With U.S. crude oil production at a multi-decade high, the prospect of uplifting the ban on U.S. crude exports is gaining widespread support.
The ban, enacted by Congress back in 1975, enforces strict limits on where crude oil produced in the U.S. can be shipped. The restrictions were imposed in the aftermath of the 1973 OPEC oil embargo and were intended to help keep domestic oil prices low by protecting domestic oil reserves and deterring imports of oil from abroad.
But a lot has changed over the course of four decades. U.S. crude oil output has surged by nearly 60% since 2008, while crude imports have plunged more than 20% over the same period. With the U.S. awash in so much oil, several influential lawmakers and companies have called for an end to the crude export ban, or at least encouraged revisiting it.
Reasons to end the U.S. crude export ban
Sen. Lisa Murkowski (R-Alaska), for instance, has urged the Obama administration to relax crude export restrictions, calling the ban "antiquated." Tom Donohue, the president of the U.S. Chamber of Commerce, has also voiced his support to end the ban. Even ExxonMobil (NYSE:XOM) is on board, urging lawmakers to rethink current policies amid a new era of oil abundance.
The arguments in favor of ending the ban include massive potential economic benefits in the form of up to $15 billion in annual revenue and an improvement in U.S. foreign policy leverage, because allowing exports would signal the nation's commitment to free trade.
U.S. consumers also stand to benefit, since crude exports would likely reduce the price of Brent, the international crude oil benchmark, by driving more supply onto the global market, thereby reducing the price of gasoline for many U.S. consumers, especially those on the East Coast.
But not everyone is sold on the merits of uplifting the crude export ban. In fact, the most formidable opponent comes from within the energy sector itself -- U.S. refiners.
Meet the opponents
Over the past few years, refiners have been among the biggest beneficiaries of the U.S. shale boom. Those with facilities in the Mid-Continent and Gulf Coast regions have profited handsomely from their access to heavily discounted inland crude. By buying cheap domestic oil, refining it, and then selling the refined product into foreign markets where it commands a higher price, they've reaped hefty margins.
In recent years, many refiners have aggressively ramped up their exports of refined products, especially middle distillates such as diesel. According to the EIA, net U.S. exports of diesel more than doubled from 433,000 barrels per day in 2011 to 883,000 barrels per day in 2012.
Marathon Petroleum (NYSE:MPC), for instance, has invested heavily to boost exports of diesel and gasoline by expanding its Garyville refinery and acquiring the Galveston Bay refinery last year from BP (NYSE:BP) for $2.4 billion. As a result, the company's refined product exports have nearly quintupled over the past three years, surging from 50,000 barrels per day in 2010 to 245,000 barrels per day in the third quarter of 2013.
Similarly, Valero (NYSE:VLO) exported 284,000 barrels a day of diesel and gasoline in the third quarter, up from 193,000 barrels per day in the year-earlier period, while Phillips 66 (NYSE:PSX) ramped up its third-quarter exports to 190,000 barrels a day, the company's fourth consecutive quarterly increase in exports.
With refined product exports representing an increasing share of these refiners' profits, they have good reason to oppose an end to the crude export ban, which would likely drive up domestic oil prices, thereby squeezing margins and eroding their lucrative arbitrage advantage.
The bottom line
The hotly contested issue of whether to allow U.S. crude oil exports has polarized the energy industry between the oil producers, who are eager to access foreign markets and receive a higher price for their product, and the refiners, which are reluctant to see their margins fall.
Eventually, however, the decision needs to be made based on what is in the best interest of the nation at large. With U.S. oil production unlikely to slow in the near-term, I think the potentially huge economic and geopolitical advantages of loosening export restrictions outweigh the negative impacts of rising domestic oil prices and lower refining margins. What do you think?