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Congressional testimony: US crude oil exports

Hydrocarbon Engineering,

Jamie Webster, Senior Energy Director, IHS Inc., has testified before the House Committee on Agriculture regarding the ongoing changes in the global energy market and the economic benefits of removing the ban on US crude oil exports. Below are highlights from the testimony.

“The catalyst for the oil price decline that started last summer was the partial return of Libyan production. But it was the underlying growth in US oil production from 5.6 million bpd in 2011 to the current 9.2 million bpd that sustained this price drop. OPEC’s decision last November 27 to not cut production in the face of growing volumes, not just from US shale oil, but also the Gulf of Mexico as well as Canada further hastened the price decline. OPEC’s decision, reaffirmed again in June, appears to have marked the beginnings of a serious shift in how supply and demand is balanced in the global market.

“The boom in US production has the potential to upend the need for a formal market balancer, leading to lower oil prices for consumers, while increasing energy security for not just the US but the world.”

“The US has a liberal trade policy for natural gas, coal, refined products and processed condensate. It also allows oil exports to other countries in certain, very specific cases. Allowing US producers to seek out international markets for their product will allow them to receive global prices, keeping the laboratory of US shale technology and production fully open for business, while supporting job growth across many industries and in places far from the oilfields. It will also help to lower the price of Brent, the benchmark price for global oil, much as the increase in production already has. Lowering the Brent price is the access point to lower US gasoline prices as US gasoline prices are linked to the Brent world price, not the domestic WTI price.”

Intertwined refining

“To fully maximise US savings at the pump, exports should be liberalised to ensure this dated policy does not cause an unnecessary drag on American productivity, while hampering our ability to exploit fully the national security benefits from this energy resurgence. The reasons are intertwined with the nature of the American refinery system and the price discounts that American oil producers must frequently take in order to sell their products competitively to refineries, particularly along the Gulf Coast, which holds over half of the nation’s total refining capacity. Over US$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. The US contains the largest refining capacity of any country in the world, with 139 operating refineries with a combined crude oil distillation capacity of about 18 million bpd. The US refining system is characterised not only by the number and size of refineries but also by a high number of world class, high complexity, full conversion refineries with a substantial degree of petrochemical and specialty products integration.

“In this complex refining system, if the crude quality varies enough, the refineries cannot run optimally within their designed operating parameters. In the Gulf region, most refineries are configured to process heavy crude oil. When using light tight oil, Gulf refineries operate inefficiently. Refineries are now working to reorient to take advantage of this new domestic crude, investments that will largely continue even if the export ban was lifted.”

Export benefits

“The benefits accrue across most of the US, not just oil producing states like Texas. It also touches states like Minnesota, New York and Massachusetts, and Michigan, with little or no oil production, also benefit substantially in terms of economic activity and jobs, owing to the interconnected nature of US supply chains.”

“Eliminating the crude oil ban proves even more important when oil prices are low and companies are laying off workers which slows the benefits to the interconnected supply chain. For example, if Brent crude trades in the range of US$55/bbl and WTI trades in the US at around US$45/bbl, many companies will be on the margins of their new well investment breakeven point. In such a case, a small price change can have a major impact on supply because it can make or break the profitability of a significant share of tight oil producers and because it may determine whether an investment decision is made or not. Crude oil production thus drops even more sharply when prices are low and producers must take further price cuts to sell to domestic refiners if they cannot export. A US$3/bbl change in a US$50/bbl price environment can have the same effect as a US$10 change in a US$100/bbl environment.”

Edited from testimony by Claira Lloyd

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