The ban can bend as long as producers and refiners get their cut.
STEVE AUSTIN | 2014/09/08
Back in February 2014, oil-price.net posted an astonishing report on the US government's trade restrictions on its own oil industry. While other governments protect their home industries and give preference to their own national interests, by a convoluted path of logic, successive administrations in the US stymied the producers of crude oil in the USA. You can read that full report here: Oil Export Ban Hurts US Oil Industry. However, moves are now afoot to ease this restriction. By one method or another, the crude oil export ban may be undermined to the point that it is meaningless. This is one more battle in the war between US oil producers, who want the export ban lifted, and US oil refiners, who want to keep the ban. The battleground is the definition of what constitutes "crude" and "refined" oil.
The export ban on crude oil was put in place following the oil price shock of the 1970s. Arab governments held the Western world hostage by restricting their oil exports and hiking the world oil price. US legislators vowed to insulate their nation from future actions by Middle Eastern governments and put in place a series of measures to ensure a constant supply of oil to US refineries. The crude oil export ban was just one of the measures contained in the Energy Policy and Conservation Act (EPCA) of 1975. However, the measure skewed the oil trade within the USA greatly in favor of the refining industry who were allowed to import oil from abroad. Domestic oil producers were hampered by their inability to sell elsewhere and today this imbalance causes frequent distortions in the price of crude oil within the US compared to global markets.
Feast and Famine
Crude oil coming out of the ground (or ocean floor) is not a uniform product. Different areas of the world produce oil with different properties, namely API gravity and viscosity. Some oil can easily be readily refined into gasoline, others with high gravity are more suited to use by the chemicals industry and could not be counted towards the national need for fuel. However, the blanket ban on crude oil exports has resulted in a glut of high gravity oil (heavy crude oil) that US oil refiners find too costly to refine and producers are banned from selling on the open market. In order to get around this hurdle, petrochemists have thus formulated a technique to mix together different gravities of oil in specific proportions to still provide US motorists with the affordable gasoline they need: this technique is called blending.
Oil refiners are able to strike good prices for heavier crude because they can argue that this oil is harder to process into gasoline. However, they then blend that heavy crude with light crude to lighten up the gravity of the mix and so don't have to go to greater expense to process heavy crude into gasoline. Refiners don't need that much ultra light crude to make the heavy crude workable -- it is not a straight 50:50 split. Petrochemists analyze the gravity of oil produced from a particular location and calculate the proportion of oil from other locations that needs to be added in order to lower the oil's gravity and run it through their refineries at an average gravity. These factors mean there is a differential for different gravities of oil and that, together with transport costs means that there is no set price for any oil deal that takes place in the world today. The US is accumulating a surplus in this ultra light crude.
US oil producers have driven forward technologies that enable oil and gas to be extracted from rock formations such as shale. The fracking process is particularly suited to extracting a form of oil called condensate. This is actually a gas that condenses into oil and it produces that precious ultra light oil which oil refiners need to blend with heavy crude oil. Here is the interesting part: the fracking process has been so efficient at producing condensate that it now manages to extract more of it than the US oil refiners can handle. Producers have found new markets for this condensate in the chemicals industry, resulting in a boom in job creation in the USA. However, condensate production even exceeds the demands of this rapidly growing market.
Supply and demand
The USA still does not produce enough oil to meet fuel demand within its borders and so it still needs to import crude and refined oil from abroad. A quick look at simple production and demand figures would tell anyone that the US is still a little ways from true energy independence. However, reading a breakdown of the types of oil produced and required shows that the USA now has an excess supply of ultra light crude coming from condensate. The simple laws of supply and demand mean that where there is excess supply, prices will fall.
Two condensate producers in Texas managed to get approval for export of their products from the Commerce Department in June of this year. Pioneer Natural Resources and Enterprise Products Partners argued that a certain amount of processing takes place in order to get the extracted gas into crude oil form and as such, ultra light crude oil derived from condensate is not subject to the crude oil export ban. Truth be told, the gas converts to oil almost naturally as soon as it is taken out of the rock formation in which it was suspended. The producers argued that condensate is not a naturally occurring oil, it is a gas that gets converted into oil and that conversion process requires tanks at regulated pressure, pumps, coolers and stabilizers. Although there is little chemical processing, the physical processing of condensate into ultra light oil amounts to refining. The Commerce Department agreed.
US oil refiners like the crude oil export ban. It frees them to roam the world looking for cheap oil while reserving them tame prices in their own backyard. Oil producers would like to be able to export any and all the oil they can produce if that would bring them a better price. In both camps, the case for exporting condensate is seen as the thin end of the wedge. If simply placing the gas in holding tanks with conditions that encourages the condensation process is defined as refining, then eventually, all oil production by fracking or modifying the rock formation's inner pressure could be defined as "in-situ refining". The oil refiners argue that this stretching of the definition of refining undermines the ethos of the export ban and will eventually destroy it.
The export of ultralight crude makes sense, commercially and the White House, Congress and the Senate can see the financial benefits for the country of allowing these condensate deals. However, the US government is controlled by politicians and decisions are not always made on what makes sense commercially. Some Congressmen and Senators have large oil producers within their constituencies and they know that the erosion of the crude export ban will bring jobs to their voters and get them re-elected. Other politicians have large oil refiners to please and dare not agree to any moves on the ban that could be seen as destroying jobs in the places they need to gather votes. Refiners want a glut of ultra light crude in their back yard because that will force the price lower and enable them to make bigger profits. They don't care if large storage facilities filled with the stuff is a loss of income for the nation. The export ban suits the refiners and they are enraged by any measures that undermines it.
Lies and statistics
Industry bodies and consultancies in both the producer and refiner camps calculate projections on the benefits and harm that the export ban causes in the US economy. An unfortunate consequence of expert opinion is that the expert giving it is usually paid by someone. The balance of economic opinion tends to show more benefits to the US by lifting the ban and that message seems to have gotten through to the White House. As Obama is currently jogging through his second term and he cannot run again, his interest in voter opinion is probably at its lowest. The remainder of the current president's term in office is the best window of opportunity the oil producers have of getting the export ban lifted. The export of condensate points the way to destroying the ban without alerting voters to its demise.
Published on 2014/09/08 by STEVE AUSTIN