Export of US Crude Oil

The issue of crude oil exports is increasingly attracting some much needed attention and discussion amongst our national policymakers. Since 1975, our government has prohibited nearly any export of domestically produced crude oil and natural gas. This restriction was part of a broad policy response to the energy crises of the 1970’s. Forty years later, many suggest that it’s time to re-examine the relevance and consequences of our national crude oil export policy given recent, and what appear to be enduring, enhanced production levels.

Not surprisingly, today’s global oil market is vastly different than it was in the 1970’s. Just five years ago, the changes that have revolutionized American energy production and consumption would have been discounted as unlikely to occur. However, sweeping technological advances since 2009 have achieved dramatic increases in domestic production of natural gas and light sweet crude from North American shale formations.1 Concurrent to these production improvements, domestic consumption of fossil fuels has moderated, due to new efficiencies and changing economic conditions.

Consider the following – the U.S. Energy Information Administration (EIA) currently estimates that US oil production will reach approximately 9.2 million bpd this year, even allowing for downward pressure driven by still-low crude prices. EIA’s projections begin to approach the highest domestic production level ever reached (9.6 million bpd in 1970).

The growth in domestic crude oil and other liquids production has contributed to a significant decline in imports. EIA currently pegs net crude imports in 2015 at 6 million bpd and projects that the US will remain a net importer of crude through 2040 with the lion’s share likely to continue from Canada.

Clearly, major developments in oil markets – here and abroad – have taken hold.

America’s oil production boom are already affecting world petroleum supplies and pricing. Regional economic slowdowns are dampening Asian and European oil demand, and the price of Brent crude has fallen as both global production and new North American supplies are creating an abundance of petroleum.2 Given these dynamics, some believe that it is appropriate to loosen restrictions on American-produced crude exports. In pursuit of this objective, there have been some questionable assertions offered as “facts” about domestic refining and crude distribution, such as:

  • A lower price for US crude is a result of domestic refiners inability to easily process the type of oil produced in this country;

  • As a result of discounted crude pricing, US production could become “shut in” or taken offline; and

  • American refiners benefit from discounted crude to produce gasoline which sells at prices set internationally while the full economic benefits that could reach consumers from widespread petroleum exports are blunted due to current restrictions.

While it seems self-evident that these theories merit factual analysis, it is also apparent that such evaluations are presently far from complete and legitimate questions remain. These include (but are certainly not limited to):

  • Do infrastructure bottlenecks impede American refiners’ equal access to US-produced crude supplies?

  • What can be done to remedy these bottlenecks?

  • Is domestic refining capacity constrained to absorb additional supplies of domestic light sweet crude projected to come online?

  • What other options (e.g., capacity expansions, infrastructure changes, crude slate adjustments3) exist for increased domestic refining’s use of American oil and how aggressively are such options being pursued?

  • What are the impacts of relaxing the domestic crude export restrictions on US gasoline prices?

  • What, if any, impact would relaxing the crude exports ban have on U.S. imports of foreign crude?

  • What are the net impacts of relaxing the crude exports restrictions on different regional subsets of domestic refiners and do Jones Act shipping rates play a role in shaping those impacts?

These subjects are emblematic of the policy questions that need to be asked…and answered.

As the policy debate surrounding crude exports intensifies, Congress and the Administration are charged with the responsibility of sorting through the statutory and regulatory pillars of US policy on crude oil exports. This process has begun through hearings and will likely continue for some time as the complexity of the issues presented, the flexibility of current regulations, and the politics of crude exports are simultaneously confronted.

Tesoro supports free trade and free markets. As such, Tesoro supports legislation to relax the current restrictions on the export of American petroleum. As an advocate of free trade and free markets, Tesoro believes that Congress should undertake a comprehensive review of other statutes that inhibit these activities in the energy sector such as the Jones Act and the Renewable Fuel Standard. Tesoro does not, however, condition our support for relaxing the domestic petroleum export restrictions on reforming or repealing these other statutes.

1 Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Density is classified by the American Petroleum Institute (‘API’). API gravity is based on density at a temperature of 15.6 ºC. The higher the gravity, the lighter the crude. Light crude has an API gravity of 38 degrees or more. Heavy crude has a gravity of 22 degrees or less. Crude with an API gravity of 22 to 38 degrees is generally referred to as medium crude. Sweet crude generally has a sulfur content below 0.5%, while sour crude’s sulfur content exceeds 0.5%.

2 Brent Blend is a light, sweet North Sea crude with approximate API gravity of 38 and sulfur content of 0.4%. Most Brent Blend is refined in Northwestern Europe, although significant volumes are shipped to the US and Mediterranean. Brent Blend is used for pricing around two-thirds of the crude traded internationally. Rolling price assessments are based on physical Brent-Forties-Oseberg crude oil cargoes loading not less than 10 days ahead and loaded free on board at the named port of shipment (‘Brent Dated’).

3 Light, sweet crude is generally more expensive than heavier, sourer crude because it requires less processing and produces a mix or “slate” of products with a greater percentage of value-added resources, such as gasoline, diesel, and aviation fuels.