It's now common knowledge that the U.S. is in the midst of a massive oil boom, fueled by growing production from shale plays in Texas and North Dakota. The surge in domestic production, coupled with a lack of sufficient pipeline infrastructure, has led to a massive oversupply of oil in the middle of the country.
With more oil than refiners know what to do with, a growing number of experts are suggesting that the surplus oil be exported abroad. Recently, the head of the International Energy Agency, even suggested that not allowing crude exports threatens to bring the American oil boom to a screeching halt. Let's take a closer look.
America's oil boom
In just the past two years, domestic crude production has risen by 1.3 million barrels per day, with the EIA projecting a further increase of 1.4 million barrels per day by year-end 2014. Extracting all this oil hasn't been a problem. But transporting the stuff has posed numerous challenges.
Major bottlenecks in transportation, caused by a lack of sufficient pipeline infrastructure, have kept the price of domestic oil far below international prices. In fact, this price differential, as reflected by the Brent-WTI spread, rose to above $20 per barrel last week. And certain grades of inland crude are fetching lower prices still.
Transport difficulties and the Gulf Coast oil mismatch
While midstream companies are working hard to alleviate the oversupply of crude and transport growing volumes to refineries along the Gulf Coast, it remains to be seen whether it will be enough. For instance, an expansion of the Seaway pipeline, which is operated as a 50/50 joint venture between Enterprise Products Partners (NYSE:EPD) and Enbridge (NYSE:ENB), is expected to gradually alleviate the oversupply at Cushing -- the nation's biggest oil storage hub -- by the end of this year.
And Kinder Morgan's (NYSE: KMP) Crude Condensate pipeline, or KMCC, which went into service in June, serves growing production from the Texas Eagle Ford shale, which it transports to Phillips 66's (NYSE:PSX) refinery in Sweeny, Texas.
But even with this infrastructure buildout, the problem is that many facilities along the U.S. Gulf Coast refining hub are poorly suited to process the light, sweet crude flowing from shale plays in Texas and North Dakota. So if local refiners can't process it and it's too costly to be transported to East Coast refineries that are better equipped to process it, it might just make better economic sense to export it.
Recently, Maria van der Hoeven, the head of the International Energy Agency -- a 28-member international agency formed in response to the oil crisis of 1973 -- made this argument.
The IEA and the EIA in favor of crude exports
She warns that the U.S. government's archaic stance on exporting crude oil is a major threat to the economic viability of the current American oil boom. Energy companies are motivated to drill for domestic oil as long as its price is sufficiently above its marginal cost of production.
But if the massive discount between domestic oil and Brent persists for much longer, van Der Hoeven argues that "it could threaten the economic viability of these new supplies, potentially stopping the boom in its tracks." She argues that U.S. crude export restrictions need to be lifted, since U.S. refiners are limited in the quantity of domestic supplies they can handle.
Crude exports are governed by the Export Administration Act of 1979, which gives the president the authority to ban or curtail the export of commodities thought to be in short supply. While certain exceptions have been granted, most U.S. energy companies are unable to export crude to foreign countries besides Mexico and Canada.
Adam Sieminski, the recently appointed head of the US Energy Information Administration, has also voiced his support in favor of crude oil exports. He argues that crude exports could actually benefit the U.S. economy by creating jobs and ultimately reducing prices.
Even if the U.S. continues to import crude oil on a net basis, Sieminski suggests that exports may be the right solution for the growing volumes of light, sweet crude, which are poorly suited for U.S. Gulf Coast refiners.
To export or not to export
In my view, exports of surplus light, sweet crude, if implemented correctly, could be a major boon to the U.S. economy. Laws governing oil exports do indeed appear archaic, since many of them were instituted three decades ago, when the prevailing ideology was drastically different. Back then, oil was considered the most vital of strategic resources, supported by the then-prevalent belief that peak oil would soon turn out to be reality.
But now, it certainly appears that we're a long way away from running out of oil. Unless we allow greater exports of crude oil, we will probably continue to build on the current glut, which will almost inevitably drive prices lower still.
By doing so, we could risk alienating the oil and gas entrepreneurs who have contributed to the rapid growth in domestic oil production. If the price of oil collapses below its marginal cost of production, they would suffer, which would be bad news for our economy as a whole.
If history is any indicator, oil booms can lead to tremendous prosperity. It was oil gushers discovered at Spindletop, Texas, that helped fuel America's extraordinary economic growth in the first quarter of the 20th century. Similarly, it was the massive discoveries of oil in East Texas that aided the U.S. during World War II; some six out of seven barrels used by the Allies came from oil produced in the United States.
Like in these past decades of prosperity, oil exports may once again be exactly the catalyst America needs to boost its economy.