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Oil prices and the export ban

Hydrocarbon Engineering,

A new study from IHS has found that the ban on US crude oil exports is exacerbating the challenges of lower oil prices for US tight oil production and is creating a doubly chilling effect on additional investments, jobs and oil production that would actually lower gasoline prices if the ban were lifted. The study, ‘Unleashing the Supply Chain: Assessing the Economic Impact of a US Crude Oil Free Trade Policy’, builds upon previous research from the company on the economic impacts related to the 1970s era ban on exports of US crude. The study says that substantial economic benefits of developing the nation’s oil and gas resources extend beyond the oil producing regions throughout an extensive supply chain that includes every state. Every new oil production job creates three jobs along the supply chain and another six jobs in the broader economy. The export ban which started in 1973 in conjunction with the now defunct oil price controls, deters additional production, which reverberates in job losses throughout the supply chain and broader economy.

Previous research from IHS found that removing export restrictions would result in significant benefits in terms of jobs, US GDP, household disposable income and government revenues. The research has 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.

New findings

The new study has found that the negative effects of the ban, which creates a supply gridlock that forces US light crude to be sold at a sharp discount since production of that type of crude has outpaced domestic capacity to refine it, are amplified in the current price environment. During periods of lower oil prices, crude oil production drops even more sharply with each incremental price cut since as those that results from the crude export ban. 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, the study finds.

The export ban, which keeps domestic crude from trading on the global market, causes US crude prices to be discounted versus international crude. The study notes that the difference in price between international and domestic crude widened recently, ranging from US$7 – 12 /bbl over the past month.

Kurt Barrow, IHS Vice President of downstream energy said, “the decline in global oil prices provides further need to remove the market distortions created by the ban on US crude oil exports and avoid the additional disruption to investment in oil and gas production and its associated economic benefits and jobs growth. US crude production would be facing the doubly punitive impact of low global oil prices and additional price discounts compared to international crudes. At current prices, the spread between Brent and WTI pricing will be the difference between the viability and non-viability of a great deal of new investment.”

Report focus

The report focuses on the impact of upstream expenditures from lifting the crude oil export ban on the diverse set of industry sectors that support oil and gas producers, from steel and non-ferrous metals to engines, pumping equipment, construction, professional services and railroads. The study has affirmed previous IHS research that ending the crude oil export ban would benefit the entire economy, generating another 394 000 jobs a year, US$238 in annual household disposable income, and US$86 billion more per year in GDP on average from 2016 – 2030. The increased economic activity would add US$1.3 trillion to cumulative government revenues during the period. Additionally, the increased supply of oil on the global market would lower US gasoline prices by an average of 8 cents /gal. The study also finds that supply chain industries represent more than a third of the total economic benefits if the export ban were lifted.

Edited from press release by Claira Lloyd

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