Should the U.S. Allow Increased Domestic Crude Oil Exports?

U.S. domestic crude oil production was in decline following the mid 1980’s.  Recent drilling technology innovations and new State and Private Lands reserve development have reversed this trend since 2008.  Rapidly growing new domestic crude oil supply could possibly exceed some regional (Refining) markets’ demand similar to what has been recently experienced with the rapid shale natural gas production growth.  Some Major Oil Companies are considering applying for Federal approval to export potential future excess domestic crude oil production.  This would alleviate a future possible local-regional market energy over supply situation.  Is exporting U.S. domestic crude oil production in the best interests of the country?

Brief U.S. Crude Oil Production, Imports and Consumption History – prior to the 1970’s domestic crude oil production grew at an average rate of about 4% per year.  Due to a combination of depleting conventional oil reserves, lack of production technology innovations and decreasing assess to proven on-/off shore oil reserves, U.S. crude oil production peaked in 1970.  Refer to the following graph.

Data source: EIA U.S. Field Production of Crude Oil, MER Table 3.3a Petroleum Trade: Overview, and U.S. Net Imports of Crude; adjusted, for 1920-1972.

The EIA data shows that U.S. Net (Petroleum) Oil Imports peaked in 2005 and have dropped by 40% over the past 7 years.  These data also show that Domestic (Crude) Oil production bottomed-out in 2008 and has increased by about 30% over the past 4 years.  The EIA data further shows that net petroleum imports have declined by 5 million barrels per day (MBD) 2005-2012, while domestic oil production increased by only about 1.5 MBD during the same period.  What are the primarily factors that have substantially reduced the need for recent petroleum imports?  Refer to the following graph.

Data source: EIA Table 3.3a Petroleum Trade: Overview.  Domestic (Petroleum) Supply is calculated based on the difference between ‘Petroleum Products Supplied (consumed)’ and ‘Petroleum Net Imports’ per Table 3.3a.

The large reduction in Net (Petroleum) Imports Supply is due to increased Domestic (Oil) Supply and reduced Total (Petroleum) Demand or consumption.  Reduced U.S. demand has been due to a combination of the 2007-2009 economic recession and many recent energy efficiency improvements.  As efficiency improvements such as the new CAFE standards go into effect, and further Commercial and Residential Sectors’ buildings/appliance upgrades are made, these improvements should further reduce petroleum consumption in future years (Re. EIA AEO2013 Early Release).

Why Should the U.S. Consider Exporting Crude Oil in the Future? – shale natural gas development has led to excess supply in recent years.  As a result, Gas Companies are requesting the ability to export the excess production into international markets.  Similarly, domestic crude oil production is projected to exceed that of Saudi Arabia by 2020.  As a result of this projected increase in domestic crude oil production and the continued decline in future petroleum consumption levels, some Major Oil Companies appear to be developing plans to request the ability to export U.S. crude oil production in the future.  (Re. WSJ ‘video’ on their recent article: “Oil Exports Get Second Look”).

Some of the Major Oil Companies state that the U.S. should seriously consider allowing domestic crude oil exports since such an action would be consistent with supporting our normal participation in most world markets; where nearly all commodities including oil are widely bought, sold and traded among most international companies and countries.

Historic and Current U.S. Petroleum Oil Exports –the U.S. has historically exported relatively small amounts of crude oil and petroleum oil products.  Following the 1973 Arab OPEC oil embargo, the Federal Government basically prohibited exporting domestic crude oil production.  Only small amounts of crude exports have been approved by the Federal Government since the 1970’s.  Although the U.S. has exported relatively small volumes of finished and intermediate petroleum oil products since the 1980’s, this trend has changed very significantly in recent years.  Refer to the following graph.

Data source: EIA Table 5.5 Petroleum Exports by Type. Note: ’Petro Oil’ includes finished and intermediate or unfinished petroleum oil products from refined/processed crude oil.

The EIA data shows that following 2004 U.S. petroleum oil products exports began increasing quite significantly.  The destinations for the largest volumes of U.S. petroleum products exports are currently Mexico and Canada; about 30% of the total.  Crude oil exports have been allowed and made only to Canada, and today average about 60 thousand barrels per day.

The reason for the rapid increase in petroleum oil products exports is due to a combination of reduced U.S. demand and the poorer economics of operating existing U.S. Refining capacity at decreased rates.  As U.S. total petroleum demand has dropped in recent years this has idled increasing amounts of existing Refineries processing capacities.  Running at less than maximum-optimal rates significantly reduces average Refinery profit margins.  After operating at breakeven or negative profit margins for significant periods of time Refiners have two options: 1) shutdown and layoff their work force, or 2) find alternatives to increasing-maximizing throughputs and restoring sustainable profit levels.

Since 2000, ten U.S. refineries have shutdown due to low throughputs and poor economics.  In order to operate at reasonably profitable levels Refiners have increased their crude oil throughputs by increasing petroleum products exports.  Since 2005 U.S. petroleum oil products exports have increased by 2 MBD, which is essentially equal to the level of total reduced U.S. domestic petroleum oil demand during the same period.  The Refining Industry has been heavily criticized by a number of groups and organizations, including FOX News, for keeping their Refineries operating at higher-optimal rates and increased exports.  These actions have successfully prevented the shutdown of several additional major Refineries in recent years and the loss of many thousands of highly paid union jobs.

U.S. Crude Oil Imports and Energy Security – a major issue with potentially allowing crude oil exports from the U.S. is ‘Energy Security’.  Energy Security is normally defined as the level of disruption risk of crude oil imports.  Historically the highest risk crude oil imports come from OPEC countries, which embargoed the U.S. in 1973.  Although U.S. relationships with many OPEC countries have increased since the 1970’s, today Iran poses the greatest risk to U.S. Energy Security.  Since the Iranian Revolution in 1979, the U.S. has stopped all oil imports from Iran.  Today the risk from Iran is their nuclear ambitions and chronic threat to shutdown the Strait of Hormuz if any country interferes with their nuclear program development.  Shutting down the Strait of Hormuz will immediately cause the loss of all U.S. Persian Gulf imports.  Refer to the following graph.

Data source: EIA Crude Oil Imports by Country of Origin. 

Highest risk Persian Gulf imports peaked in 2001 and declined until 2009.  Since 2009 these highest risk imports have increased by an alarming 30%, while total U.S. consumption has decreased on average.  These data indicate that U.S. Energy Security has actually decreased very significantly in recent years.  Today Persian Gulf imports account for almost 12% of total U.S. petroleum oil supplied (consumed).  This level of highest risk imports is twice the percentage of U.S. crude oil supply disrupted or lost during the 1973 Arab OPEC oil embargo.  Despite the installation of the Strategic Petroleum Reserve (SPR), the short-term and regional impacts upon loss of Persian Gulf imports would still lead to major petroleum oil shortages on the East and West Coasts.  Re. my past post section: “Mitigating a Strait of Hormuz Shutdown with the SPR”.  The SPR Gulf of Mexico Coast storage locations and logistics constraints will limit the U.S.’s ability to restore lost crude oil to the West and East Coasts.

Fortunately, the most reliable and lowest risk crude oil imports that come from within North America (Canada and Mexico) have increased over the years.  Since the early 1980’s Canadian crude oil imports have increased quite substantially and today represent the single largest source of U.S. total oil imports.  Mexico imports essentially equaled and parallel Canadian imports until 2004.  Since then the significant depletion of their Gulf of Mexico oil production has led to declining Mexican imports.

Future potential increases in Canada imports via the Keystone XL pipeline project still appear promising towards improving future U.S. Energy Security.  However, the lack of an effective recent Federal Government Energy Policy or priority focus on current increasing levels of highest risk Persian Gulf imports is very concerning towards future U.S. Energy Security.

Should the U.S. Allow Increased Domestic Crude Oil Exports in the Future? – exporting U.S. domestic crude may benefit some ‘upstream’ Oil Companies that develop and produce crude oil.  The impacts on ‘downstream’ and Independent Oil Companies (those that refine & market the crude oil products), and U.S. consumers could, however, be significantly negative.  In recent years the increase of domestic and Canadian crude oil has very successfully reduced U.S. crude oil costs compared to world markets.  (Re. my recent post, section: “Other Keystone XL Benefits and Associate Impacts” WTI-Brent spread graph).  Exporting domestic crude would directionally reverse recent favorable WTI-Brent price spread trends.  This could lead to increased average crude costs for many U.S. Refiners and in turn directionally cost increases of all petroleum oil products for many U.S. consumer markets.

Besides the potential increased petroleum product costs for consumers, prematurely exporting domestic crude oil could increase the need for further Persian Gulf imports.  This would be highly inconsistent with improving future U.S. Energy Security.  With the growing concerns of Iran’s developing nuclear capability, the risk that Israel could soon take military action to protect themselves, and Iran’s likely retaliation of successfully shutting down the Strait of Hormuz (and all U.S. Persian Gulf imports), exporting U.S. domestic crude oil supplies does not appear to be in the best interests of the U.S.

In Conclusion – the U.S. obtains the majority of its non-OPEC/Persian Gulf crude oil imports from within North America.  Allowing the export of U.S. domestic crude oil to countries outside North America could be detrimental to U.S. Energy Security, domestic consumer markets and the overall economy.  Although exporting domestic crude would be consistent with supporting some world free markets, the possible benefits will likely be small in comparison to keeping all U.S. domestic crude oil supply within North American markets.

In the future, after all high risk crude oil imports have been eliminated and when an actual excess of domestic crude oil production-supply develops, only then should the U.S. seriously consider any crude oil exports to outside North America.

Energy Collective

One Comment on "Should the U.S. Allow Increased Domestic Crude Oil Exports?"

BillT on Tue, 9th Apr 2013 1:35 am 



Oil is a ‘for profit’ resource. The only way to prevent its export is by law or nationalizing the oil fields, which I see coming to America in the not to distant future. Many other countries already have.