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Why Oil Refiners Really Want to Keep This Regulation in Place

Rex Tillerson, the CEO of ExxonMobil (NYSE: XOM  ) , once said that if oil traded solely based on supply and demand, oil prices would be $60 to $70 a barrel, not $100 a barrel. 

The reason for the discrepancy is speculation. Many financial institutions and hedge funds are long oil because they think it will go up in the future. Their net buying causes oil prices to trade substantially higher than what the underlying fundamentals justify.

Because of speculation's effect on oil prices, the U.S. government tacitly influences oil prices. Some regulations that promote speculation, for example, lead to higher oil prices while other regulations that dampen speculation lead to lower oil prices.

Divining the goals of government is difficult. While lower oil prices may be good for the economy in the short term, lower oil prices are bad for the economy in the long term. This is because lower oil prices leads to less investment and less investment leads to less oil produced in the future. Less oil produced in the future will inevitably lead to supply shocks and recessions.

Because the government is influential in the marketplace and its goals unclear, the regulations that government does promulgate are very important to oil prices.

To export WTI or not to export WTI
Among the many energy regulations, perhaps the most important is the current government restriction on exporting crude oil.  

The current export restriction was instituted in the 1970's during the Arab oil embargo when crude oil was in short supply. At the time, it made sense for United States to keep crude oil within its borders to promote energy independence and lower energy price volatility.

The crude oil export restriction makes less sense now. As a result of the shale revolution, the U.S. produced more oil last year than it has in any year since 1989. More importantly, many U.S. refineries cannot handle the lighter grade of oil produced domestically.

If the U.S. government does not repeal the export restriction, prices of the lighter grade crude oil, or WTI, are in danger of falling significantly due to oversupply. Indeed, hedge fund manger Zach Schreiber believes that WTI prices may be a replay of natural gas prices in 2012, a year that saw natural gas decline significantly. 

If the U.S. government allowed for exports of WTI, however, the chance of oversupply would be lower and the institutions long WTI contracts would be in a stronger position psychologically.

The bottom line
So far, the Energy Department has shown some signs that it wants the export restrictions to be repealed. The decision is not a final, however, and there will no doubt be intense lobbying on both sides. 

U.S. refiners such as Valero Energy Corp (NYSE: VLO  ) and Marathon Petroleum Corporation (NYSE: MPC  )  currently benefit enormously from cheap WTI. Valero Energy and Marathon Petroleum buy WTI as input, but price their products based on more expensive brent. The cheaper WTI becomes in relation to brent, the more profits the refiners make. 

If the U.S. government keeps its crude oil export restriction and WTI prices fall, the refiners may do even better than what they are doing now. Their share prices will likely rally significantly higher than current levels. If the U.S. government repeals the export restriction, however, refiners may not see as much upside. 

Whatever their belief that government regulation should be, the refiners no doubt want the crude oil export restriction to remain in place. 

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On May 26, 2014, at 7:37 PM, rickshelton53 wrote:

    short term long term...Bull... liars just profits

  • Report this Comment On May 26, 2014, at 8:42 PM, stever4585 wrote:

    The export restriction was a knee jerk reaction by grandstanding politicians when a report appeared during the 70's oil shortage that America was exporting oil. In fact the export that was reported in Commerce Department reports was oil that Canada imported to a pipeline in Maine that crossed Maine and entered Canada from Maine. The pipeline involved was built during WW II and allowed tankers to avoid a long roundabout trip to get to Canadian ports (they were easy prey for U-Boats as well). It was oil purchased in Venezuela and intended for Canadian consumption. When we disrupted this flow all it did was piss off the Canadians and increased their costs to get he oil delivered.

    Similarly we do not allow Alaska Crude to go to Japan, a much shorter journey than to lower 48 ports. Oil is fungible and it would be more efficient to sent Alaska oil to Japan and use the money to purchase Venzuelan or Nigerian crude which is closer to the refineries in the Gulf of Mexico. Whenever politicians get involved common sense goes out the window.

  • Report this Comment On May 27, 2014, at 5:44 AM, Mark1946 wrote:

    Current prices are high due to SPECULATION?...Tell us something we don't know!

  • Report this Comment On May 27, 2014, at 6:56 AM, beyondo1 wrote:

    how about they just let the "free market" do it's job

  • Report this Comment On May 27, 2014, at 7:48 AM, savage393 wrote:

    The free market is doing it's job. It is redistributing wealth from the poor and middle class to the already rich. Then the GOP is reducing the taxes on the wealthy so they can keep more of it off shore, and hopefully hide it from what little tax they actually pay. If the top 5% have 95% of the money, then they should be paying 95% of all the taxes collected.

  • Report this Comment On May 27, 2014, at 11:36 AM, kdi wrote:

    They had no earthly intention of allowing renewable's to participate in the marketplace in any meaningful way, and they never did. Their problem is that the earth has the final say . . .

    Capital Expenditures have soared 11% per year while production has faltered for Exxon, Shell, Chevron, BP, etc . . . OM Profitability is down 10-20 % !!

    Consumer resistance to price indicates OM Demand Driven Forecasting should be abandoned and replaced with more conditions appropriate Supply Driven Forecasting!!

    Canceled projects in 2013:

    · Rosebank

    · Castberg

    · Mad Dog 2

    · Hadrian

    ==> Capex compression is beginning to hit home.

    Nearly half of oil industry needs more than $120/bbl. The OM's in the 4th quartile need $130/bbl. Shell had to borrow to pay their dividends - Not Good !!

    And for 2014, Shell has backed off doing anything in Alaska. Shell has already announced major divestment program just to pay their dividends! Look for more OM's to announce major divestment programs to pay their dividends.

    $4 trillion spent on finding and getting oil since 2005. More than GDP of Germany! EROI ratio has dramatically shrunk!!

    Since 2005, $2.5 trillion has been allocated to what amounts to OM bailouts to prop up declining supply which in turn props up GDP when Demand

    Driven Forecasting is used. However, supply growth appears good only because China has shown decreasing demand since beginning of 2013 and is currently out of the market and not moving the price of oil. The US has taken what was expected to go to China but at a much lower but temporary residual oil price. Furthermore, this temporary improved residual supply growth did not increase the price! Refiners are failing in Europe due to declining demand for oil.

    Unraveling of OM’s is indicated because the bailouts only provided temporary supply relief! Conclusion: Short on oil, and economy is being adversely affected. China will likely soon return to the oil market and affect the price of oil in a big way. China could add 50-60 mbpd consumption by 2020 and could bid out OECD's fossil fuel consumption.

    Point being that given the eventual and unavoidable failure of fossil fuels which now appears to be within sight, what are we going to pump through that immense natural gas infrastructure NYS is currently investing in ???

    Well, ponder this . . . What if Geothermal Assist were made part of the public commons ??? Those trillions of dollars earmarked for additional OM bailout's to prop them up TEMPORARILY might better be used to start migrating away from fossil fuel infrastructure !!! Every home that has a red banded NG furnace might be better served with real incentives to develop their own Geothermal Assist infrastructure for the long haul rather than replace it with a hard to maintain high efficiency NG furnace with a highly questionable supply !!! You have to have something waiting on the other side of a successful struggle against these fossil fuel Psychopaths.

    Note: Geothermal Assist is not the same as Geothermal. The latter is a High Tech solution that is employed in Iceland that converts volcanic heat into electricity. It's hyped here as a way to promote our sick Monetary/Market Economy. It's at least feasible to require homes to use Geothermal Assist here which is low tech simply harvests naturally occurring heat from about 150' underground with no burning of anything. Compressors, which have been around for quite a while, are used to squeeze heat out of the water that’s been heated to 57 degrees underground so that you wind up with two tanks of water. One contains super hot water and the other super cold water. Use the super hot water to heat up air and force it into your home with a big fan in the winter. Use the super cold water in the summer to cool your home. I was able to turn off my natural gas service, so they have no reason from me to sacrifice the 2nd largest forest on earth for that awful tar sands project, and poison our water with that awful fracking, and that completely awful Keystone pipeline that has utter failure written all over it.

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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