Why The USA Should Export Crude Oil

abarrelfullabarrelfull wrote on 05 Feb 2014 20:02
Tags: refinery upstream usa

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Whilst the USA likes to pretend that it is a beacon of free markets, when it comes to energy, we can see that this is not the case. The discussion around exporting LNG and Crude Oil has once again shown that all is not what it seems.

The arguments against exporting tend to revolve around the idea that it will be bad for consumers, whilst arguments for, tend to be based on ideals and principles.

Whilst I fundamentally support the idea of free trade, I believe that there is a more self interested argument in favour of exporting crude oil. (I have previously argued in favour of gas exports here). I do not believe that exporting would have a significant effect on gasoline prices.

The Wrong Crude
First of all, the USA is producing the “wrong sort of crude”. It is completely different to the crude used in the majority of refineries. It is light and sweet, whereas crude currently imported is heavy and sour. Major suppliers to the USA are Canada, Venezuela, Colombia and Mexico, all of which have predominantly heavy crudes.

In order to utilise this fundamentally cheaper raw material, refiners have invested heavily in upgrades, such that good quality products can be produced from poor quality crude. Such refineries can be retooled to process the domestic supplies, but then billions of dollars of investment would be wasted. Surplus heavy crude would then get cheaper, disadvantaging those that made the switch.

By exporting light, and importing more heavy, you are effectively decreasing your NET import bill.
Gift to the Globe

The impact of extra production in the Bakken, Eagle Ford and the Permian is not being enjoyed by the rest of the world. They are still stuck buying Brent indexed crude. Before feeling smug, think this through. The impact of fully integrating US crude with the world would be a cheaper price of oil for everyone.

Whilst WTI prices would go up, Brent prices would undoubtedly also go down. The impact of cheaper oil (even marginally) on fragile emerging market economies would be a great boost for the global economy.
Moreover, the possible impact of crude oil price rises is limited. As an aside, not all US refiners are even seeing the benefit of cheaper crude, so a weighted average crude cost could conceivably actually go down.

Consumers Don’t Buy Crude

When was the last time your bought a barrel of oil? Gallon of gasoline?
Exactly, the consumer is interested in gasoline prices, not WTI. Gasoline prices are set in an open global market. Therefore they are not nearly as impacted by WTI prices as you might think. As volumes of gasoline increase, refiners with more expensive oil, simply produce less. So gasoline follows global crude prices, not just US ones.

The only clear winners from the current set up are refiners. Unless you have shares in such companies, you are probably not really benefiting very much.

Upstream Job Potential Far Outstrips Downstream
Shale oil is expensive stuff to produce, if the price falls too much, supply will fall with it. At the same time, we are all familiar with the stories of zero unemployment in shale oil regions.
So why put at risk, a sector that has generated masses of well-paid jobs, whilst other sectors have struggled. The better the price given for the oil, the more activity there will be in the sector.
The refining sector is producing some new jobs, but it cannot compete with the shale boom.

Not Enough Investment Elsewhere
Most of the new upstream projects today are expensive. They need a high price of oil to offer a return on investment. Shale oil adds another risk. If America is kept apart from the global market, less oil will be produced and we may well see further increases in prices.

In short, the upside for US citizens far outweighs the small risk of a few cents rise in prices at the pump.

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