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A new report from the Energy Information Administration adds more weight to the notion that crude oil exports from the U.S. would not damage the economy.
The EIA studied the prospect of oil exports in response to questions from Congress, and it builds on several prior reports completed by the agency over the past year and a half. The report is full of caveats and other drawbacks, but the headline takeaway could fuel political momentum to remove the export ban.
According to the results, the EIA believes that if U.S. oil production remains below 10.6 million barrels per day through the next decade, there would be few differences between leaving the export ban in place and removing it. If production is set to rise beyond that level, however, removing export restrictions would have several effects: higher domestic oil production, higher crude exports, slightly lower gasoline prices, but also lower refined product exports.
Digging into the findings, the EIA says that if the export ban stays in place, it would have the effect of maintaining the current discount at which WTI trades relative to the Brent crude marker. Moreover, if U.S. oil production increases, the spread between WTI and Brent would only widen, perhaps as high as $10 per barrel under one scenario. And that spread would increase in corresponding fashion the more U.S. oil production increases.
Of course, removing the export ban would shrink that spread, allowing for higher oil prices at the wellhead for American oil and gas drillers. That would incentivize more drilling, leading to higher oil output than would otherwise occur under the export ban.
Crucially, not just for the U.S. economy but also for the political landscape, is the effect of lifting the export ban on refined product prices. The U.S. Congress has hesitated to address this issue for fear of a political backlash from the American public, if allowing crude oil exports led to higher gasoline prices. However, the EIA predicts that "gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports."
The results may be confusing at first glance. But refined product prices are linked closer to the Brent benchmark rather than WTI. Therefore, allowing crude oil exports could increase supplies on the international market and lower Brent prices (while WTI would increase), potentially leading to a decline in the prices for refined products.
Finally, removing the export ban would be bad news for refiners, a conclusion that does not come as a surprise. Refiners have been the most vocal proponents of the status quo, as they benefit from the relatively large spread between WTI and Brent. Cheaper U.S. oil allows for cheaper inputs for their refineries, and they can turn around and sell refined products at a higher price on the international market. It is no coincidence that the U.S. has become a massive exporter of refined products in recent years. Exports of refined products would take a hit if the crude export ban is lifted.
There are other caveats, however. For example, much of the price assumptions depend on how oil producers overseas respond to U.S. exports. Also, a lot depends on the growth of the refining sector. If more refineries come online than expected, there would be a smaller effect from allowing crude exports. More refining capacity would by itself close some of the spread between WTI and Brent, and thus mute the importance of an export ban.
Still, by and large, the report delivers a huge win for the supporters of scrapping the export ban. It will provide significant momentum to a growing political consensus around allowing crude oil exports. The top Republicans in both the House and Senate are now strong supporters of such a move. Prior to the collapse in oil prices, it was seen as much more politically risky to support oil exports due to the perceived impact on the price at the pump, a politically sensitive issue for voters.
Now, that the political risk is much lower. Even if gasoline prices rise by a bit, motorists are still paying much lower than they were in years past. Furthermore, Congress is coming under increased lobbying pressure from the oil industry, which is desperate for a way out of the current pricing mess. Exports will increase WTI prices, allowing for some breathing room. With that message resonating in Washington, it's only a matter of time before the Congress – and the White House – sign off on a deal to remove barriers to oil exports.
And with the most important government energy entity essentially giving its blessing, the odds of a legislative move to scrap the export ban next year are rising.