Tuesday 29 September 2015


As the financial screws tighten on the US oil industry, the search for ways to relieve the pressure has become increasingly desperate. Oil producers are looking for something, anything that might conjure up a little more revenue.

For many American oil executives there is something the Obama administration can do: abandon the 1970s-vintage restrictions on exports of US crude. US government analysis suggests lifting those curbs would make little difference to domestic oil producers. Many of the companies themselves take a different view.

Earlier this month, the US Energy Information Administration published its analysis of the issue, which has been rapidly moving up the political agenda thanks to growing support — principally from Republicans — in Congress.

The good news for US oil producers was that the study concluded there were no plausible scenarios in which liberalisation of crude exports would push up fuel prices for American motorists. Petrol and other refined products can be exported freely from the US, so their prices are already set in world markets.

The bad news was that if production stays reasonably close to present levels, ending export restrictions would not raise either the price or the output of US crude.

As Lynn Westfall, the EIA’s director for energy markets, puts it, liberalisation of crude exports “won’t do any harm, and could even do a little bit of good.” The EIA’s argument is that in its “reference case”, with projected average US production of 10.4m barrels per day for 2020-25 — up from about 9.3m b/d this year — domestic crude could all be processed by domestic refineries.

That means export restrictions would not distort the market, and in the long term the spread between US benchmark West Texas Intermediate crude and internationally-traded Brent should remain about $6 per barrel, reflecting the difference in transport costs to world markets.

It is only if US production were to go above 11.7m b/d that the export restrictions would really start to bite because US refineries would be swamped, driving down WTI relative to Brent and penalising US producers, the EIA says.

Oil companies have several criticisms of that analysis. One is that the EIA’s reference case production is too low. While US output is falling at the moment, they say, it is quite possible that it will rise high enough for export restrictions really to hurt.

Another concern is the likely impact of refinery shutdowns for planned maintenance or unplanned outages. While US refiners might be able to process enough domestic crude in normal times, the producers say, there could be periods when their capacity is overwhelmed.

Finally, oil companies say the EIA’s estimate of an equilibrium WTI / Brent spread understates the potential gains from exporting. Oil from the Eagle Ford shale of south Texas could be sent to the coast at nearby Corpus Christi and on to markets in Latin America for just $3-$4 per barrel, they say, offering a few extra dollars profit even if the discount of WTI to Brent sticks at that $6 level. (businessday)

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