What Would You Sacrifice if it Meant Lower Gas Prices?

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A new study commissioned by the oil industry's leading trade group came to a surprising conclusion. It predicted that if America ended its 39-year-old ban on exporting crude oil, we'd actually see the price of gasoline fall. Given that the price of gasoline usually goes up along with that of crude oil, this would be a surprise, to say the least.

Drilling down into the study
According to this study commissioned by the American Petroleum Institute, we'd export about 2 million barrels of oil per day by 2017 if the ban were lifted. That's about a quarter of current production. However, because the price of domestic crude oil would rise, it would incentivize drillers to increase production further. That would increase supply, help with debottlenecking our backed-up refineries, as well as boost our economy. In so doing, it would also slice 1.4 to 2.3 cents per gallon from the price of gasoline between 2015 and 2035.

Call me crazy but a penny or two sounds like a rounding error to me. However, I do see the overall logic to the industry's argument that our economy would benefit from the free trade of oil. While we'd increase our production and send that overseas, we'd basically be trading it for heavier crude oil that would be imported to feed refineries, which were built to refine heavier oil.

Overall, the study found several positives to exporting. First, exports would spur an extra $70.2 billion in investments in U.S. oil exploration, development, and production by the end of the decade. That would put an extra 110,000 to 500,000 barrels of daily oil production online by 2020. Further, it would boost U.S. refinery output by 100,000 barrels per day as it would debottleneck the system. Finally, it would create another 300,000 new jobs by the end of the decade, all of which are positives for our economy.

Clear winners and losers
Opening up the floodgates of exports would be a boon to producers like those in the Bakken Shale. That's why Continental Resources (NYSE: CLR  ) CEO Harold Hamm is leading the charge to get the ban lifted. He recently pointed out that by entering the export market, we could have an overnight impact on global events as we could send a message to Russia that we're displacing it as the world's leader in oil.

 

Photo credit: SandRidge Energy

However, by getting a higher price for its oil, Continental's profits would improve. As would the profits of higher-cost producers and basins. Lesser-known shale plays like the Cline Shale in Texas and the Mississippian Lime in the Mid-Continent could become much more profitable to drill as many producers need oil prices around $96 just to break even due to the high well costs and lower oil output. Higher oil prices thanks to exports cause companies to increase spending in those higher-cost plays. 

In the Mississippian, for example, SandRidge Energy (NYSE: SD  ) is about the only company that can earn a decent return as its well costs are well below competitors. Opening up oil exports would make it more profitable to drill that play, which would in turn grow production. It would also fuel more cash into SandRidge's coffers so that it too could boost its investments and further boost its production future.

That being said, there would be some big losers if we exported oil. Topping the list would be small independent refiners. This is why independent refiners like Alon USA Energy (NYSE: ALJ  ) and even Delta Air Lines (NYSE: DAL  ) refinery subsidiary Monroe Energy are joining together to fight lifting the export ban. These companies are currently thriving thanks to access to cheaper domestic crude oil prices. That advantage would likely go away if we exported oil. While profit is clearly a motive there, it's the same motive on the other side of the argument. 

Final thoughts
I'm about as free market as they come, but I'm not yet convinced that exporting our crude oil is in our best interests. While we currently have more oil than we ever dreamed of, it's still not an infinite supply. Why sell something that so many fought to protect to the highest bidder? While there's a case to be made that exporting oil would lower the price of gas, the data isn't compelling enough for me to support ending the export ban. 

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