The 4-decade-old ban on most crude exports from the U.S., now the world's largest producer, will be weakened bit by bit as government rulings allow exceptions, said energy analysts including IHS Inc.
The Commerce Department's permission for Enterprise Products and Pioneer Natural Resources to ship abroad ultralight oil known as condensate foreshadows a chain of incremental actions that will chip away at the restriction until it's obsolete. As much as 1.2 million barrels a day may be freed for export on the recent rulings alone.
The ban was passed by Congress in 1975 in response to the Arab oil embargo that cut global supplies, quadrupled crude prices and created gasoline shortages in the U.S. at a time when the country's own crude production was shrinking. Now that horizontal drilling and hydraulic fracturing are unleashing record volumes of light oil from U.S. shale formations and a glut of crude is pooling along the Gulf Coast, federal policymakers are facing increasing pressure to ease the restriction.
"They're going to try and get around the export ban in a lot of ways, case by case, without lifting it," said Amrita Sen, chief oil analyst for the London-based research firm Energy Aspects. "There are a lot of things they can do to alleviate this light crude overhang."
U.S. crude production has surged to the highest level since 1986, propelled by the boom in "tight oil" drawn from shale that now accounts for almost half of the total. Output of tight oil, almost all of which is light, will rise annually through 2021, peaking at 4.8 million barrels a day, the Energy Information Administration projects.
That may be a conservative prediction considering shale output has surpassed estimates over the past several years, said Jason Bordoff, founding director of Columbia University's Center on Global Energy Policy. "There's reason to be optimistic that actual production may continue to exceed forecasts," he said at an Energy Information Administration conference in Washington on Monday.
Policymakers have been eating away at the U.S. export ban for decades, said Daniel Yergin, vice chairman of the Englewood, Colo.-based consulting firm IHS. The prohibition was enacted to protect the price controls on oil and products including gasoline imposed because of the Arab embargo and to block Alaskan oil from being sent to Japan, he said.
Those price controls are long gone, refined products were cleared for export, and President Bill Clinton granted an exemption in 1996 that allows Alaskan North Slope oil to be sent abroad. Shipments to Canada were approved in 1985, and California's heavy-oil producers were freed in 1992 to export as much as 25,000 barrels a day.
"Most people recognize there's no rationale for having this ban," said Yergin, author of The Quest: Energy, Security and the Remaking of the Modern World. "In Washington, they're concerned, particularly in an election year, about doing anything that others would say affected the price of gasoline. It all comes down to gasoline."
While the fear of rising pump prices may be paralyzing politicians, IHS estimated in a May 29 report that lifting the restriction would cut retail gasoline prices 8 cents a gallon between 2016 and 2030 by increasing global oil supplies.
"Refiners are able to capture a lower cost to run their refineries, but the price they're selling that product for is set in a global market," Bordoff said.
Valero Energy, the biggest independent refiner in the U.S., has said it doesn't see a need to change the ban. In an April 29 call with analysts, Valero Chairman Bill Klesse described the surge in domestic energy production as "a windfall for the United States," allowing the nation's refiners to enjoy large crude discounts relative to the rest of the world.
The light-oil buildup has energy consultant John Auers betting on a "day of reckoning" when refiners reach their light-crude limits and drillers, without an international market to turn to, start scaling back production. That day could come as soon as next year, Auers, executive vice president at engineering consulting firm Turner, Mason & Co., said at the conference in Washington.
The pressure will probably spur the federal government to weaken the ban "kind of one step after another until there's a cumulative outcome instead of making one dramatic move," Yergin said. "People are cautious. They have enough problems. They don't want to take on a new risk."
That could change if the U.S. elections in November lead to Republicans taking over the Senate and then having the power to include a reversal of the export restriction in a larger energy bill, said Gayle Trotter, a Republican lawyer and senior fellow at the Independent Women's Forum in Washington.
"They're doing this piecemeal -- actually, I wouldn't even call it piecemeal because it's more just a sprinkle," she said. "Republicans could have the numbers to roll back this retrograde policy."
Business on 07/19/2014