There is a growing debate over lifting the US ban on crude oil exports. Recently US Energy Secretary Ernest Moniz said he thought it time to review the prudence of the exports ban during the 2014 quadrennial review of US energy policies. Not everyone has responded favorably to the calls to ease the ban so expect a loud debate over the year ahead.
For more than thirty years, the United States has banned crude oil exports. The logic at the time was energy security concern both from sending oil to foreign markets rather than using it here at home and a fear that crude oil exports would simply mean higher crude oil import to fuel our growing economy. Some of the laws on the books limited crude oil exports date back to the Mineral Leasing Act of 1920. Others were adopted in the 1970’s in response to the Arab oil embargo including the Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979. Federal rules in the Export Administration Regulations (EAR) of the Bureau of Industry and Security (BIS) of the Department of Commerce also impose export restrictions.
Clearly, times have changed since the frustration of long lines and spiking prices at gasoline stations in the 1970’s in the aftermath of the Arab Oil Embargo. Today, the US is in the midst of a boom in domestic oil production from tight oil and shale development. The problem now is that there is too much of the wrong type of oil (heavy imported crude versus light sweet tight crude oil) in the wrong places (Gulf coast versus North Dakota) to fit the energy infrastructure in place to serve market needs since those 1970’s days.
US oil markets are filling with crude from tight oil in North Dakota and Texas. The market is trying to rationalize changes brought about by this surge as pipelines reverse direction to ease the bottleneck at Cushing, Oklahoma and reduce the WTI-Brent spread.
Figure 1: Annual Energy Outlook 2014 US Crude Oil Production
SOURCE: US Energy information Administration 2014 Annual Energy Outlook
This supply growth trend from onshore tight oil formations is expected to continue through 2021. According to the 2014 US EIA Annual Energy Outlook total projected U.S. crude oil production will grow to 9.6 million barrels per day (MMbbl/d) by 2019 up 3.1 MMbbl/d from 2012. Tight oil production is projected to grow by 2.5 MMbbl/d, to 4.8 MMbbl/d or 50% of the US total. That is a lot of oil looking for a market and the ban on US crude oil exports is already causing congestion in the oil pipeline system.
US oil supply growth from onshore tight oil is producing ripple effects across world markets as the US is projected to produce over 4 million bpd and to keep growing through 2020 then peak at 10 million bpd.
US EIA forecast of crude oil production is more optimistic than Deloitte MarketPoint’s World Oil Markets outlook shown in Figure 2 below with EIA forecast production increasing from an estimated 7.5 million bbl/d in 2013 to 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970. According to the US EIA Annual Energy Outlook for 2014, US oil production is expected to surpass its previous 9.637 million barrels of oil per day record by 2019 and US oil imports are down from ~60% in 2005 to ~45% in 2012. In May 2013 according to the US EIA the monthly production rate was 7.2 mmb/d. US oil production is reaching 8.075 million barrels per day tipping the balance in world oil trade.
Offshore Gulf of Mexico production and crude oil production from Canadian oil sands are also expected to grow but more slowly than shale and tight oil production to offer long term sustained growth in output and reserves becoming a large contributor to US production as less expensive resources are depleted.
Growth in US crude oil production from tight oil and shale formations has grown fourfold since 2008, when it accounted for 12% of total U.S. crude oil production, to 35% by 2012. Total projected U.S. crude oil production in the latest AEO2014 Reference case reaches 9.6 million barrels per day (MMbbl/d) in 2019—3.1 MMbbl/d more than in 2012. Over the same period, tight oil production grows by 2.5 MMbbl/d, to 4.8 MMbbl/d or 50% of the national total.
Tight oil production grows quickly but also peaks more quickly–AEO2014 suggests the current fully producing plays will peak around 2021 at 10 million bpd as the Bakken, Eagle Ford, and Permian Basin plays drive the expected production surge with over 4 million bpd projected by 2020.
The story is all good news, while US oil production is up—way up, and US oil imports are down—way down, the market is re-balancing energy pipelines, storage, refining capacity and export facilities built for a previous era rationalizing energy infrastructure with pipeline flows being reversed and new pipeline projects proposed.
But new US crude oil supply is so plentiful it clogs the system creating bottlenecks causing pricing impacts such as the WTI-Brent spread. Infrastructure bottlenecks are the key reason oil by rail transport is growing not because it is the best option but because it is the only option available to get some product to market. These are growing pains some say, but pain is what is being imposed on a market eager for growth.
Should the US export crude oil?
The facts on the ground with the build up of light crude oil produced from onshore tight oil combined with the practical reality that most US refineries are still set up to process heavier crude oil types suggest exports of crude oil especially the light crude types in the API 50-55 gravity range (often called condensate) are the ideal target for light crude export.