WALL, N.J. -- Don’t look for any short-term drama now that U.S. lawmakers have eliminated the 40-year-old ban on exports of American crude. But don’t write off the potential for controversy later in this decade, either. In fact, if the largely impotent OPEC cartel sees a resurgence of pricing power, or additional membership, U.S. participation in a “free market” will be questioned.
But thanks largely to the “compression” of global and North American oil prices, export flows promise to be little changed this winter. Indeed, whereas global sweet-crude-oil grades once fetched a price of more than $25 per barrel over similar U.S. domestic barrels, the price of WTI and Brent crude are within $1 of one another currently. Simply put, when global prices don’t exceed U.S. numbers by $3 or more per barrel, the economics don’t make sense.
In fact, export flows have declined recently for other reasons. Canada has a refurbished crude pipeline that now moves sweet and sour crude from Alberta to Quebec and economics don’t support moving crude oil from the Gulf Coast to Eastern provinces. However, there is somewhere between 750,000 and 1 million barrels per day of crude oil export capability at the Gulf Coast (mostly near Corpus Christi) and light sweet “tight oil” crude exports to Mexico or South America will be an occasional phenomenon even in a low-oil-price environment.
The one region that might deserve the most scrutiny, and which could provoke the most controversy, is the U.S. West Coast. Tanker rates are quite high these days, but should oil prices sneak higher in the western reaches of the Pacific Rim, refiners could see Alaska North Slope (ANS) crude flow not to Washington or California, but to Korea or Japan. As recently as 2014, Alaskan crude moved to the Far East, but only because a U.S. vessel had to be refurbished at an overseas facility. Refiners need to use expensive Jones Act U.S. flagged vessels to move crude from Valdez to U.S. ports, so it’s conceivable that eventual ANS crude economics could occasionally push barrels offshore.
But the bottom line is that it will take sharply higher crude-oil prices to inspire a real flurry in U.S. exports. It shouldn’t be ruled out, particularly if there is another Arab Spring that sends overseas prices up at a much more rapid pace than U.S. numbers.
Here’s a rundown of the impact OPIS sees from all of the historical legislation that was approved earlier this month:
- Gasoline exports could actually be curtailed by the new rules. More light sweet crude for Mexico allows for refiners there to increase their gasoline production, so they need less supplemental motor fuel from the United States.
- The President has the authority to suspend crude-oil exports in the event of national security or economic crises. But the conditions that would trigger such executive action are very unlikely.
- Republican efforts to de-fund or delay the EPA’s ambient-air-quality standards for ozone were rejected. So, later this decade, dozens of counties and cities could face non-attainment status on ozone, necessitating more boutique blends of gasoline across the country.
- Lower freight rates could come about for marine transport between U.S. ports. A number of barges and tankers were switched from moving light products to moving crude at various Gulf and East Coast ports, and they could be reconfigured to carry gasoline and diesel. Hence, it might be cheaper to move gasoline from Texas to southeastern waterborne ports.
- The biodiesel tax credits were extended for two years, retroactive to Jan. 1, 2015. The tax break is kept as a blender credit and was not converted to a producer credit as some lobbyists wished.
- Independent refiners, who in some cases fought vociferously against lifting the ban, received little in return. There is an additional tax deduction, but it is incredibly complicated and might result in a break of less than 10 cents per barrel.
- In the end, the agreement could facilitate a quicker demise to fossil-fuel dependency. Tax credits for wind power were extended to 2019, and solar electricity gets benefits through 2021.
Tom Kloza is chief oil analyst for OPIS (Oil Price Information Service).
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