Changing crude oil markets

The US Government Accountability Office (GAO) has re-examined studies and interviewed stakeholders and has found that removing crude oil export restrictions could indeed increase domestic crude oil prices but decrease consumer fuel prices. Prices for some US crude oils are lower than international prices, an example being one benchmark US crude oil averaged US$ 101 /bbl in 2014, while a comparable international crude oil averaged US$ 109 /bbl. Studies have estimated that US prices for gasoline, diesel and other consumer fuels follow international prices, so allowing crude oil exports would most likely increase world crude oil supplies, which is expected in turn to reduce international prices and subsequently lower consumer fuel prices. Some stakeholders did tell GAO that there could be important regional differences in prices implications of removing crude oil export restrictions. Some also cautioned that estimates of the implications of removing export restrictions are uncertain due to several factors such as the extent of US crude oil production increases, how readily US refiners are able to absorb such increases, and how the global crude oil market responds to increasing US production.

Implications

The review that the GAO carried out generally suggested that removing crude oil export restrictions may also have the following implications:

• Crude oil production. Removing restrictions on exports would increase domestic production because of increasing domestic crude oil prices. Estimates range from an additional 130 000 – 3.3 million bpd on average to 2035.
• Environment. Additional production may pose risks to the quality and quantity of surface groundwater sources; increase GHG and other emissions; increase the risk of spills from crude oil transportation.
• The economy. Removing restrictions is expected to increase the size of the economy, with implications for employment, investment, public revenue, and trade.

Strategic Petroleum Reserve

Changes in market conditions will have implications on the size, location and composition of the US Department of Energy’s (DOE) SPR. Increased domestic crude oil production, in particular, and falling net imports may affect the ideal size of the SPA. Removing export restrictions is likely to contribute to additional decreases in net imports in the future. As a member of the IEA, the US is required to maintain public and private reserves of at least 90 days of net imports, but, as of May 2014, the SPR held reserves of 106 days (worth approximately US$ 73 billion) and private industry held reserves of 141 days. The DOE has reportedly taken some steps to assess the implications of changing market conditions on the locations and composition of the SPR but it has not recently reexamined the size. The GAO, in its research has found that agencies should reexamine their programs if conditions change. Without such, the DOE cannot be assured that the SPR is sized appropriately and risks holding excess crude oil that could be sold to fund other national priorities.

Reasons for reexamination

Nearly 40 years ago, in response to the Arab oil embargo and consequent recession, Congress passed a legislation restricting crude oil exports and establishing the SPR to release oil to the market during supply disruptions and protect the US economy from damage. After decades of falling US crude production, technological advances have allowed it to now increase. However, net crude oil imports have declined from a peak of 60% of consumption in 2005 to 30% in the first five months of this year. According to EIA forecasts, net imports are expected to remain well below 2005 levels into the future.

The GAO was asked to report information on the implications of removing crude oil export restrictions and a report has been compiled. The report examines what is known about price implications of removing oil export restrictions; other key potential implications; and implications of recent changes in the market on the EPR. The GAO reviewed four studies on crude oil exports, including two sponsored by industry, and summarised the literature and views of a non-probability sample of stakeholders.

Recommendations

In view of recent changes in the crude oil market and in tandem with the DOE’s ongoing activities to assess the content, connectivity and other aspects of the SPR, the Secretary of Energy should undertake a comprehensive reexamination of the appropriate sixe of the SPR in light of current and expected future market conditions.

Adapted from report brief by Claira Lloyd

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/21102014/gao-reexamine-oil-exports-from-us/