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Delta Airlines paper on Crude Oil Exports Falls Short on Sound Economics

 

A paper published today by a Delta Airlines affiliate concludes that the U.S. Energy Information Administration (EIA), Congressional Budget Office (CBO), U.S. Government Accountability Office (GAO), Columbia University, Rice University, Harvard Business School, Resources for the Future, Brookings, Dallas Federal Reserve, IHS Energy and ICF International were all wrong in previous studies when they concluded that gasoline prices are determined by the international (Brent) crude oil benchmark and that lifting the ban on crude oil exports would not increase the price consumers pay at the pump.

Hard to believe? We agree. So we took a closer look and here’s what we found.

At its core, this paper was written by a petrochemical and refining consultancy to support Delta’s position on crude oil exports (they oppose lifting the ban). Case in point: look no further than the assumption made on page 11-1 (pg. 17 of the PDF), where the authors note the following:

“It is assumed that the crude price increase would translate into corresponding increases in gasoline prices by $0.084 to $0.145 per gallon and jet, heating oil, and diesel prices by $3.23 per barrel.” (emphasis added)

The problem with the assumption, which is the foundation for the entire paper, is that domestic crude oil prices do not determine the price of refined petroleum products.

Furthermore, the author compares the average U.S. gasoline price to prices paid in Europe over a period of time (2008 to 2014) to purportedly make the case that U.S. consumers are saving as a result of the export ban being in place. And following Delta’s logic, if the ban is repealed, U.S. prices will increase and be on par with what our friends across the pond are paying at the pump.

But there’s at least one important piece of information omitted from the analysis.

Readers may recall that the 2008 hurricane season was marked by two significant storms (Gustav and Ike), which shut down a significant portion of U.S. Gulf Coast refining capacity. Since this type of disruption (abrupt decrease in supply of refined products) caused gasoline prices to increase, it is flawed analysis to compare the averages between these two periods (2008 and 2014) and claim that the consumer benefits are derived from the crude export ban being in place. Furthermore, the Delta paper does not explain why diesel prices increased when compared to Europe in the later period (2014). Indeed, if trapped crude (i.e. trapped in the U.S. due to the existence of the export ban) was the cause, then diesel prices should have fallen as well.

Think tanks from across the political spectrum, academic institutions and government agencies have researched the issue of crude oil exports extensively over the past year. In each case, they have all agreed on one key principle: gasoline prices are determined by the international (Brent) price of crude oil, not the domestic price (WTI). And at the end of the day, that’s the fatal flaw in this new Delta paper.

A recent EIA report (What Drives U.S. Gasoline Prices?), explains, in part, that the price consumers pay at the pump in the U.S. are determined by the international (Brent) crude oil benchmark:

“Gasoline is a globally traded commodity and, as a result, prices and changes in prices are highly correlated across global spot markets… The effect that a relaxation of current limitations on U.S. crude oil exports would have on U.S. gasoline prices would likely depend on its effect on international crude oil prices, such as Brent, rather than its effect on domestic crude prices.”

And here’s how GAO explains the impact crude oil exports would have on the price at the pump:

“A decrease in consumer fuel prices could occur because they tend to follow international crude oil prices rather than domestic crude oil prices, according to the studies and most of the stakeholders. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well.”

The Center for Global Energy Policy at Columbia University has also studied the issue of lifting the restrictions on crude oil exports and how that may impact the price consumers pay at the pump. Here’s what they found:

 “Permitting companies to export crude oil in greater quantities may reduce the rents refiners receive relative to leaving current restrictions in place, but will likely decrease the price Americans pay for gasoline, diesel and other petroleum products and benefit the US economy as a whole… In light of these and other variables, we estimate lifting current crude export restrictions could increase US crude production anywhere between 0 and 1.2 million barrels per day on average between now and 2025, and reduce domestic gasoline prices by between 0 and 12 cents per gallon.”

And more recently, Harvard Business School published a study (America’s Unconventional Energy Opportunity) that in part evaluated the policy that restricts crude oil exports from the U.S. and concluded the following:

“Crude oil exports increase the competitiveness of domestic oil production without affecting U.S. consumers. The U.S. price for gasoline and other refined products is closely tied to global market prices for these products, because the U.S. places no restrictions on their import or export. However, the existing ban on crude oil exports hurts domestic producers while benefitting domestic refiners, because U.S. producers must sell their crude at a discount to U.S. refiners. Therefore, exports will not cause an increase in prices at the pump, and few, if any, other U.S. industries would be affected.”

We could enter an excerpt from each of the aforementioned studies and reports to further demonstrate how this paper commissioned by Delta Airlines is a self-serving outlier – one written to support a company’s position to preserve that company’s ability to reap massive revenue gains (that aren’t shared with customers) by purchasing discounted domestic crude oil while leading the public to believe the status quo is in their best interest – but we think you get the picture.

 


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