The US To Allow Crude Oil Exports; Not That It Will Make Much Difference Weve the news that the US is to allow some crude oil exports for the first time since the ban on them was set in place in the 1970s. This is good news as it removes an economic inefficiency (and removing economic inefficiencies is always good news) but its not going to make all that much difference to the nation as a whole. It’s really all a fight between the independent crude producers and the independent refiners. They, obviously, care about how this goes, crude exports or no crude exports, but it makes very little difference to the rest of us. The news isn’t that all crude exports are to be allowed, sadly, but that certain sorts of condensates are being, well, really they’re being redefined as being not crude and thus exportable: The US government has moved towards lifting a 40-year ban on oil exports by allowing two companies to sell ultra-light oil to foreign buyers. Pioneer Natural Resources PXD +0.19%, of Irving, Texas, and Enterprise Products Partners, of Houston, have been told by the Bureau of Industry and Security that they can export the oil, known as condensate, which can be turned into gasoline, jet fuel and diesel. Some people seem to be rather over-hyping this: Oil shipments could begin as soon as August, in a move that energy research group IHS believes could add more than $1 trillion (£590bn) to government revenues through 2030, trim fuel prices and create an average of more than 300,000 jobs a year. No, not really, that’s not what’s about to happen. As background you need to understand that US produced crude cannot be exported but refined products (gasoline, avgas, heating oil, all those sorts of things) produced from US crude can be exported. The second thing you need to know is that all of these things, both the crude and the refined products, are what is known as “fungible”. There are slight differences between African, Middle East and US crude, between the products of different refineries, but they’re all pretty much substitutes for each other. Thus Ricardo’s Iron Law of One Price comes into play and their prices will be the same around the world minus their costs of transport. So, we would thus expect the price of US produced crude to be the same as the price of North Sea crude (minus any small technical details like sulphur content and so on). But one of the things you might have noticed is that for several years now they have not been at the same price. WTI (which is US oil delivered Cushing, OK) has been trading much lower, 10 to 15% lower, than Brent which is the benchmark for N Sea oil. The reason being that the supply of US crude has been rising strongly but no one is allowed to export it. So, the Iron Law cannot come into play: it’s not possible to export that extra, newly produced, oil. So what does happen? It gets refined into that gasoline and avgas and so on (not entirely, but this is the driver of prices). Those products are freely exportable and given that they will command the world price, be able to compete against the same products made from the higher priced N Sea, African and so on oil, they will be exported. What doesn’t happen, not to any great extent that is, is that Americans get lower gasoline prices. Because the refined products are exportable and fungible to they will still trade at those world prices, whatever the price of US produced crude. This isn’t entirely exact as there will always be some leakage in such schemes. But essentially what the ban on crude exports has meant is that refiners get higher profit margins and crude producers lower ones. For the refiners get to buy US crude at the depressed inside the US price, refine and then receive the world price for their products. By allowing exports this artificial boost to refining margins disappears. Crude producers can either export at the world price or sell to domestic refiners at again that world price. The refiners don’t have the law bending the market into giving them a fatter margin. This doesn’t make much difference to us as consumers, either inside or outside the US. It also doesn’t make much difference to the oil majors as they own both crude production and refining capacity. It affects which division makes the profits, yes, but not the profits of the overall company. So whether or not crude exports should be allowed is really a fight down in the second and third tiers of the independent companies. Who gets the profit, the crude producers or the refiners? This is only the start of course, this is only about condensates, but it bodes well for relaxing the ban on all crude exports soon enough. There’s no good reason why the law should favour the refiners over the crude producers at all.
Posted on: Fri, 04 Jul 2014 08:36:07 +0000