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Here Are the Four Real Reasons Behind the Lifting of the U.S. Oil Export Ban

by | published December 18th, 2015

Late in this week’s Congressional budget negotiations, a provision was introduced that will dramatically change the prospects of U.S. home production. It allows for the export of domestically produced crude oil.

The move may escape an earlier threat of a Presidential veto because, unlike on the state level where some governors have a line item veto power (which allows them to excise specific provisions without rejecting the whole legislative package), the President is limited to accepting or rejecting complete Congressional bills.

The agreement also has broad-based bipartisan support, and allows the President to reintroduce an export ban on national security grounds. That should soften objections to the deal.

Make no mistake, this is not simply some campaign-season political machination to score brownie points with some voters.

There are four very real reasons behind the end of the export ban. And some of them may surprise you…

The Oil Export Ban Doesn’t Make Sense Any More

First and foremost, the policy no longer makes any sense. The U.S. will never again be subject to blackmail from OPEC or any other foreign producing cartel, and has the domestic largesse to determine oil balances inside its boundaries – a leverage that was not available in 1974 when the export ban was introduced.

Back then, in response to an Arab oil boycott, Congress passed the ban on exporting American oil. Later, concerns over being able to provide for the country’s energy needs in the face of oil being used as a geopolitical weapon also resulted in the creation of a national Strategic Petroleum Reserve.

But boycotts on exporting oil to the U.S. will never happen again, especially in light of the ongoing worldwide oil glut and the necessity that producing nations sell product for badly needed (and diminishing per-barrel) revenues.

The advent of massive unconventional – shale and tight oil – reserves available domestically has likewise fundamentally altered the landscape. That means oil produced can be subject to the same market opportunities and forces as any other product.

And the domestic effects of lifting the oil ban made it hard to resist for Congress…

Americans Stand to Benefit From the End of the Export Ban

Second, there is the main economic reason for ending the practice. Preventing the export of American crude is costing some areas of the country significant employment and local tax-base losses. Jobs and revenue bases may be ready-made weapons in an election year, but this time they have a bona fide truth about them. Both side of the aisle recognize this.

Third, the amount of known extractable reserves available in the U.S. would provide a guarantee that exports would not tangibly increase domestic retail oil product costs.

Americans, in other words, would not be penalized by companies moving some of the raw material abroad, and their local governments stand to benefit.

Lifting the Export Ban Takes the Fight to OPEC

Finally, and perhaps most visibly in the present geopolitical climate, lifting the export ban becomes a response to OPEC’s attempt at maintaining (and increasing) its own production levels to defend the organization’s international market share.

That decision, made on Thanksgiving Day 2014, remains the single most direct cause of the drop in worldwide oil prices and the acute crisis facing overextended operators in the U.S. There is a certain satisfaction in finally taking the battle to OPEC in the more extended global demand environment that previously was only indirectly impacted by American production (via the levels of imports into the country).

And this satisfaction is widespread across the entire spectrum of American politics.

Now, OPEC has seen this coming. It has been a standard assumption in the cartel’s recent meetings. In fact, if there has been a common refrain in the opinions of Saudi, Kuwaiti, and UAE oil officials it has been wonderment at why it took Washington so long to begin removing the export ban.

Remember, while much has been written about OPEC in general and the Saudis in particular combatting U.S. shale producers in some massive international energy chess match, this is only the initial round.

More than 80% of the extractable unconventional oil globally is outside the U.S. and Canada.  North America may have been the first to bring the new oil to market. But this is a fight OPEC will be having literally across the planet as others start to develop their own reserves.

Now, the U.S. export ban hasn’t been without loopholes…

U.S. Oil Exports Won’t Be Starting From Zero

Already some categories of U.S. oil are being exported – grades subject to some initial steam stimulation (thereby “processed” oil according to creative accountants), heavy oil from the Monterrey basin in California for which there is an insufficient local market demand, and volume allowed to Mexico on a “tolling” basis.

This last approach has raw crude exported for refining in Mexico with the finished oil product either imported back into the U.S., or controlled by American-based refineries or wholesalers for sale elsewhere.

In fact, while the ban has severely limited exports of crude from the U.S., the country is already the largest exporter of refined product in the world.

But these allowances have been exceptions to the rule. For the vast majority of U.S. oil production, an export ban has remained in force.

Until now.

But the question of how much will change remains…

In the Short Term, Not Much Will Change

In the short term, the lifting of the U.S. export ban will change little. The world is at the moment awash with surplus oil – much of it from deliberate OPEC overproduction to discourage competition. By keeping prices low, the cartel has been successful in putting considerable pressure on other non-OPEC exporters, especially Russia.

Adding additional U.S. exports to the mix will simply put added restraint on price, thereby making revenues (and company profits) less interesting.

True, the regional and spot prices for oil in other parts of the world are higher than in the American domestic market. Yet that in itself will not entice massive exports given the added expense of transport and storage.

But what the end of the ban does do in the longer term is quite significant.

The New Law Will Strengthen U.S. Oil Companies in the Long Term

The end of the ban will allow U.S. companies to play a wider field, factor in broader international factors when structuring ongoing operations (which may even bring some welcome respite to the current energy debt crunch), and balance demand in ways impossible without exporting.

It may well also open new end-user opportunities in mixing inferior grades of crude produced elsewhere for better sale – thereby making the importing of lighter American crude of interest even to nations primarily relying on heavier oil for their own exports (OPEC member Venezuela comes readily to mind here).

But the main advantage of lifting the export ban is this.

It will allow the U.S. private oil sector to offset there being no U.S. national state-run oil companies. Every OPEC nation has a centrally-determined oil strategy because the government controls the industry. America does not.

Instead, we lead the world in what can be accomplished with private property and profit incentive, with a fair amount of entrepreneurial skill for good measure.

That will be the difference in a master fight of global proportions just getting under way in the energy sector. As always, I’ll bring you more as this fight develops.

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  1. Bill
    December 18th, 2015 at 14:37 | #1

    The fact is American refiners can refine only so much light crude (WTI). The rest of our crude must be imported (Brent). Until we can refine all of our crude production, it makes sense to export our excess production.

  2. December 18th, 2015 at 14:46 | #2

    So now that US of A is in the export business of oil energy…. What will be the bottomline amount of barrels exported to keep a more stable price at home for Consumers… Minumum
    & maximum amount for the answer please…in barrels!

  3. jeff kobilka
    December 18th, 2015 at 17:10 | #3

    Thanks for your Energy Advantage recommendation, Dr.Kent. We made 50% profit in just a week, BEFORE the gov’t extended the solar credit. Just like you said; hang on for a thrilling ride!

  4. Charles Torrey
    December 18th, 2015 at 18:05 | #4

    Are you standing by your oil price forecast or have any new developments changed you thinking.
    Your timely response is very much appreciated. And, thank you for the updates.

  5. December 19th, 2015 at 02:50 | #5

    Pardon me, but the cat is out of the bag. Once fracking catches on everywhere else in the world all anyone can do to profit is max production Opec is history and big oil is next, old fossil fuels, then hello solar!!

  6. Charles Torrey
    December 19th, 2015 at 16:54 | #6

    Sounds as if we are faced with just the natural supply and demand forces that will determine oil prices. So with this being the case, are you standing by your projected pricing for oil in 2016.
    Charles Torrey

  7. DM
    December 21st, 2015 at 04:09 | #7

    It will be just like what big oil did to the North Sea and that was exploit the area by burning off a lot of gas in the rush for profits and unless the USA developed a massive alternative to oil the world will warm up and the stormy weather will become much worse. It is so typical of Greedy OIL Companies.

  8. Daniel T
    December 23rd, 2015 at 14:35 | #8

    I don’t understand why it’s a big deal. US Consumption runs @ 19M barrels a day and production runs @ 10M barrels a day. I understand that some excess liquids can be exported but the overall impact on world markets (and thus the world price) is going to be minimal.

  9. Allen Novotny
    December 27th, 2015 at 14:24 | #9

    It seems to me that the tanker business would really pick up now that we are exporting oil.

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