Lifting the 40-year-old US crude oil export ban would benefit pricing, energy security, and petroleum investment, according to a new study issued by the Center for Energy Studies at Rice University’s Baker Institute for Public Policy in Houston.
Ending the ban would level the playing field for US producers who face deep discounts for light crude relative to globally traded grades, said Kenneth B. Medlock, the CES’s senior director who wrote the study.
Most US light, tight crude is of higher quality than both West Texas Intermediate, the US benchmark, and Brent, the current global light crude reference, he told reporters during a Washington briefing where the study was released. If it was exported, it would fetch higher prices globally than either WTI or Brent, Medlock said.
“Providing more global trading opportunities increases fungibility and enhances energy security,” he said. Global demand growth in the next 25-30 years will be driven by China, India, and other emerging Eastern Hemisphere economies, Medlock said. That will make the world look to other regions largely in the Western Hemisphere for additional supplies, he said.
“This potentially could redraw the world’s crude oil trading map,” Medlock said. “Free trade will essential for the US. Otherwise, crude from countries with less stable regimes will be relied on.”
His research assessed a wide range of crude prices—$30-100/bbl—instead of narrow high price ranges previous studies have used. “Our results indicate the importance of addressing the crude export ban is very high even in a low international price environment, with discounts reached as high as $8/bbl in a $50 world, depending on the quality of the crude that is being produced and marketed,” Medlock said.
“If you move up into the more than $100/bbl range we had at this time last year, the discounts move into the double digits,” he added.
Medlock said the ongoing crude export ban is a classic policy intervention that has created a market distortion. “This doesn’t just happen with crude oil,” he said, adding that the report’s index plots prices of global light crudes relative to Brent and finds that, absent of trading constraints, only North American grades are discounted.
“The biggest US policy risk now would be if the export ban was removed and prices went up for other reasons,” Medlock said. “You can imagine the 30-sec elevator speeches if that happened.”
With most US refineries configured to process heavier grades, there’s a growing awareness that domestic capacity to refine these new US light tight crudes is limited, leading to the deep discounts relative to comparable overseas grades, he said.
“In turn, this could dampen US upstream investment,” Medlock warned. “Opening foreign markets to US crude would facilitate new upstream and midstream investments as domestic oil prices moved into greater parity with other international crudes.”
He said data also show that some US refiners have backed out lighter crude imports by substituting domestic tight oil, while others are backing out grades heavier than WTI and shale oils with blending and other activities.
“Counterintuitive to some, removing the ban generates distinct energy security benefits,” Medlock said. While some have argued it would simply increase US gasoline prices, refined product prices are in parity with international prices because US refined products are not covered by the crude export ban and would not rise if US crude prices rose with the ban’s removal, he said.
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