Could congress's lifting the crude oil export ban threaten U.S. energy security?

Congress has been increasingly considering lifting the ban on U.S. crude oil exports, which was put in place 40 years ago.  Lifting the export ban could possibly eliminate current national crude oil production-marketing bottlenecks by allowing Oil Producers full access to world markets outside North America.  Besides eliminating existing U.S. oil logistics-market bottlenecks, lifting the export ban could possibly led to added U.S. economic growth from increased domestic oil production and associated jobs creation. 

Is lifting the U.S. 40 year-old crude oil export ban in the best interests of the Country or could it lead to increased future U.S. Energy Security threats and possibly other significant negative economic impacts?

U.S. Export Ban History - The crude oil export ban was originally put in place following the 1973 Arab OPEC Oil Embargo, which led to a huge energy crisis.  This past energy crisis caused the worse U.S. economic recession since the 1950’s and until the recent 2007-09 recession.  As a result of the oil embargo and large oil shortages, the Federal Government passed the ‘Energy Policy and Conservation Act of 1975’ (EPCA 1975).  The EPCA 1975 gave the Executive Branch the authority to ban U.S. crude oil exports, and, created the Strategic Petroleum Reserve (SPR) and new regulations to reduce future U.S. petroleum consumption.

Over the past four decades the U.S. has made some progress in improving U.S. Energy Security; or the Country’s need for higher disruption risk oil imports.  These improvements include building and filling the SPR, increasing on-road vehicles’ fuel efficiencies (CAFE standards), and displacing petroleum motor fuels with renewable fuels (RFS).

Despite these Government Energy Security policy changes-improvements, total crude and petroleum oil imports continued to increase to historic highs until just before the 2007-09 Great Recession.  Refer to Figure 1.

Figure 1 – U.S. Oil Consumption and Imports: 1960-2015

Date Source – EIA Petroleum Trade Overview. Note: Total U.S. Petro. Products Supplied = Petroleum ‘Consumption’, and ‘Net’ imports = ‘Total’ imports – exports.

U.S. total oil imports have increased from about 6 million barrels per day (MBD) in 1973-75 up to almost 14 MBD 2005-06.  This was due to a combination of declining domestic production and increasing consumption.  Fortunately this trend reversed following 2007 as a result of the Great Recession’s reduced consumption, and, substantial increased domestic crude oil production from U.S. domestic Shale or Tight Oil.

Historically, past U.S. Presidents have banned crude oil exports to essentially all countries except Canada.  Last year the Obama Administration approved exporting ‘minimally processed’ light-tight oil to countries outside North America.  This Executive Agency action resulted in exporting about 20 thousand barrels per day (KBD) to Asia and Europe last year and similar quantities this year.  Since the U.S. currently produces about 12-13 MBD domestically, these increased exports outside North America currently have had relatively small impacts on U.S. Energy Security; or the levels of most secure supplies-imports.  U.S. crude oil exports to Canada have also increased up to almost 0.5 MBD.  This U.S. crude oil export level is relatively insignificant, since the U.S. imports 3.5-4.0 MBD from Canada; for net Canadian-to-U.S. crude oil import supplies averaging over 3.0 MBD.  This level of net Canadian imports has had a huge positive impact on U.S. Energy Security; since Canadian oil is clearly the most security source of imports.

This year the Obama Administration has approved ‘exchanging’ crude oil with Mexico.  Historically Mexico has also been a major supplier of U.S. imports since the 1990’s.  However, Mexican imports peaked in 2006 and have dropped by about half or down to about 0.8 MBD this year due primarily to reduced Mexico domestic production.  The level of light, low sulfur (sweet) U.S. crude oil to be exchanged with Mexico for heavy, high sulfur (sour) crude could initially be up to 100 KBD.  The impacts of this recently approved crude oil exchange with Mexico on U.S. Energy Security could be small; as long as replacement light-sweet crude oil imports from outside North America are readily available to U.S. Refiners, and similarly priced.  The potential negative impacts on the U.S. Refining Sector could, however, become significant if the approved Mexico crude oil exchange level becomes substantially greater than 100 KBD and the availability of light-sweet crudes from world markets becomes limited and/or higher priced in the future.

So if the current and planned exports of U.S. domestic crude oil production within North America generally have positive-to-neutral impacts on U.S. Energy Security, what could the impacts of fully lifting the crude oil export ban be? 

U.S. Crude Oil Energy Security History – Prior to World War II U.S. Energy Security was at its highest level since imports were essentially zero.  Since WWII, the combination of a continuously growing U.S. population and a rapidly expanding economy led to total oil consumption rapidly exceeding domestic supply.  The U.S. reliance on imports increased up to 33% of total supplies by the early 1970’s.  The risk level or threat to U.S. Energy Security just prior to the disastrous 1973 Arab OPEC Oil Embargo was at a historic high, and, was totally overlooked by the Federal Government at the time.  As a result of the oil embargo and loss of only about 5% of total crude oil supplies, this situation lead to one of the worst energy crises in U.S. history.

As a result of the 1973 Arab OPEC Oil Embargo and energy crisis/economic recession U.S. crude and petroleum oil supplied (consumed) rapidly dropped by about 6% or almost 1.0 MBD.  This was slightly greater than lost Arab OPEC imports and was due in part to the 1973-75 economic recession.  Since passing the EPCA 1975, the level of U.S. Energy Security has varied over the years.  The largest current threat to U.S. crude oil imports and Energy Security are due to Iran’s and regional terrorist group’s threats to shutting down all supplies that must be transported through the Strait of Hormuz.  This very significant U.S. Energy Security threat can be estimated by calculating the percentage of total U.S. petroleum supplies that originate from ‘Persian Gulf’ countries’ imports.  To illustrate a plot of the percentage of total U.S. petroleum oil that was imported from Persian Gulf sources was developed.  Refer to Figure 2.

Figure 2 – Percentage of U.S. Petroleum Oil Supplied from Persian Gulf Imports

Data Source – EIA ‘Petroleum Trade: Overview’.  Note: the data is based on continuous 3-month averages.

Just prior to the Arab OPEC oil embargo (1973 4^th quarter) the U.S. relied on about 6% of its total crude and petroleum oil supplies from the Persian Gulf.  Fortunately OPEC decided to discontinue the embargo after about 9 months and rapidly restored U.S. imports.  This action was too slow to prevent the 1973-75 U.S. economic recession.  Unfortunately it took almost a decade for the EPCA 1975 export ban and energy related Government policies to reduce the risk level of OPEC Persian Gulf imports to a level about half the 1973 pre-oil embargo level.

The risk level of Persian Gulf imports increased 1985-90, or essentially double the level that existed in early 1973.  This was due to a combination of substantially increasing Saudi Arabia imports, large reductions in U.S. domestic production, and increased U.S. consumption.  Since 1990 the U.S. Energy Security level has been volatile, but remained relatively constant until recently.  The combination of the 2007-09 economic recession (reduced demand) and the Shale Oil boom (increased supply) has reduced the level of Persian Gulf imports and U.S. Energy Security risks/threats by about 20%.  So, why has the Federal Government continued to allow U.S. Energy Security to remain at levels greater than what existed prior to the 1973 oil embargo and energy crisis?

Impact of the SPR on U.S. Energy Security – One of the most important and potentially effective actions the Federal Government made to mitigate future U.S. Energy Security risks was building and filling the SPR.  The SPR currently has 695 million barrels of crude oil inventory.  This represents about 1.25 years supply of current Persian Gulf import levels.  If the SPR could readily supply the entire U.S., this would make the U.S. Energy Security risk of a future Persian Gulf imports’ disruption fairly small.  However, the SPR is located on the Gulf of Mexico; or the south border of PADD 3.  Existing crude oil pipelines and canal/barge infrastructures allow readily supplying SPR emergency crude oil supplies into most the mid-U.S. or PADD’s 2, 3, and 4; PADD 4 also has the advantage of directly receiving large Canadian imports volumes.

Supplying the West Coast (PADD 5) and East Coast (PADD1) is much more constrained due to limited existing oil transport infrastructure, and, the 1920 Jones Act shipping constraints.  The almost century old Jones Act requires that all shipments ‘between U.S. ports’ must be carried out in U.S. built, owned and crewed ships, which are the most expensive marine shipment sources in the world.  As a result there are very limited U.S. oil tanker ships available to transport SPR crude to PADD’s 1 & 5 in the event of a Strait of Hormuz (Persian Gulf oil imports) shutdown.

Another factor that will have much greater impacts on West & East Coasts’ Consumers and Economies’ is the fact that these regions rely more on crude oil imports from outside North America than the rest of the U.S.  To illustrate refer to Figure 3.

Figure 3 – PADD’s 1 &5 Persian Gulf and Total Imports from Outside North America

Data Source – EIA Crude and Petroleum Oil consumption and imports by PADD.

PADD’s 2-4 current rely on 10% of their crude oil import supplies from the Persian Gulf and 26% total from outside North America; i.e. countries other than Canada and Mexico.  While PADD 1 (East Coast) historically has relied on slightly less than 10% of Persian Gulf imports, it has overwhelming relied on the vast majority of its total crude oil supplies from outside North America.  This trend has changed substantially over the past 5 years as a result to the domestic Shale Oil boom and increased Canadian Oil Sands imports.  Today PADD 1 still requires 34% of its crude and petroleum oil supplies from outside North America.  PADD 5 is clearly at greatest crude oil supply disruption risk with 19% currently from the Persian Gulf and 35% from outside North America.  This West Coast Energy Security risk has increased quite substantially over the past 20 years due primarily to declining domestic supplies from Alaska (ANS) and California.

An added Energy Security threat to the U.S. West and East Coasts is the fact that about 35% of ‘total world crude oil trade’ must pass through the Strait of Hormuz.  Persian Gulf crude oil primarily supplies Asian markets.  Loss of all Persian Gulf crude oil supplies will not only create energy crises in most the world, but will also substantially increase the competition for remaining crude oil supplies outside North America.  This will very negatively impact PADD 5’s Energy Security, followed by PADD 1.  Shipping SPR supply to PADD 5 will be far more constrained compared to PADD 1 since the oil must be transported a greater distance; through the Panama Canal.

The Pros and Cons of Fully Lifting the U.S. Crude Oil Export Ban – The EIA recently completed an analysis of lifting the U.S. export ban.  This analysis generally supports lifting the ban and estimates that the impacts on the U.S. economy will possibly be positive.  The EIA further predicts the price impacts of lifting the export ban on U.S. motor fuel markets will be neutral-to-positive; i.e. directionally reduce Consumer costs.  Surprisingly the EIA also predicts the impacts on the U.S. Refining Industry will be insignificant.

Those who strongly oppose lifting the current U.S. crude oil export ban primarily include the U.S. Refining Industry.  This Opposition is based on the potential economic risks to the U.S. Refining and Marketing sectors.  Unlike the U.S.'s ‘durable goods’ Manufacturing Industrial sector (building/fabrication materials production, equipment manufacturing, new buildings, etc.), the Refining Industry has grown very significantly since the 2007-09 recession.  Refer to Figure 4.

Figure 4 – U.S. Oil Refining Capacity and Utilization

Data Source – EIA ‘Refining Operable Capacities’ and ‘Gross Inputs’ .

U.S. Refining capacities and utilization (production rates) have increase to historic highs over the past 5 years.  Even though U.S. consumption has been directionally in decline since 2007, the level of petroleum oil products ‘exports’ has increased by 300%+ over the past 7 years.  Refer back to Figure 1.  This growth in the Oil Refining sector production has not only saved and created 10,000’s of jobs since the recession, but has also contributed significantly to growth in the U.S. GDP and helped reduce U.S. trade deficits.  One of the factors that has supported this growth in the Oil Refining sector has been the increased availability of domestic light-sweet Shale or Tight Oil feedstocks.

The EIA’s analysis assumes that exporting some existing and future increased U.S. domestic crude oil will have generally neutral impact on the Oil Refining Industry.  This conclusion or assumption may not be accurate.  Yes, exporting or displacing domestic crude oil with crude oil imports will likely benefit Oil Producers, but replacing domestic crude oil with increased imports from outside North America will most likely increase the Oil Refining Industry’s feedstock costs; due to increased cross-ocean marine transportation expenses at minimum.  What the EIA has also apparently over looked is the fact that Oil Refineries are designed to operate with fairly constant crude oil qualities; as needed to operate within existing oil processing unit’s constraints, and to maximize yields and profit margins.  A recent analysis I completed clearly illustrates the fact that U.S. Oil Refineries’ average crude oil feedstock physical properties (gravity and sulfur) have remained relatively constant over the years.  Refer to Figure 1, ‘U.S. Refining Crude Oil Input ^oAPI’ and the referenced ‘Sulfur Content of Crude Oil Inputs’ in a recent published analysis.  This generally means that exporting current light-sweet domestic crude oil production will at minimum increase similar quality crude oil imports and the costs due to increased transportation expenses.  These imports costs could also increase significantly if foreign supplies of similar quality crudes become increasing constrained due to increased world demand or reduced supply availabilities.

How Best to Lift the Current Export Ban? – Lifting the current U.S. crude oil export ban will have its benefits (to Oil Producers) and costs (to Oil Refiners, Consumers, and potentially increased threats to U.S. Energy Security).  However, the negative impacts of lifting the export ban can be managed and possibly mitigated by establishing a process to minimize the costs on Oil Refiners, Consumers and threats to U.S. Energy Security.  This could begin with first addressing the highest supply disruption risks to PADD’s 1 & 5.

Since PADD 5 is logistically the most remote to existing SPR oil supplies, Congress should seriously consider installing a new 100 million barrel SPR on the West Coast.  In addition, the century old Jones Act needs to be amended to increase the availability of oil tankers in North America, which could more rapidly be made available to ship SPR oil to the East and West Coasts in the event of a Strait of Hormuz shutdown.  The plan to lift the export ban needs to include mandated crude and petroleum oil export sales contract emergency restriction requirements that will immediately enable the Government to stop all crude and petroleum oil export shipments in the event of a future Strait of Hormuz shutdown event.

Next, Congress should only allow ‘gradually’ lifting the U.S. crude oil export ban in order to monitor and make changes to export increases as needed to minimize the negative impacts on the Oil Refining Industry and Consumers; and the ability to economically sustain and possibly grow future petroleum oil products exports.

Another option would be for Congress not to lift the existing crude oil export ban, and instead, persuade the Administration to have the Commerce Department approve further future crude oil export actions as allowed under their current EPCA 1975 authority.  And do so with a properly managed process in order to avoid significant U.S. Energy Security risks and negative impacts on Oil Refining sector and Consumers.

These are my suggestions and thoughts on lifting the current U.S. crude oil export ban, while mitigating the potential Energy Security and economic threats.  Your ideas and comments are always welcome.

http://www.theenergycollective.com/jemillerep/2277415/could-congress-s-lifting-crude-oil-export-ban-threaten-us-energy-security