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U.S. Department of Energy: Crude Oil Exports Will Not Raise Gasoline Prices
A new report released this week by the U.S. Energy Information Administration (EIA) provides further evidence of the economic benefits of allowing unrestricted U.S. crude oil exports and directly refutes two key arguments used by those who oppose allowing domestic oil producers to sell crude oil to allies and trading partners.
First, the report found that lifting the decades old ban on U.S. crude oil exports would NOT raise gasoline prices and could even help provide lower prices at the pump for U.S. consumers under some scenarios. This is the latest in a long line of reports from universities and think tanks that have all found that lifting the ban would put downward pressure on U.S. gasoline prices. The EIA report concludes:
- “Petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports.” (emphasis added)
Second, EIA concluded that domestic refiners would NOT be disadvantaged if the ban were lifted. It found that domestic refiners would continue to have a “significant advantage compared to offshore refiners” if the ban was repealed because of their access to much cheaper natural gas which is used as a feedstock in the refining process.
While these two key findings are instructive, there are a few areas in which EIA’s analysis requires some additional context.
As is often the case with EIA studies, they utilize “scenarios” and in this case they are based on various domestic crude oil production levels and prices to determine the economic benefits of U.S. crude oil exports. And while the two preceding points remain unchanged based on all of the scenarios, EIA concludes that in the high production case, U.S. crude exports are necessary and lifting the ban will increase domestic crude production. However, in its low production case, EIA projects that crude exports were deemed not to be necessary.
Here are four points to consider regarding the assumptions made in the low production scenario:
- EIA underestimates U.S. light tight oil production. EIA historically underestimates domestic crude oil production. Additionally, tight oil is proving to be more resilient than expected despite low oil prices due to improvements in drilling efficiency and completions and falling service industry costs in this lower global oil price environment. In addition, light tight oil (from shale formations) remains one of the few areas of investment that remain attractive to publicly traded oil and gas companies.
- EIA understates the impact that a $6-8 per barrel domestic crude price discount will have on U.S. tight oil production in a low global price environment.This phenomenon was described in a recent analysis by IHS who stated in a recent report that “a $3 per barrel change in a $50 environment can have the same effect as a $10 change in a $100 environment.” Accordingly, there is an even greater risk to investment and oil production in a lower global crude price environment because the global crude oil price is much closer to break-even prices for the majority of U.S. tight oil supply. Even a small reduction in the domestic crude price impacts many more volumes than when the global price was higher.
- EIA assumes a higher level of exports. A key assumption in the EIA report is that about 1 million barrels per day of 50+ degree gravity production (very light crude oil) is exported under current law. This grossly exaggerates how much processed condensate can likely be produced and moved to the Gulf Coast for export given the rules that it cannot be commingled with other crude oil that is not permitted to be exported. To put in perspective of just how far off this estimate is, the Bureau of Industry and Security at the Department of Commerce recently reported that through the first five months of the year, only 84,000 barrels per day of processed condensate has been exported (note: this data point is included in the EIA analysis). Various other studies estimate that 1-2 million barrels per day of surplus light crude will need to be exported over the next 5 years. Thus, EIA’s assumption that this magnitude of exports will take place with current restrictions explains why they don’t believe additional exports are needed in their low production case.
- Seasonality is ignored. EIA’s NEMS model and the report were based on an annual assessment of export requirements such that it fails to take into account the two 2-3 month periods per year when 1-2 MMBD of refining capacity is taken off line for refinery maintenance. During the last deep refinery turnaround in November 2013, WTI was discounted by $18/bbl vs. Brent. Crude surpluses clearly build up during those periods and in an extreme case, could shut in production.
Despite the shortcomings with the assumptions deployed in the low production case, this EIA report adds to the growing body of research that clearly shows how U.S. crude oil exports will provide economic growth, create American jobs and help lower prices at the gas pump.