Lifting the Oil Export Ban

Jim Brown
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The U.S. administration is coming under increasing pressure to lift the 40 year old ban on exporting U.S. oil. The ban was passed in 1970s in an effort to lower our dependence on imported oil from the Middle East.

The ban did not solve the problem of imported oil. Starting in the 1980s U.S. oil production began to decline at the same time as demand for oil increased. Imports increased significantly and became our largest import/export imbalance and that has persisted for decades.

A problem developed that was not foreseen. The more oil we imported the more the refineries had to be modified to process the heavy sour crude coming from Venezuela and the Middle East. All of the major coastal refiners are predominately refining this heavy sour crude. It would cost billions per refinery to convert them back to process WTI.

They don't want to go back because they need the refined products they get from the heavy crude. WTI is predominately refined for gasoline, which is a true commodity where low price matters. This means small profit margins. Heavy crude produces heating oil, diesel, distillates and gasoline. They get more products from the heavy crude and that gives them a wider profit margin. Also heavy crude expands more in the refining process. For instance a barrel of oil (42 gallons) may expand to 50 gallons of refined products if the source is WTI and 60 gallons if the source is heavy crude. The numbers are just examples and not accurate. Every grade of crude expands at its own rate depending on the internal components and the density of the source barrel.

Unfortunately the majority of the shale oil produced today is not even WTI. It is much lighter than WTI and is better suited for gasoline and a lot of gaseous byproducts like NGLs, Methane, Propane, Ethane, etc. While all those other byproducts are useful there is not a big profit margin associated with them.

Refineries don't want to spend billions of dollars restructuring their refineries to process only WTI and then be limited on the profits they can make.

Over the last year crude oil inventories have risen from 350 million barrels to 470 million in the USA. Once the summer driving season is over the inventory levels will continue to rise because there is not enough refining capacity for WTI and the U.S. only produces WTI or lighter oils.

The government relented and let a small amount of super light oil be exports starting in 2014 but this light oil still had to be run through a minor refining process to remove some of the gases. As "refined" oil it was eligible for export.

Bank of America recently listed several reasons why the export ban should be lifted. They said the drop in gasoline prices has already negated some of the potential cost of ending the ban. That means politicians may be more open to changing the rules.

If the U.S. does a deal with Iran to let them begin exporting their oil again why should the U.S. be penalized by being forced to store their oil at lower prices. Preventing Americans from participating in the world market is stupid. They also said oil is a weapon. If the export ban is lifted much of Europe would like to import our WTI because it is cleaner and easier to refine and they are all about clean air. They also would like to stop importing from countries like Russia and that means less income for Putin.

BofA said allowing export of oil would benefit the energy sector and provide more jobs in the exploration and production sector. Forcing WTI to remain in the country is forcing prices lower.

That would seem like a reason for not allowing exports. If WTI prices are low because it cannot be exported then that should be good for gasoline prices. Only refiners are not refining that much WTI and gasoline prices are based on Brent prices not WTI. Since the coastal refineries use more expensive imported waterborne oil the gasoline prices are actually inflated. A few refineries inside the country have been buying the cheaper shale oil and selling the refined products at the higher price points for a decent profit. If more WTI was available on the open market the price of waterborne crude would decline and in theory push gasoline prices lower. I admit I have reservations about this theory.

When a dozen U.S. producers are lobbying for export capability you know there is a profit motive in there somewhere. Let's just hope it works out as I described it above.

I do believe we should be able to export WTI and add our volumes to the global market in order to lower revenues for the nations that hate us. Why should we not use every method at our disposal to reduce their ability to wage war against us? Why would we not want to reduce our balance of payments by several billion dollars a month? That just makes the dollar stronger while boosting our economy.

Active Rigs

Active drilling rigs actually rose +2 to 859 for the week ended on Friday. This broke the strong of 28th consecutive weeks of declines. Oil rigs declined -3 for the week to 628. Active gas rigs rose +5 to 228. Active rigs have now declined -1,072 since the high of 1,931 in September. That is a -60% drop. Active offshore rigs rose +1 to 2 and -31 off their peak.

Oil Inventories

Crude inventories declined -4.9 million barrels to 463.0 million.

Refinery utilization rose from 91.1% last week to 94.0%. Imports fell -302,000 bpd. U.S. production rose +15,000 barrels to 9.604 mbpd. Demand rose +250,000 bpd.

Cushing inventories declined slightly to 56.2 million.

Gasoline inventories rose +700,000 barrels to 218.5 million. Gasoline demand rose by +479,000 bpd and imports rose +214,000 bpd.

Distillate inventories rose +1.8 million barrels to 133.6 million. Demand fell -509,000 bpd. Imports fell -19,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.

Jim Brown

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