Anyone who thought Rep. Paul Ryan would make government budget talks more transparent as Speaker of the House may have to reconsider. In the $1.1 trillion spending bill passed today by a 316-113 vote in the House, last minute deals give both Republicans and Democrats sweeteners for their supporters. And by far the biggest surprise is a provision that lifts the nearly 40-year ban on exporting oil from the U.S.
Republicans have argued for years that lifting this restriction would be good for U.S. drillers, while Democrats have opposed it on fears that it could cost good union jobs in the refining sector. But the biggest question for most Americans is whether dropping the ban will hit their wallet.
It is almost certain that lifting the ban will cause oil prices to rise in the U.S. That’s why oil companies lobbied so hard to lift it. But higher oil prices will not necessarily translate into higher prices at the pump, at least not right away.
That’s because of the shale oil boom of recent years. Oil is often thought of as a fungible commodity, meaning that one barrel of oil can be easily swapped for another. But in reality there are many variations in oil quality and consistency, variations that can have a significant impact on price and usefulness.
The explosion in shale drilling in the U.S. has increased the amount of “light” (compared to “heavy”) crude in the domestic oil market. This would seem to be an embarrassment of riches, as light crude is easier to refine and yields more gasoline.
But U.S. refineries—like Valero, Tesoro, Murphy USA, Phillips 66, and Marathon—have spent the last two decades upgrading so they can process heavy crude as efficiently as they process its light sibling. Since heavy crude is much less expensive than light crude on the international markets, it is more lucrative for those upgraded refineries to import heavy crude from Mexico and Venezuela than it is to use the more expensive shale oil in their backyard.
And so, since U.S. light crude can’t be exported to other countries (until now), whatever isn’t used by U.S. refineries goes into storage. A large chunk of the U.S. benchmark oil, West Texas Intermediate Crude (WTI), goes to the Cushing oil storage facility in Oklahoma, which is storing about 60 million barrels at the moment, some 80% of its capacity.
In fact, on Wednesday, the government announced that there was 1.158 billion barrels of oil in storage across the country—the highest figure since the government started keeping oil storage records in 1982. To put that in perspective, the U.S. consumed around 19.1 million barrels of oil a day in 2014.
Prices home and abroad
All this stored oil weighs heavily on the price of WTI, which consistently trades at a discount to the global oil benchmark, Brent Crude. Some consider this an advantage for U.S. drivers—cheaper oil equals cheaper gas, right?—but it really isn’t.
That’s because, unlike with crude, there are no export restrictions on “finished” oil products like gasoline, diesel, and jet fuel. And so, since U.S. gasoline can be sold globally, its price tends to more closely mirror global benchmarks, according to a recent analysis by the EIA.
So what happens now that WTI crude can be sold overseas? All the light oil clogging up the system will finally be freed from Cushing and sent into the world market. WTI will no longer be artificially depressed and its price will most likely rise, while Brent prices will fall from the influx of new supply. In fact, that’s already happening: The spread between the two benchmarks has fallen in expectation that the ban would be lifted, moving from $2.00 a barrel last week to 20 cents a barrel this week. And gas prices, for now, will stay the same.
Flooding the market
In the medium term, it is unlikely that the U.S. is going to become the next Saudi Arabia and flood the world with crude exports; it still consumes much more than it produces. Given that, most of the oil that is pumped in the U.S. will continue to be consumed here.
That’s why some claim that lifting the export ban could spur a renaissance in the U.S. oil industry. By making local oil more expensive on the world market, the thinking goes, lifting the ban will inspire oil companies to drill more.
Ryan Lance, chief executive of ConocoPhillips, told a congressional panel earlier this year that he believed that the lifting of the ban could eventually raise production by two million barrels over the nation’s refining capacity.
Carlos Pascual, the former U.S. ambassador to Mexico who is now a fellow at Columbia University’s Center on Global Energy Policy, told the same committee that lifting the ban could lead to around an additional $750 billion in upstream (extraction) investment in the U.S. over the next 15 years. This would increase oil production by around 1.2 million barrels a day and create 400,000 jobs.
These predictions may be overstated, however. As oil prices have dropped in recent months, so has oil production. Daily U.S. production is 500,000 barrels off the all-time high of 9.6 million barrels it hit in the spring. Increasing production in today’s low price environment would be irrational, export ban or not. The only way to turn that around would be for oil prices to rebound significantly and it is hard to see that happening in today’s oil environment.
A good idea?
The lifting of the ban makes sense on multiple economic levels, but it is far from a no-brainer. And there could be unforeseen consequences.
It might have been smarter to include a provision in the bill that would have reinstated the ban if oil prices hit a certain level, say $100 a barrel, so that producers wouldn’t export everything and drive up U.S. pump costs in a high oil price environment.
Congress could have also placed a cap on the amount that could be exported to blunt any sudden drop in local production. While the U.S. looks awash in oil, all that could change on a dime. Fracked wells have a short lifecycle and there is no guarantee that producers will have access to enough capital and debt to continue hunting for new wells.
But lawmakers seem untroubled by those worries. It looks like Congress is happy to open the floodgates—and hope for the best.