Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Are Refiners Wrong in Favoring the Ban on Crude Oil Exports?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Independent refiners such as Valero Energy (NYSE: VLO  ) , Marathon Petroleum Corp. (NYSE: MPC  ) , and Tesoro Corporation (NYSE: TSO  ) have benefited immensely from rising oil production in the U.S. The supply glut due to rising U.S. oil production has kept the price of benchmark crude in the U.S. below the global benchmark, boosting the margins of independent refiners. It is not surprising then that the likes of Valero have opposed lifting the ban on crude oil exports. But are refiners right in favoring a ban on crude oil exports?

Refiners benefit from U.S. oil boom
In a report last year, the International Energy Agency (IEA) said that the U.S. will surpass Russia and Saudi Arabia as the world's top oil producer by 2015. Oil production in the U.S. has been rising due to the shale boom: In 2013, total U.S. crude oil production averaged 7.5 million barrels per day, up 15% from 2012, according to the U.S. Energy Information Administration (EIA).

Refineries have benefited immensely from booming oil production in the U.S. Not surprisingly, shares of Valero, Marathon and Tesoro have been among the best performers in the oil and gas sector in the last five years. Valero has gained over 200%, Tesoro has gained nearly 250%, while Marathon Petroleum has gained over 130%. In the same period, the S&P 500 has gained over 48%.

Independent refiners in the U.S. benefit from the spread between prices of West Texas Intermediate (WTI) and Brent crude. WTI has been trading at a discount to Brent crude, which is the global benchmark. The spread exists as the oil boom in the U.S. has created a supply glut, pushing down prices of WTI. U.S. refiners get a cheaper feedstock as a result. However, the finished refined products, which they have been exporting more and more over the years, are linked to Brent crude. Thus refiners have been enjoying healthy profit margins. In the fourth quarter of 2013, Valero reported adjusted earnings of $1.78 per share, while Marathon reported adjusted earnings of $2.10 per share. Both companies managed to beat consensus forecasts easily.

Crude oil export ban
Although the U.S. is seeing an oil boom, there is a ban on crude oil exports. The ban has been in place for nearly forty years. It was imposed after the Arab oil embargo caused an oil price shock in 1970s. The U.S. banned exports of crude to protect itself from any future price shocks. But four decades on, the scenario has changed completely.

New technology has allowed producers in the U.S. to tap into unconventional sources for oil. As a result, the U.S. is now becoming energy self-sufficient. The U.S. still imports vast quantities of oil. But, imports have been falling. The U.S. has to import some of the oil as many of the refineries in the country are configured to handle heavier and more sour crude, and not the light sweet crude the U.S. produces. In fact, this is the reason for the oil glut. It could be argued that new refineries can be built to handle light sweet crude. But building such infrastructure takes time. It would therefore be logical for the U.S. to start exporting crude oil.

The case for exporting crude oil, like natural gas, has been getting stronger. Earlier this week, Alaska Senator Lisa Murkowski said that a small change could get some U.S. crude exports flowing. The Senator said that the Commerce Department's Bureau of Industry and Security (BIS) can allow the exports of condensate, which is unprocessed light oil. According to Murkowski, the BIS can allow the exports of condensate without an act of Congress. The Senator has also released a white paper that urges lawmakers to lift the ban on crude oil exports.

Independent oil producers as well as oil majors such as ExxonMobil (NYSE: XOM  ) have also pressed the case for crude oil exports. The opposition to crude oil exports has mainly come from refiners. This is not surprising as allowing crude oil exports would push WTI prices toward the global benchmark, hurting refiners' margins.

Are the refiners wrong?
Refiners are right in trying to defend their margins and the competitive advantage they have enjoyed thanks to the oil boom in the U.S. They have argued that allowing crude exports would increase WTI prices, which would in turn lead to an increase in domestic gasoline prices. That certainly could be the case. However, lower WTI prices would discourage producers from increasing their output. It would also discourage new investment, which would be needed for increasing output. Lower production in the U.S. would mean refiners would have to import more crude oil at prices linked to the global benchmark, thus giving away the very advantage they are enjoying at the moment. 

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2901727, ~/Articles/ArticleHandler.aspx, 9/3/2015 2:49:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:02 PM
MPC $46.81 Up +0.75 +1.63%
Marathon Petroleum CAPS Rating: *****
TSO $92.46 Up +2.74 +3.05%
Tesoro Corp CAPS Rating: ****
VLO $59.01 Up +1.61 +2.80%
Valero Energy Corp CAPS Rating: ****
XOM $73.23 Up +1.15 +1.60%
ExxonMobil Corp CAPS Rating: ****