Move over, OPEC: There might be a new oil export giant in town. Explosive oil production growth is expected to push the U.S. past both Saudi Arabia and Russia as the world's largest oil producer next year. As a result, American oil producers such as ExxonMobil (NYSE: XOM ) and Continental Resources are pushing for the U.S. to lift its decades-old ban on oil exports.
Is this a crazy idea or just the free markets at work? Fools Matt DiLallo and Tyler Crowe debate.
Matt's case: crazy idea
I'm a free-market guy. Exporting our excess makes sense in most cases. That's why I support limited exports of natural gas. But oil is different. We don't have a 100-year supply of oil as we do with natural gas. We have maybe one decade of shale-fueled growth, and then the expectations are that production will start declining again. That's why exporting oil just doesn't sound like a brilliant idea to me. We've fought so hard to secure our access to oil over the years that it doesn't make sense now to just sell it to the highest bidder.
That's why I agree with top oil refiner Valero (NYSE: VLO ) that we shouldn't relax the decades-old law that has banned oil exports. Now, I know Valero's hands aren't exactly clean in this debate, as it refines oil and then exports the gasoline and diesel abroad. It wants to protect its profits. However, there is more value to the U.S. economy to export a value-added product like gasoline than a basic commodity like oil. In fact, according to America's Energy Advantage, for every $1 of final sales of U.S. manufactured products, we receive $1.34 in output from other sectors of the economy. I don't think we should sell that advantage.
Further, exports could put our country at risk to future oil spikes. Right now, U.S. benchmark crude oil trades at about a $15-per-barrel discount to globally benchmarked Brent prices. If our oil traded in-line with Brent, it would make us all that more susceptible to future supply shocks if, say, OPEC wanted to play dirty or if the Middle East started heating up again. It's a risk that's not worth taking, in my opinion.
Tyler's case: Free markets at work
If we were really that worried about the United States' ability to secure a long-term oil supply, then why are we already exporting 3.6 million barrels per day of refined products? I can understand Valero's argument that selling refined products has more added value than selling crude itself. In reality, though, selling all of our excess supply as refined products isn't possible based on the path we're heading toward. Here's why.
Crude production in the U.S. is expected to grow by 1.3 million barrels per day this year alone, and another 750,000 barrels per day in 2015. Also, the type of crude we're getting from shale oil is extremely light crude. Refiners here in the U.S. are simply not configured to process this much light crude, and production of this crude type will far outstrip our ability to refine it. Analysts at Citigroup anticipate we have another 700,000 barrels per day of light crude capacity before the entire system gets flooded with too much crude. So sometime in 2014 we will have more than we can handle.
If we were to let current policies stand, then we would see a bottleneck of our energy infrastructure, which would most likely lead to a steep drop in domestic oil prices. This is why Valero is lobbying for it: The company could make a killing! Valero gets to buy crude at extremely depressed prices and then turn around and export the refined product for more than it can get in the domestic market. No wonder the company wants to increase its export capacity to more than 400,000 barrels per day. The downside is that it would make several unconventional shale plays uneconomical, and exploration and production companies would suffer greatly while refiners like Valero take in a disproportionate amount of profits from the oil boom.
I wouldn't go so far as to say "open the flood gates" and allow for indiscriminate exports of crude, because that would then be detrimental to refiners and domestic consumers. Also, if refiners were spending tens of billions to increase their light, sweet crude capacity right now, then I might be a little more hesitant to export, but they simply aren't doing that. I think that taking a measured approach to exporting crude, much like how we have looked at LNG exports, is the best path forward for everyone involved.
As with any debate, both sides have merit. If we don't export our excess oil production, we could be faced with a glut of oil that could put a quick end to the U.S. oil boom that has been a key to fueling our economic recovery. On the other hand, lower oil prices would also push gas prices lower, which is an economic booster in and of itself. Clearly, we need a solution that works for everyone involved.
One company making OPEC's worst nightmare a reality
In an exclusive, brand-new Motley Fool report we reveal the company we're calling OPEC's Worst Nightmare. Just click here to uncover the name of this industry-leading stock.