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Page added on March 8, 2014
Loophole Makes Hilarious Mockery Of US Crude Oil Export Ban
Washington is tangled up in spirited bouts of mudwrestling over exporting US-produced crude oil, which has been prohibited since the Arab oil embargo of 1973. Oil companies, environmentalists, consumer groups, lobbyists, lawmakers – they’re all at it.
Oil companies, faced with lackadaisical consumption and ballooning production in the US, are desperate. They have visions of dropping prices just when exploration and production costs are rocketing higher. So they want to benefit from the higher prices their US-produced oil would bring in other markets – and they want to create scarcity in the US to fire up local prices.
But environmentalists fear general mayhem if crude oil were allowed to be exported. Consumer groups are worried that it would raise the cost of gasoline, diesel, propane, and heating oil – though oil companies have sworn up and down a million times, via numerous studies they themselves directly or indirectly funded, that oil exports wouldn’t impact prices at the pump. Lobbyists of all stripes see in this conflict a mega-opportunity to fatten up their wallets. And lawmakers want to exact their pound of flesh from both sides; elections are coming, and they need to stuff their campaign coffers with money.
Meanwhile, behind the scenes, so to speak, something else has been happening: a breathtaking boom in exports, not of crude oil, which would be illegal, but of refined “petroleum products,” which is perfectly legal, even if it’s refined just enough to circumnavigate the crude-oil export ban.
BP, the British oil mastodon which is still in hot water over the Horizon oil spill in the Gulf of Mexico, figured it out too. It has inked a 10-year deal for at least 80% of the capacity of a refinery being built by Kinder Morgan Energy Partners LP in Houston, Bloomberg reported. The first phase of the 100,000 barrel-a-day refinery is expected to come online in July. It’s designed to refine crude just enough to turn it into a “petroleum product,” which then can be legally exported without limits.
To heck with the crude oil export ban.
It’s not just BP. The possibility of legally exporting barely refined “petroleum products” to profit from the price differential overseas has been such an irresistible lure that it has triggered a construction boom of specialized refineries along the Gulf Coast.
An “inexpensive way around the export prohibition” is what Judith Dwarkin, chief energy economist for ITG Investment Research, called the phenomenon. She told Bloomberg, “You can lightly ruffle the hydrocarbons and they are considered ‘processed’ and then they aren’t subject to the ban.”
Specialized refineries, built at a fraction of the cost of full-fledged refineries, can distill the lightweight crude or “condensate” found in parts of the US into various “petroleum products” that often need to be refined further in the receiving country. Production of condensate has doubled since 2011, creating glut-like conditions in some areas. Hence the drive for exports. And the drive to finagle a way around the crude-oil export ban.
This chart by the Energy Information Administration shows the “petroleum product” export boom that is making such hilarious mockery of the crude-oil export ban:
Since 2007, when this boom took off, exports of petroleum products have tripled to a full-year average of 3.5 million barrels per day (bbl/d) in 2013, up 11% from 2012, according to the EIA. And they hit 4.3 million bbl/d in December, the first month ever such exports exceeded the 4 million mark.
Among these petroleum products are “distillates,” the largest category that includes diesel, kerosene, and home heating oil. US refineries increased their production of distillates to an average of 4.7 million bbl/d for the year, and set a new record in December of 5.1 million bbl/d. About 1.1 million bbl/d were exported in 2013, up 10% from prior year, half of it to Central and South America, 400,000 bbl/d to Europe.
Worried about the price of gasoline at the pump? Exports of gasoline (finished gasoline and gasoline blending components) rose 9% to an annual average of 550,000 bbl/d, with December setting a new record of 770,000 bbl/d.
Heating your home with propane? You got snookered this winter. Propane around the country prices nearly doubled since October, though they have started to wind their way back down to earth recently. Meanwhile, propane exports, supported by a new export terminal that came on line in September, soared, particularly in the last quarter, and averaged 300,000 bbl/d in 2013. A 76% jump from prior year!
Whatever the original purpose of the export ban, it wasn’t immensely helpful in keeping prices down – I mean, if I remember right, a gallon of gasoline cost a fraction of a buck at the time. Now the ballooning exports of “petroleum products” and the potential for outsized profits have nurtured along a specialized industry that is piling billions into infrastructure, plant, and equipment, with the sole goal of elegantly dodging the export ban.
What is perhaps the most gigantic loophole in the history of mankind may well obviate that spirited high-dollar mudwrestling show in Washington. Then lawmakers and lobbyists would have to go look for some other cause which they could leverage to exact their pound of flesh. And the industry will continue to use every trick in the book to light a fire under prices – and exporting “petroleum products” is just one of them.
This winter, things have begun to unravel. Natural gas inventories are near their 2003 low. Sure, weather is the main factor, but that’s always the case. The truth is that supply has not been able to meet winter demand, period. It’s a fact that is inconsistent with the fairy tales we continue to hear about cheap, abundant gas forever. Read…. Shale Oil & Gas: Not a Revolution But a Retirement Party
11 Comments on "Loophole Makes Hilarious Mockery Of US Crude Oil Export Ban"
Davy, Hermann, MO on Sat, 8th Mar 2014 1:36 pm
The oil business is a global business and the markets are fungible. The products produced by oil are diverse as is the feedstock’s. The different types of oil and other liquids that make up liquid fuels are diverse. What we need is balance here. We need to recognize the “lobby of plenty” is preaching a false tune with energy independence let alone independence and exports. We need to have a degree of oil security here in the US. Those who oppose the export ban need to recognize the structure of the US refining industry and the changes that have occurred since the Canadian tar sand production and the shale boom. These changes warrant some shifting around of product. We also need to recognize the big value added return US oil majors are getting from exporting refined oil products. Our refinery business when run at proper efficiencies allows a better economy. Since we know our crude reserves are nowhere near what the “Lobby of Plenty” claim when one considers Peak Oil dynamics we need to be cautious about exporting our national security. Yet, we need to recognize the benefits of exporting some crude products for a better refinery efficiency.
Paulo on Sat, 8th Mar 2014 3:38 pm
If grain and other commodities can be exported without secondary manufacturing to ‘finished products’, so can oil. It works both ways. The sooner world oil prices are paid everywhere, the sooner the charade will end, imho.
Paulo
Nony on Sat, 8th Mar 2014 3:49 pm
The real stupidity is having to build these splitters. Putting steel and capital into the ground when we should just ship the stuff.
US has too much light sweet crude and a refinery base optimized for heavy sour crude. The obvious solution is to send the light sweet to world markets and import heavy sour. (There are other issues with geography, us being bicoastal but the main thing is just a mismatch of refinery capacity. The whole no exports is just idiotic 1970s silliness that is still hanging around.)
rockman on Sat, 8th Mar 2014 3:52 pm
I just covered this elsewhere but worth repeating here. “…and they want to create scarcity in the US to fire up local prices.”
What stupidity: there’s no need to create “scarcity”… it already exists. Is this writer unaware that we import a very large percentage of the crude oil refined here? Last time I worked the numbers we are importing $750 MILLION OF OIL EVERY FREAKING DAY! I think that qualifies as a “scarcity”. LOL.
Virtually ever gallon of refined product we export is made from imported oil. In fact a bit remains here. From a net volumetric standpoint no refined products made from oil produced in the US is being exported. The key word is NET. We may export about 200,000 bopD to Canada but they ship millions of bopd to the US.
We are not effectively exporting any US PRODUCED OIL via the refining process. In reality the US has become the REFINING SLUT for the oil exporting countries like Canada and México. LOL. For instance, due to the contracts between PEMEX and Gulf Coast refiners about 25% of the value of the imported Mexican oil is required to be exported back to México as refined products. So México gets the products and Gulf Coast residents get the refinery jobs AND the refinery pollution.
I have no doubt that all TPTB involved in this discussion are well aware of what I just described. Why do both sides chose not to highlight these facts? Hell if I know but they are certainly doing for their own benefit IMHO.
westexas on Sat, 8th Mar 2014 9:43 pm
Most Recent Four week running average net import data (EIA):
Total Liquids: 5.3 mbpd
Crude Oil: 7.3
Products -2.0 (net exports)
Davey on Sat, 8th Mar 2014 10:27 pm
Rock said – I have no doubt that all TPTB involved in this discussion are well aware of what I just described. Why do both sides chose not to highlight these facts? Hell if I know but they are certainly doing for their own benefit IMHO.
The usual lobby game. People and groups have agendas to sell so they twist the subject enough to bend to their desired outcome. What usually happens is that something very simple and common sense is manipulated, distorted, and warped into something else. Basically the process of public policy is now a game of greed and brinkmanship. There is no public about the policy anymore it is about a system hijacked for a few at the expense of the public.
Boat on Sun, 9th Mar 2014 3:16 am
rockman….Why do both sides chose not to highlight these facts?
One major party basic talking point for decades has been lack of refinery capacity and how lack of US drilling has caused the price of high fuel. It would be hard for them to say my bad, we lied. The other party wants to pander to the greens while at the same time want the jobs and the benefits from FF. Misdirection is the name of the game for the political class.
rockman on Sun, 9th Mar 2014 3:32 am
Boys & girls…I fear I have opened a can of worms. Maybe we can collectively sort it out but it won’t be too easy.
First the obvious that’s been mentioned before: Americans don’t use oil…they use refined products. We produce X bopd domestically and import Y bopd. But we consume refinery products so here’s the first simple question: how much oil is refined daily to produce the products we consume? Well…it certainly isn’t X+Y because we export a good deal of product. Another arithmetic problem: not all the products we consume daily are refined from that X+Y volume. Especially gasoline much of which comes from EU refiners since they don’t have as much demand for that “byproduct” of the process. Likewise we ship a good bit of a “byproduct” for which we don’t have as much demand as our EU cousins: diesel.
Here’s a bit I pulled off the web. It’s from 2009 but illustrates some key points:
“The EIA cited the example of what’s happening with gasoline and distillate, which together represent over 70 percent of refinery output from crude oil. Energy Information Administration weekly data indicate that for the first quarter, demand for the two products fell more than 3 percent in total, (with gasoline declining 1.5 percent and distillate demand falling 6.7 percent). Distillate demand, which is mainly driven by heavy-duty trucking, has been hit hard by the slowing economy. The need for gasoline from domestic refineries is slowing even more than consumption, due, in part, to increased supply from gasoline imports, much of which comes from Europe. European refineries produce more gasoline than they can use, and their surplus gasoline volume has been growing as the region encourages consumers to switch from gasoline light duty vehicles to diesel-fueled vehicles. U.S. refinery demand is also driven lower by the increased use of ethanol, as the Energy Independence and Security Act of 2007 requires more ethanol to be used in 2009 than in 2008. Not surprisingly, the declining need for U.S. refinery output has kept downward pressure on refining margins and has led to refiners reducing crude inputs and product outputs.”
OK…70% becomes gasoline and diesel. But how much of each? Obviously that depends on the specific crude composition. And which crude…domestic or imported? I’ve begun searching and have yet to find where someone has done the heavy lifting of sorting it all out. We may have to figure it out piece by piece to come up with anything close to an answer: how much of the products that we export are from domestic oil and from imported oil? IOW are we supplying all our product demand from domestic oil? Do we have excess domestic oil production beyond our demand especially when you include product imports? Are we cracking most, if not all, of the imported crude to supply the exported product demand?
These seem to be THE critical questions that need to be addressed if we are to speculate about the export of domestic crude. But it opens up an even more important proposition: much is made of the increase in domestic oil production. But if we were producing much if not most of our product consumption from our previously lower production rates has the increase in production been as important a factor as some feel? IOW what if all that increased oil production is being refined with most if not all of the products exported? And if we exporting most of our oil exports back out as refined products does it matter how much we import because Americans are paying for that oil? Our refineries are…refineries that are recouping that expense from the buyers of those exported products.
My head is starting to hurt so I will stop writing now.
rollin on Sun, 9th Mar 2014 6:43 am
The US imports about 2.1 million bpd of refined products. That means a net export of “refined” products of about 2 mbpd which is less than petroleum imports.
I find zerohedge has little credibility in general and the writing is purposely biased to prove some erroneous point.
Boat on Sun, 9th Mar 2014 8:29 am
Seems to me the magic number for increased drilling would be around 4 mbpd to break even and need no imports as far as American consumption goes. As far as refineries go they used to shut down when the demand drop. Apparently the new paradigm shift is more advanced refineries can now make money by importing oil and reselling it.
rockman on Sun, 9th Mar 2014 2:15 pm
Interesting Boat. I’m still digging out some numbers. But there is something of a disconnect between drilling and the import/export dynamic. I drill to produce/sell oil. Once it leaves my well I don’t care if it’s exported or not. I don’t care if its refined products are exported or not. My focus is on finding it and getting the max price. Likewise a US refinery doesn’t care if it’s cracking domestic or imported oil…just what they pay for it. They also don’t care who they sell to as long as they can max profits.
Thus there’s little motivation in the entire system to minimize cost to the US consumer or guarantee supplies. But that is the basis of free enterprise. As such it may not benefit Americans in some situations and be of great benefit in others. We benefit from Canadian oil imports. But that also results in Canadian petroleum consumers paying higher prices. So should US consumers be shielded from this dynamic and not Canadians? Easy answer if you’re an American who feels we should always have the advantage even if it violates the free market. The one exception would deal with oil/NG produced from US govt leases…that does belong to our citizens. OTOH almost all the oil we import belongs to those govts and thus belongs to their citizens. So shouldn’t the Canadian citizens have the right to prohibit oil exports to the US? Those in Alberta might be OK with exporting but what about the provinces that are net consumers of petroleum?