Politics may be the art of the possible, as Bismarck once put it. But when it comes to Washington, whats possible is rarely timely.
Congress on Friday voted to repeal a 40-year-old ban on exports of U.S. crude oil. The measure is something oil producers have been seeking for several years because of increasing shale oil production. But the new legislation appears to be too late to make a difference. Thanks to the collapse in oil prices over the past 18 months and the supply glut on world markets, theres no significant foreign demand for American crude.
The congressional move is similar to President Barack Obamas decision to reject the Keystone XL pipeline six weeks ago. That move came after years of bitter partisan debate, but it too had little practical effect: The collapse of crude prices and the development of alternative pipelines had made Keystone uneconomic.
The U.S. imposed the export ban in response to the oil shocks of the 1970s, which made energy independence a national security objective. In recent years hydraulic fracturing, or fracking, has gone a long way toward meeting that objective by boosting domestic production and reducing crude imports. A surge in fracking production from North Dakota, Texas and other areas has stretched the capacity of the nations pipelines and storage tanks and given refiners new leverage in purchasing negotiations with producers. American oil became cheaper to buy than global equivalents, with the gap between West Texas Intermediate crude, the North American benchmark, and Brent crude, the global standard, reaching a record high of $27.88 in October 2011.
Pressure on Washington from oil producers failed to lift the ban, so investors stepped in. Railroads began carrying some of the load, new pipelines were built, and existing ones repurposed. With each new bit of infrastructure and adaptation, the gap between the two benchmark oils narrowed, notes Jeff Bellman, an energy research analyst at TIAA-CREF Asset Management. This is why the congressional action part of a $1.1 trillion year-end budget bill that President Obama has signed is seen as too little too late.The impact today will be less than if this had taken place in 2010, says David Livingston, an associate in the Carnegie Endowment for International Peaces Energy and Climate Program. Over the past four years, the industry has successfully adapted around the crude export restrictions.
Saudi Arabias energy policy has also made the export ban, and its repeal, largely irrelevant. The kingdom, the worlds largest oil exporter, used to play a swing role, adjusting its production to keep global oil supply and demand in balance. But in response to the rise of fracking, the Saudis over the past year have opened their taps and chased market share instead. As a result, the world is awash in oil, the costs of both Brent and WTI have dropped, and the gap between the two benchmarks has dwindled to just $2.16 a barrel on Friday. The gap needs to be more than $3 to make U.S. oil competitive in global markets, because thats how much it costs to ship a barrel of U.S. crude to distribution centers like Rotterdam and Singapore, says Bellman. With all else being equal, transportation costs are going to be the constraining factor, he explains.
Because the export ban was one of the main reasons for the price spread to begin with, there is now one less reason to expect the spread to reopen. Furthermore, falling U.S. supplies should ease the domestic glut. Data from the U.S. Energy Information Administration show that U.S. oil production has declined 4.5 percent from the recent peak in June, to 9.176 million barrels a day in the week ended December 11. The tally of active drilling rigs has dropped off to a much greater extent, indicating that further drops in production are coming. According to a weekly survey by the drilling company Baker Hughes, there were 709 active rigs in the U.S. as of December 11, down 62.5 percent from a year earlier.
So although the fall of the export ban wont likely help the producers that have wanted it for years at least until oil market fundamentals change there could still be a few beneficiaries. Support for ending the ban came from Republicans; in exchange, Democrats sought and won an extension for existing tax breaks for renewable energy projects. The budget bill also may offer a specific tax deduction for some smaller refineries as well, said Curtis Beaulieu, a legislative and regulatory lawyer for Washingtons Bracewell & Giuliani. The new tax structure is generally more favorable for owners of refineries who get most of their income outside the energy sector, because the way the deduction is calculated allows them to write off a greater share of the cost of shipping crude to their refineries, he says. One example would be Delta Air Lines, which bought a small refinery outside Philadelphia in 2012.
Now that exports are legal, if not commercially viable, that could also help some producers looking to stay afloat with bank loans to refinance those debts. Some may be able to convince creditors that they will be able to recover faster when exports make sense. That could be a lifeline, but will be a case-by-case, rather than industry-wide, phenomenon, says Livingston.