Crude Oil Exports – A Conundrum Whose Time Has Gone

We’ve seen  a fair amount of chatter recently about the growing issue concerning whether or not the United States government should allow the export of more domestically-produced crude oil overseas before it is refined, and no doubt some of you are wondering what the big deal is.  It’s a fairly complex subject and one of the things I like to try to do is help explain this sort of arcane topic to folks who aren’t involved in the oil and natural gas industry in terms they can understand.

So let’s take a stab at crude oil exports.

First, you might wonder why it isn’t legal to just export oil to begin with?  For the answer to that question, you have to go back to 1975, when yours truly was a freshman in college.  The restrictions on exports of U.S. crude oil were put in place via a bill signed into law by then-President Gerald Ford that year in response to the 1973 Arab oil embargo, and the energy crisis that had developed from that event.  We sit here 39 years later in a completely different world than existed when All in the Family was TV’s most popular program and you were really cool if you wore a denim leisure suit to the local dance, with the same set of restrictions in place.

Nowhere has the world changed more than in the area of oil production and refining, and the essential crux of the issue around oil exports is that there is a growing mis-match between the quality of the crude oil being produced in the United States and the volumes and types of crude oil that U.S. refineries are set up to handle.  In the intervening years between 1975 and today, as our country began to import up to 65% of its daily oil needs, refineries along the U.S. Gulf Coast – which handle the vast majority of crude imported from overseas – were increasingly set up to process “heavy” crudes that come to the U.S. from countries like Saudi Arabia, Iran and Venezuela.

Over the last decade, the rapid development of newly-discovered oil shale formations like the Bakken Shale, the Eagle Ford Shale, and the Wolfcamp/Wolfberry shales in the Permian Basin have greatly enhanced U.S. production and led to a dramatic decrease in our imports from overseas.  That all sounds like great news, and it is for the country’s economy, trade balance and national security.

But for refiners and producers, this new abundance has created a bit of a conundrum.  The reason for this is that the oil being produced from most of these new shale plays is a light, “sweet” crude which requires different tooling and processing in order to be refined.  Hence, the mismatch, and the issue, and this mismatch could become even more problematic in the next few years.

Right now, the volume of heavy Canadian crude oil moving down to Gulf Coast refineries is about 150,000 barrels of oil per day.  But if – as appears likely – the northern leg of the Keystone XL pipeline is approved and constructed, it will have the capacity to transport up to 830,000 barrels of heavy Canadian crude to the Gulf Coast for refining, or export.

So we have a situation today in which refiners and producers are assessing their current options, not really liking what they see, and looking for other options.  The “other option” that looks most attractive and easiest to accomplish – at least, in theory – would be for the federal government to at least lessen, if not eliminate entirely, the current restrictions on crude oil exports.

Elimination of the statutory restriction would obviously require an act of a highly-divided congress that currently has a hard time acting on anything, along with a presidential signature.  However, the current law is not an outright, comprehensive ban, and the Commerce Department does manage a permitting process that currently allows for a relatively small volume of limited exports.  The law governing the issuance of such permits leaves the decision largely at the president’s discretion.

Specifically, the Energy Policy and Conservation Act of 1975 directs the president to….

“promulgate a rule prohibiting the export of crude oil and natural gas produced in the United States, except that the President may … exempt from such prohibition such crude oil or natural gas exports which he determines to be consistent with the national interest and the purposes of this chapter.”   The act further provides that the exemptions to the prohibition should be “based on the purpose for export, class of seller or purchaser, country of destination, or any other reasonable classification or basis as the President determines to be appropriate and consistent with the national interest and the purposes of this chapter.”

So, as with the ultimate approval of the Keystone XL pipeline, and barring an unanticipated (right now) act of congress, the final decision on the issue of expanding exports of crude oil produced in the United States currently lies on the desk of President Barack Obama.  If he were so inclined, the President could do what he has done so often on other matters and issue an executive order finding that permitting the export of additional volumes of U.S. crude oil is in the national interest, and directing the Commerce Department to promulgate regulations to make that happen.

It will be interesting to see how the President handles this issue, especially in light of the looming decision on authorizing the northern leg of Keystone XL.  There is really no legal or rational basis for denying that authorization, and the President’s environmentalist constituency should want as much heavy oil as possible to be refined in the U.S., where emissions standards are vastly superior to refineries in China, India and other developing nations where this oil would otherwise go.

But as we have seen so often where U.S. energy policy is concerned, rationality rarely becomes the key factor in making such decisions.  After all, if that were the key factor, the ban on crude oil exports would have gone the way of the denim leisure suit about 30 years ago.

Source: Forbes Business

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