes, could also encourage significant investments in additional processing capacity to convert domestic crude into petroleum products that can be exported.
“For owners of existing refinery capacity,” said he EIA report, “a wider Brent-WTI spread will provide higher margins as refined product prices continue to move with global crude prices.”
The report caveats, however, that factors other than U.S. export policy, “affecting global supply and demand will largely determine whether global crude prices remain close to their current level…or rise…Global price drivers unrelated to U.S. crude oil export policy will affect growth in U.S. crude oil production and exports of crude oil and products whether or not current export restrictions are removed.”