ECONOMICS & FINANCE 9/03/2014 @ 7:19AM 2,663 views Shell Chief Urges US To Lift Crude Oil Export Ban Comment Now Follow Comments This is an interesting little snippet of news: the CEO of Shell has urged, in a speech, that the US should lift the 40 year old ban on the export of crude oil from the country. There are, of course, a lot of people urging the same lifting of the trade restrictions. Just as there’s also a lot of people shouting that it shouldn’t be lifted. But the thing is that Shell is an integrated oil major: therefore it’s reasonably impartial as to its own economic interests on this point. Given that oil is fungible the ban staying or going makes a difference to how profits are divided between drillers and refiners but not to prices in general nor to anything very important to a company like Shell which is both a driller and refiner. Here’s the actual news: The chief executive of Royal Dutch Shell has urged Barack Obama to lift America’s 40-year ban on oil exports. Ben van Beurden told a conference in the US that the move would make the global energy system more stable. “Policy makers here in the US should embrace a truly liberalised diverse and global energy market,” the head of the FTSE-100 oil giant said in his speech at Columbia University. US oil and natural gas exports “would reinforce the long term future of North American energy production”, significantly improve the US balance of trade, and “help to make the global energy system much more stable”, he added. The important point to understand here is that the US bans the export of crude oil. But it does not ban the export of refined products. Add in the fact that both crude itself and refined products are (not perfectly, but well enough) substituitable, or fungible, and we can work out why we’ve got the people we have on either side of this argument. Largely speaking the people who drill for and pump up crude in the US are in favour of the export ban being lifted. Equally largely speaking the people arguing against the ban being lifted are those who own refineries in the US. This is because the people who own the refineries benefit from the ban and the drillers and pumpers suffer from it. That oil is fungible means that consumers don’t really matter either way. The oil market is a global market. If someone pumps up oil in the US then that replaces what might be imported. Or, if the US produces more than it consumes then that crude will be exported. Now, if we add in that ban on crude exports we can see that it’s at least theoretically possible that there’s more crude in the US than can be used inside it. At which point consumers would benefit of course: if there’s a surplus that cannot be exported then prices inside the US will go down. However, it is possible to export refined products: and they are also fungible. Other than transport costs there’s not a great deal of difference between gasoline made from US oil, Saudi or Venezuelan. At which point domestic US consumers aren’t going to benefit. For if there’s a surplus of US crude, US crude that cannot be exported, the refiners will just buy that cheap stuff, refine it then sell on the global market at the global price. This is largely what is happening now. The end result of this is that US consumers are paying global prices for the refined products that they consume (minus transport costs of course). But US refiners are paying that lower, glut induced, price for US produced crude and the US drillers and pumpers are getting that lower, glut induced, price for US produced crude. The refiners think this is absolutely great for the price difference feeds right through into their profit margins. The drillers think this is terrible for exactly the same reason: the price feeds directly through into their bottom line. So, the argument about whether there should be a crude export ban or not is nothing at all to do with what benefits consumers: they’re going to pay global prices whatever. But it does influence who gets the profits: the refiners or the drillers. And as we’d expect, lining up to defend the ban are the refiners and similarly lining up to get it overturned are the drillers. At which point we should obviously be very suspicious of anyone in the oil industry talking about whether the ban should stay or go. For we’ve more than a sneaking thought that they might just be talking their own interest. But it’s that very point that makes Shell’s intervention so interesting. They’re one of the integrated majors. A change in the export ban might move profits around between their drilling and refining arms but it’s not going to make much difference, if any, to their overall results. We have, as best we can expect to get, a disinterested but knowledgeable industry observer here and that they are saying the export ban should be lifted is significant.
Posted on: Thu, 04 Sep 2014 09:56:02 +0000
Trending Topics
Recently Viewed Topics
© 2015