Oil exports: The rhetoric and the reality

If not natural gas, then oil. That seems to be the latest reaction to breaking Russia’s energy grip on Europe.

Harold Hamm, the chief executive of Continental Resources CLR +3.99%, reciting a new meme in the energy industry, told members of Congress this week to forget all the breathless banter about natural gas exports to counter Russian aggression in the Ukraine. If we really want to help wean Europe off its dependency on Russian energy, we should immediately begin exporting oil. The first export terminal for liquefied natural gas won’t begin shipments until next year. It will simply take too long for LNG exports to help Europe, Hamm argued.

While opening LNG exports is a noble goal and one that we as a country are actively working towards, the fact is the infrastructure to undertake large scale overnight LNG exports does not currently exist. If we want to have an overnight impact on today’s global events, we can immediately begin exporting crude oil, which does not have the same infrastructure constraints.

While oil may be unconstrained by infrastructure, it also won’t solve Europe’s dependency issues in the same way gas might. Different grades of crude may make it difficult for European refiners to simply switch to a new oil source.

But oil exports also have a different impact on the home front than LNG exports. While we currently have more gas than we need, we still import, on a net basis, about 7.3 million barrels a day, or just less than half of our daily consumption.

Any exports would have to be offset by additional imports, says Jeffrey Brown, an independent petroleum geologist who tracks import data. Embracing exports the way Hamm suggests would simply shift the burden of greater foreign oil dependency from Europe back to the U.S.

This is why the notion of energy independence is unrealistic. Midwest producers like Hamm talk about rising oil production as if we have a surplus, but we are a long way from domestic production levels that would reduce imports to zero. Even if we achieve those levels, we are unlikely to maintain them for long.

For consumers, the entire debate doesn’t matter much. Exporting crude probably would have little effect on gasoline prices because most refiners are already selling their products based on the Brent price for crude, which is higher than the price for West Texas Intermediate, the U.S. benchmark. The Brent, or world, price is currently about $6.50 a barrel higher than WTI.

For Midwest producers like Hamm, oil exports would narrow that spread. They’ve been forced to sell their crude to Midwestern refiners at WTI prices, only to watch the refiners turn around and sell it at prices set by Brent. In other words, in the Midwest, margins are migrating to the refiners. Exports would be a way for companies like Continental to reverse the trend.

Our export policies, though, shouldn’t be based on the special interests of a handful of companies.

Just like Europe, U.S. refiners require different grades of crude, and some of the biggest ones require heavier oil from places like Venezuela rather than the light sweet crude produced in the domestic shale plays. Oil exports may, indeed, make sense at some point, and lawmakers need to revisit energy policy that is based on 40 years of resource scarcity. The issue, though, needs to be studied carefully based on its domestic impact, rather than as a knee-jerk response to Russian aggression in the Ukraine or the opportunistic urging of oil producers at home.

The changing energy landscape in the U.S. has already altered the nature of global petro-politics, and it will continue to do so. But we can’t look to exports of gas or oil as a quick fix for the world’s problems.

http://www.forbes.com/sites/lorensteffy/2014/03/28/oil-exports-the-rhetoric-and-the-reality/?ss=business:energy