Crude Behavior

BY Keith Johnson
APRIL 1, 2014

Russia's land grab in Ukraine is fueling a debate in Washington that would have been unthinkable even a year ago: should a country that still imports half its oil start selling some of that black gold overseas?

The dispute is pitting oil producers, who want to open the doors to exports, against oil refiners, who want to keep cheap crude at home. It pits conservative lawmakers who see overseas sales as a boon for American business against liberals who fear it would raise prices at the pump. And it pits Democrat against Democrat: Sen. Ron Wyden of Oregon was wary of oil exports during his tenure at the helm of the Senate Energy and Natural Resources Committee. His replacement, Sen. Mary Landrieu of Louisiana, is an unabashed supporter of greater overseas sales.

The issue will be at the center of a hearing Wednesday before a House panel that will feature a leading voice for exports in the Senate, Alaska Republican Lisa Murkowski; refiners who oppose the sales; and energy experts. The debate is as contentious as it is surprising: Just five years ago, U.S. oil production had reached historic lows, and worries of ever-increasing dependence on fickle sources of foreign oil dominated the thoughts of policymakers and oil executives.

The turnaround has been dramatic. U.S. oil production has increased more since 2008 than any place in the world, and will keep growing by almost 1 million barrels a day in coming years. Some experts, including the Paris-based International Energy Agency, expect the United States to produce more oil than Saudi Arabia or Russia as soon as next year, which would further wean the country off pricey imported oil. That's all due to the large-scale use of drilling techniques developed after World War II, but which didn't become economic enough to go mainstream until barrels of crude oil started selling for $100.

"Now that the U.S. is poised to become the world's largest oil producer, the economic case for exports is clear," said Kyle Isakower, the vice president of regulatory policy at the American Petroleum Institute, the oil industry lobby that is leading the charge for overturning the 40-year-old ban on exporting crude oil.

To be sure, even though it's on track to pump more oil than any other country, the United States also uses more oil than anyone else. That means it is still a net importer of crude, to the tune of about 7.5 million barrels a day. But the glut of light, sweet American oil gushing out of new oil fields, especially in Texas and North Dakota, is causing a fundamental rethink of the whole edifice of 1970s-era energy policy, which was framed in an era of scarcity, not abundance. The Organization of Petroleum Exporting Countries oil embargo of 1973, in particular, led to the virtual banning of crude-oil exports from the United States.


The debate over crude oil exports mirrors a similar policy battle that erupted two years ago and has been getting more intense ever since: what to do with the growing glut of natural gas unleashed by the fracking revolution. That is in many ways an easier fight for free trade proponents, because there are fewer legal restrictions on shipping U.S. gas overseas. The Obama administration, not known as a friend of the oil or gas industries, has already approved seven new terminals that could liquefy natural gas and ship it to customers in Europe and Asia.

Like with gas exports, the potential for exporting crude has gained sudden prominence in the weeks since Russia forcibly annexed the Crimean peninsula and moved tens of thousands of troops to its border with eastern Ukraine. Lawmakers from both parties, backed by President Barack Obama, have suggested boosting exports of U.S. natural gas to weaken Russia's energy hold over Europe. But gas exports will take years to materialize; excess crude oil is already sloshing around the center of the country, oilmen told Congress last week, but they can't sell any of it because of the current export ban.

"If we want to have an overnight impact on today's global events, we can immediately begin exporting crude oil," Harold Hamm, chairman and chief executive of Continental Resources Inc., told the House Foreign Affairs Committee last week.

The exports bandwagon has plenty of critics. Big refiners, who turn discounted American crude into products like gasoline, want to keep things the way they are, because they benefit economically by selling refined products overseas at a premium. The United States is now exporting about four million barrels a day of refined products, a 300 percent increase from a decade ago.

"It seems kind of ridiculous to us that we would export crude oil when we don't have a surplus of it," said Bill Day, a spokesman for Valero Corp., one of the biggest refiners in the United States.

Some lawmakers, such as Sen. Ed Markey (D-Mass.), have been vocal opponents of crude exports since the idea first gained currency last year. In December, he urged the U.S. trade representative to "vigorously oppose" any efforts in the World Trade Organization to tweak the longstanding U.S. export ban.

Even the Obama administration has sent mixed signals about crude exports despite its generally favorable view of overseas natural gas sales. Late last year, Energy Secretary Ernest Moniz suggested that 1970s-era energy laws needed to be revised. But at a big energy conference in March, Moniz said the oil industry has not yet made its case for why exports would be a good idea.

But it's clear that the once-unthinkable notion of exporting oil is gaining momentum. The first witness to testify at the House hearing Wednesday will be Murkowski, the senator from Alaska, who has become one of the biggest cheerleaders for overturning the export ban. She will reiterate that lifting the ban will boost production and help trim the trade deficit.

The main reason that crude exports are now on the table is because there is a simple mismatch between the crude oil gushing out of wells and the refineries that turn oil into useable products. The United States now produces lots of light, sweet crude, but the multibillion-dollar oil refineries that proliferate on the Gulf Coast were built to handle the heavy, sour crudes found in Saudi Arabia and Latin America. Refineries in Europe and elsewhere, meanwhile, are optimized to process the lighter crudes now being drawn out of the ground in enormous quantities.

As a result, there's so much American oil sloshing around the Midwest that U.S. oil, which was once the global benchmark and historically fetched a premium, sells at a substantial discount to the main grade of oil traded in London. American producers figure exporting crude would be a way to sell their oil at those higher overseas prices; U.S. refiners are happy to keep things the way they are because they can buy oil more cheaply and sell their products at higher prices. Opening up global markets for U.S. crude would also be a way to ensure future production. In fact, the IEA suggested earlier this year that current export curbs could actually stunt U.S. oil production in coming years.

But as with the debate over natural gas, the industry is also arguing that exports will be a big boon for consumers and the wider economy. A new study prepared for API by ICF International and EnSys Energy, consulting firms, found that ending legal restrictions on the export of crude oil would lower gasoline prices for U.S. consumers by a few cents a gallon, provide tens of billions of dollars in annual economic growth, create hundreds of thousands of jobs, and help raise oil production even further.

Crude export proponents also say that loosening decades-old restrictions would bolster U.S. free trade credentials. That argument is gaining weight now, in light of a World Trade Organization ruling last week against China's restrictions on rare-earth exports. Essentially, the WTO found that countries can't give domestic industries a leg up by restricting the export of critical materials that other economies need. And that could have implications for the debate over U.S. gas and oil exports.

Despite the push by industry, there are plenty of voices urging caution. Deborah Gordon, an energy and climate expert at the Carnegie Endowment for International Peace, said in an interview that she will tell the House panel Wednesday that in a tremendously fast-moving energy landscape, big policy decisions such as removing export bans need careful consideration. Hydrocarbon products, whether specially-prepared feedstocks for certain industries or refined liquids such as diesel fuel, will dominate future energy trade more than simple crude oil, which could make changes to the export ban problematic down the road.

"I think we need to slow down. This is a multidimensional game of chess," she said in the interview.

One of the biggest questions surrounding whether or not to lift the export ban is figuring out just what will happen to U.S. oil production in years to come. The oil industry is confident that new technology developments will enable the United States to keep producing oil at a world-beating pace for years to come. The IEA, on the other hand, figures the era of U.S. petro-dominance will be relatively short lived, with production tailing off in the 2020s and OPEC regaining its status as the world's biggest producer.