The saying goes that “a rising tide lifts all boats,” and much the same can be said about the new energy abundance in the United States. Repealing the crude oil export ban will provide U.S. oil producers with the regulatory certainty they need to invest, while at the same time allowing U.S. refineries to maintain their competitive advantage when it comes to meeting global demand for gasoline, diesel and other processed fuels.
Much of the increase in U.S. oil production over the last several years has come in the form of light, sweet crude (also called light tight oil – or LTO for short), while most U.S. refineries are configured to process heavier crudes.
In fact, according to IHS Energy, a global consultancy and think tank, “over $85 billion has been spent in the past quarter century to reconfigure these refineries to process heavy oil imported from countries like Venezuela, Mexico and Canada. As a result, there are limits to how much of the new, domestically produced LTO the refining system can efficiently and effectively process.” Although increased U.S. production will go to U.S. refineries where possible, the revolution in U.S. oil production means the U.S. market still has, and will continue to have, a surplus of LTO – even after accounting for projected refining expansions in the U.S.
At the same time, U.S. refineries are leading the world in their ability to deliver fuel products to a hungry global energy market. The U.S. already allows free trade of transportation fuels, such as gasoline and diesel – and in 2013, the United States sold $150 billion in petroleum product exports, the largest in the world.
Put simply, U.S. refineries, for the most part, are configured to process heavy crude – and they do it exceptionally well, leading the world. That will not change when the export ban is repealed. In fact, the feedstock oil coming in will be at a lower price, thanks to the new U.S. oil entering the global market and increasing global supply, which in turn brings down global prices.
Refineries are manufacturing assets that are carefully operated and optimized to maximize economic value. What is “technically feasible” for these facilities does not dictate how they are actually operated. The inescapable fact is that the majority of U.S. refinery capacity is calibrated and optimized to process crude oil slates that include more heavy and medium crude oil, and less LTO.
In many cases existing U.S. refineries can process more light oil, but doing it requires running the refinery in a sub-optimal fashion. To do that, they need to get crude oil at a steep price discount – or it wouldn’t be worth the investment to refine it. But the catch is that a price that low makes it uneconomical for crude oil to be produced.
Beyond the refinery configuration limits, there are a number of other reasons that make absorbing all of the new U.S. LTO extremely problematic:
First, the U.S. refinery system is nearly at full utilization. According to the U.S. Energy Information Administration, refinery utilization in 2014 stood at nearly 90 percent, year-to-date, which is full capacity given the downtime that is required for maintenance
Second, there is an internal transportation issue in the U.S. Given the limitations on transporting crude oil, various structural bottlenecks exist, making it impractical to deliver all of the country’s new LTO to domestic markets. For example, transporting U.S. crude oil from the Rocky Mountains to the East Coast is slower and more expensive than sending that LTO to refineries in Canada or Mexico, given existing infrastructure.
Third, there are complicated factors that limit the ability of refineries to retool or expand. For example, there is the high investment cost; missed revenue due to lost production during an expansion’s downtime; the ability to attain expansion and emissions permits from the government; and competition from international refineries that are also expanding.
According to energy experts, the overall system will be optimized if producers are able to export light sweet crude, while refineries continue to import and refine heavy sour oil.
“U.S. refiners’ competitive advantage will be maintained under a policy change expanding U.S. crude oil exports,” according to IHS Energy. This is because the LTO exported would bring down the price of oil globally, thereby allowing “U.S. refiners to economically supply both the domestic and export product markets.”
Consultancy ICF International echoes this conclusion: “Allowing crude oil exports may provide the United States the opportunity to export higher-valued light sweet crude oil while continuing to import heavier crude oils, including growing Canadian volumes, to fit the refinery system and at the same time potentially reducing the U.S. trade deficit.”
As the Financial Times noted, under the current export ban there may be large volumes of heavy oil coming in – in order to efficiently use the heavy oil refining capability in the U.S. – while U.S. produced oil sits without a market, or worse, does not get produced at all. “Unless the export ban is lifted,” the paper concludes, “the U.S. could face the paradox of a glut of light domestic crude in the Gulf region, even as millions of barrels per day of heavy oil imports are still coming into the country.”