Since 1975, U.S. exports of crude oil have been largely banned under restrictions imposed by Congress in the aftermath of the 1973 Arab oil embargo. But with the U.S. entering into what many have termed a new era of oil abundance, U.S. lawmakers are now seriously thinking about lifting the ban.
Some worry that exporting U.S. oil could raise domestic gasoline prices, eating into consumers' disposable incomes and hindering economic growth. But according to a new study, lifting the ban would actually result in lower prices at the pump, in addition to a plethora of other economic benefits. Let's take a closer look.
The economic benefits of allowing U.S. oil exports
The study, conducted by consultancy ICF International and commissioned by the American Petroleum Institute, found that exports of U.S. crude oil would increase global oil supplies, exerting downward pressure on global oil prices and, therefore, on U.S. gasoline prices, which are more closely linked to global oil prices than they are to domestic ones.
According to the study, allowing crude oil exports would reduce U.S. gasoline prices by 1.4 to 2.3 cents per gallon between 2015 and 2035, measured in 2011 dollars. Cost savings from lower prices for gasoline, heating oil and diesel could fuel $5.8 billion per year in consumer savings over that period, the study estimated.
The study also found that allowing crude oil exports could lead to some $70 billion in additional investment by U.S. exploration and production companies over the period 2015-2020, allowing them to drill about 500 to 1,000 more wells each year than they otherwise would have drilled. As a result, U.S. crude oil and condensate production would rise by an estimated 130,000 to 300,000 barrels per day, ICF said.
Increased domestic drilling activity, in turn, would have widespread positive effects on various sectors of the economy. The increased demand for drilling equipment would support job growth in manufacturing and boost demand for raw materials like steel, supporting an additional 300,000 new jobs by 2020 and boosting U.S. GDP by an annual $38 billion by 2020.
Who wins and who loses if exports are allowed?
While the ICF study and other analyses have concluded that allowing oil exports would have a positive net economic impact, it would also create a group of winners and losers within the energy industry. Specifically, upstream producers, which are involved in exploring for and producing oil, would benefit, while downstream operators, which are involved in refining crude oil into gasoline and other refined products, would suffer.
Upstream companies would benefit because exports would boost prices for domestic crude oil, benchmarked to West Texas Intermediate, allowing them to earn a higher margin on their production. Meanwhile, refiners would suffer because their profits are tied to the price difference between WTI and global crude oil, benchmarked to Brent.
Basically, allowing oil exports would boost the price of WTI by a lot more than it would decrease the price of Brent, resulting in a contraction of the Brent-WTI spread. Therefore, the price of refiners' crude oil feedstocks would rise, while the price at which they sell gasoline and other refined products would fall, leading to a compression of their margins.
As one would expect, most U.S. refiners are vehemently opposed to lifting the crude export ban. Over the past few years, many of them have benefited tremendously from exporting refined products such as gasoline, diesel, and jet fuel. Because U.S. crude oil prices have been substantially lower than global crude prices, they've earned fat margins by exporting ever-growing volumes of these products abroad.
For instance, Valero's (NYSE:VLO) gasoline exports surged 33% year over year to to 133,000 barrels per day during the fourth quarter. Phillips 66 (NYSE:PSX) similarly grew its refined product exports by 32% to 197,000 barrels per day, while Marathon Petroleum's (NYSE:MPC) exports more than doubled to 298,000 barrels per day. All three firms view exports as a key driver of future growth thanks to substantial refining capacity along the Gulf Coast region export hub.
Are crude oil exports in the nation's best interest?
Based on the ICF study and other recent analyses, it appears that the combined benefits of allowing oil exports -- including GDP and job growth, greater domestic oil production, and increased consumer spending due to lower gasoline prices -- would more than outweigh the costs of lower margins for U.S. refiners. While I'm certainly not advocating unfettered crude oil exports, I think a gradual lift of the ban may be in the best interest of the nation at large. What do you think?