"Safety and certainty in oil lie in variety and variety alone"--Winston Churchill.
Churchill's statement on oil supplies dates back to the time when he, as first lord of the admiralty, decided to convert the British Royal Navy from coal-fired steam boilers to diesel engines so its ships would be faster and more nimble. The move was incredibly controversial, because it meant the fleet would abandon a bountiful domestic energy source for one it would need to import.
America faces a completely different situation today, but the legendary British prime minister's message is just as applicable. We are in the midst of an epic boom in oil production, and there is a great debate as to whether we should export crude oil. The biggest argument against exporting crude is that it would keep gasoline prices lower in the U.S. But exporting oil might actually lower prices for gasoline more than if we hoard domestic supplies. Let's look at how the theory of keeping oil at home doesn't really hold up and how following Churchill's advice might be the best way to see cheaper prices at the pump.
Being a hoarder never works
To see how the U.S. can lower gas prices by exporting crude oil, we first need to address a myth about gasoline prices. Gasoline prices are pretty much the same globally. Yes, the average price for a gallon of gasoline in Europe is about $7.50, while the average retail price in the U.S. is $3.60. But that isn't because we are better at sourcing oil and gasoline; instead, it all comes down to taxes. The major difference in price between domestic crude -- West Texas Intermediate -- and the international benchmark -- Brent -- looks like this over the past couple years:
But the difference in pre-tax gasoline prices in the U.S. hasn't budged in comparison to other countries:
Why is this? Well, largely because we still import significant quantities of crude oil, about 7.7 million barrels per day at the most recent count from the U.S. Energy Information Administration. With about 45% of all refined crude oil coming from outside our borders, we are still very much subject to international crude price. Also, there is no ban or limit on exports of U.S. refined product. So the price of gasoline will likely continue to be based on what the world pays, and keeping oil in-house probably won't lead to a lowering of gasoline prices no matter the cost of domestic supplies.
Lower global prices = lower domestic prices
How exactly could allowing the export of U.S. crude lower gasoline prices, especially considering that the nation will still will be a net importer of oil? It has a lot to do with Churchill's quote and the way the U.S. is geared to process crude oil. Much of the new oil produced from shale in the country is a very light crude oil, but our refineries are designed to refine heavier, lower-quality crudes from nations such as Mexico, Venezuela, and Canada. If the United States maintains an export ban on crude, we won't be able to process more of our light crude without massive refinery retrofits. Instead, it's much more likely that domestic crude prices will drop and producers will be less excited to bring on new production while refiners continue to produce at the same rate and sell gasoline at the international standard prices.
If the U.S. were to become a greater part of the global oil trade by allowing exports, it could significantly impact global oil prices in our favor, which would in turn lower gasoline prices. Allowing exports would likely increase domestic crude prices, but would also be expected to decrease international prices. According to a recent study from consulting group IHS, allowing oil exports would increase domestic production by as much as 2.3 million barrels per day on top of any projected growth. This could have up to a $5 per barrel impact on Brent prices. Add these cost savings up and you're looking at a potential 10% drop in gasoline prices.
What a Fool believes
I see the appeal of not exporting crude oil: Ideas such as "energy independence" and "going on our own in the energy market" really tug at American values of self-reliance and self-determination. However, they aren't as practical as they may seem. By electing to remain out of the global oil market, we would in essence deny ourselves the ability to maximize the value of U.S. oil. The situation between America's oil boom and the British Royal Navy's switch to diesel would seem to be worlds apart, but in both cases Churchill's words resonate: Diversity is the key to security.
Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.
Do you know this energy tax "loophole"?
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.