x Abu Dhabi, UAEMonday 22 January 2018

US ban on crude exports a bemusing boon for foreign producers

Should the US should allow oil exports, it would ensure American oil producers continue to receive international prices, and thus sustain shale oil output.

A major oil producer forbids crude exports by law. Is it perhaps one of the former Communist countries? Maybe an anti-western firebrand like Venezuela, Iran or North Korea? Or environmentally-friendly Norway? No, it is the supposedly free-market United States that, since 1975, has had this strange law on its statute books.

A recent Bloomberg report suggested the American Petroleum Institute (API), an industry group, was preparing a legal argument that the ban on crude exports violates World Trade Organization (WTO) rules.

Until a couple of years ago, such a case would have been as unthinkable as it was unnecessary. The prohibition on exports had almost no practical effect: the US was a large and ever-growing importer of oil. The ban’s main effect was to ensure Alaskan cargoes went to the US West Coast rather than to Japan.

But from 2005 onwards, US oil consumption dropped under the pressure of high prices and improving efficiency. And from 2009, oil production grew, first steadily, then explosively, as shale drilling in North Dakota and in south and west Texas took off.

By some measures, the US is now the world’s largest producer of petroleum liquids. Net imports have fallen from two-thirds of consumption to just one third. Analysts at Citibank believe North America overall could be an oil exporter by the 2020s.

This glut has led to major dislocations in trade flows and product prices. The flood of very light shale oil, with heavy oil from western Canada, has reversed the traditional system which moved oil imports north from the coast of the Gulf of Mexico. West Texas Intermediate crude has at times traded at US$10 or $15 per barrel cheaper than the international benchmark, Britain’s Brent crude, so that inland refineries make windfall profits.

US imports of light oil from countries such as Nigeria have slumped, but the Arabian Gulf’s medium crude sales have been little affected so far.

Unlike crude, exports of refined oil products – such as diesel, petrol and jet fuel – are legal. US Gulf coast refineries are running flat-out to make products for Latin America and Europe. Even though the US is not yet a net exporter, individual companies still want to export light oil in excess of reasonable needs, and import some heavier oil to get a suitable blend for refining.

But this is where the ban comes in. The commerce department permits some small shipments to eastern Canada on a case-by-case basis. But large-scale exports would require legislation. And this is sure to be fiercely contested by consumer-rights advocates, environmentalists hostile to “Big Oil”, oil refiners benefiting from cheap crude, and national-security hawks. If ever launched, the API’s WTO case would probably take years to resolve.

Objectively, the US should allow exports. This would have little impact on domestic consumers, since refined product prices are still set in world markets. It would ensure US oil producers continue to receive international prices, and so sustain shale oil output.

While the ban endures, it is hypocritical, not to say bizarre, for US presidents to threaten to “jawbone Opec”, or blame Russia as a gas monopolist, or castigate Chinese bans on exports of rare earth elements. In the case of a major global oil supply crisis, US allies in Europe, Japan and South Korea would be furious at being left in the lurch.

Middle East oil producers, on the other hand, while standing aloof from domestic US politics, benefit from the ban. Forty years after the Arab oil embargo, they now appear as more reliable suppliers. They can be quietly relieved that the curious dysfunction of the US political system will somewhat blunt the shale oil challenge.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon