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Testimony: Economic benefits of removing the crude oil export ban, Part 1

Hydrocarbon Engineering,

Jamie Webster, IHS Energy Senior Director testified on the immense changes in the energy market, its impacts on the Western Hemisphere, and the importance of crude exports before the US House of Representatives Subcommittee on the Western Hemisphere. IHS recently released the latest in a series of studies examining the economic impacts of removing the ban on US crude oil exports. Overall, HIS research has found that removing export restrictions would result in significant benefits for the economy as a whole in terms of jobs, US GDP, household disposable income and government revenues. The research also determined that lifting the ban on exports would actually lower gasoline prices since US gasoline, unlike crude oil, is part of a global market, and the current crude export ban prevents additional supplies of crude from being produced.

Below are highlights from Webster’s testimony.

Market balance

“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 to 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. It seems unlikely that OPEC will reverse itself in its upcoming Ministerial meeting on June 5. OPEC’s decision appears to have marked the beginnings of a serious shift in how supply and demand is balanced in the global market, potentially allowing the oil market to be a market based system rather than relying on a balancer as has often been the case in the past. The purpose of the market balancer is an entity that can quickly add and remove oil supply in order to balance it against changing demand.

“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. This is possible not because of the large production volumes that US producers have brought to the market, but because of the character of those flows. Conventional production projects can take years to finance, plan and bring to the market. US shale producers can do it in four months. Globally, conventional production has a decline rate of 5 – 6%, meaning a project will be producing that much less each year. US shale production has an initial decline rate of approximately 50%. These two factors allow the US shale system to react quickly to market signals to bring more oil onto the market, and a lack of investment when prices turn downward can quickly reduce supply. This shift from OPEC to the market driven forces of shale oil is far from certain and far from complete and it could be reversed.”

US exports

One of the key policy changes needed to help support this shift is the liberalisation of US oil exports. Energy flows into and out of the US have already provided partial benefits to the region and the world. In July 2010, the US imported 1.1 million bpd of oil from Nigeria. Because of US supply, this has shrunk to nearly nothing, while at the same time we are providing a large share of their refined products from the US. In the same time frame, our liberal natural gas export policy has allowed us to further supply Mexico with fuel for industry and electricity, with volumes growing from 21.6 billion ft3/month to nearly 75 billion ft3/month. Soon the nation’s burgeoning LNG infrastructure will allow this fuel to travel globally, providing an alternative source of supply and increasing regional and global energy security. Our energy ties with Canada have only deepened over this period. Although the majority of crude oil flows south, US has increasingly provided oil to Canada’s central and eastern refiners, a trade that has grown from approximately 30 million bpd in 2010 to 491 million bpd earlier this year. Imports from Canada have also grown in recent years. Canada has been the single largest source of foreign imports to the US just over a decade ago. And as of September last year, Canada overtook the combined imports from all of OPEC nations into the US. And Canada supply is not anticipated to slow because of lower prices. We expect to see nearly 800 million bpd of new production by 2020 most of which could come to the US through Keystone XL, one potential additional link in the tight interconnection between the countries, which extends from power lines to rail lines to pipelines. The Keystone XL pipeline can help economically move heavy oil to the Gulf Coast of the US, home to the world’s most sophisticated refining system, and an eager buyer of heavy oil. Given this is a natural buyer of this oil, we find that the vast majority of this oil will be refining in the US, with at least 70% of the resulting refined produces being consumed in the US, with the rest pushing into global markets, competing with now waning Venezuelan production. The decision on Keystone is really a decision between importing oil from our near neighbour Canada, our largest trading partner, or a Venezuela whose hostility to the US is manifest. The competitive oils between the two countries have about the same carbon footprint.

“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, much as the increase in production already has. Lowering the Brent price is the access point to lower US gasoline prices because US gasoline prices are linked to the Brent world price, not the domestic WTI price.

“Moreover, maintaining the ban increasingly undercuts US credibility in its three decades endeavour to persuade other nations to permit free flows of energy trade and not constrain trade in strategic commodities with political restrictions and resource nationalism. The US, for instance, has launched numerous complaints under the WTO against China exactly because of these kinds of restrictions on natural resources that China imposes.”

“Eliminating the crude oil ban proves even more important when oil prices are low. For example, if Brent crude trades in the range of US$ 55/bbl and WTI trades in the US at approximately US$ 45/bbl, many have a major impact on supply because it can make or break the profitability of a significant share of tight oil producers. 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.”

Further highlights can be found here.

Edited from testimony by Claira Lloyd

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