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Are U.S. Oil Exports Possible?

Exploring the Potential for Exports

Written by Brian Hicks
Posted November 8, 2013

The issue of exporting oil from the U.S. en masse is a controversial one, but it doesn’t have to be. Quite simply, production companies will have to export some oil in order to keep production lucrative – otherwise the oil industry could end up in the same boat as the natural gas sector.

The Department of Energy has only approved four liquefied natural gas export terminals for shipping the resource abroad, with over 20 applications awaiting approval. And it appears companies eager to export oil may face the same delays.

oil tanker sidebarAlthough it is good that the U.S. is starting to have a conversation about catering to new energy markets, oil exports are out of the question in our current political atmosphere.

But they shouldn’t be, since shipping oil abroad in the near future will ensure that shale oil production will continue for the long haul.

Advances in fracking technology have unlocked a flurry of shale oil resources in states like Texas and North Dakota – two states at the helm of the U.S. shale boom.

The Bakken of North Dakota is still going strong, and the Three Forks formation in the same area remains relatively untouched. The same can also be said of the Cline Shale in the Permian Basin of West Texas. Other shale plays, like the Niobrara shale and the Mancos shale further west, are proving to be good buffers in national shale oil production.

According to Bloomberg, U.S. oil production reached 7.5 million barrels per day nationally in August.

And while Congress is beginning to have the conversation of exporting oil, no serous measures have been taken. The oil industry is getting antsy.

The American Petroleum Institute is challenging U.S. restrictions by appealing to international trade law. Some are claiming these restrictions violate trade rules by the World Trade Organization.

And while this is a good move, it will not go very far. Many congressional leaders are not sold on the idea of exports.

This heavy resistance can be traced back to the oil embargo of 1973, when oil resources were scarce domestically and there was fear of an overreliance on foreign oil from the Middle East. But the real law governing oil exports is the 1975 Energy Policy and Conservation Act, which falls under the jurisdiction of the Commerce Department. The Commerce Department would only approve oil exports if they supported national interest.

Things have changed since the 1970s.

Oil demand is lower today because of a weakened economy and more efficient fuel consumption for cars and appliances.

And we already export oil.

98 percent of current oil exports go to Canada, with refined petroleum products including diesel and jet fuel being shipped abroad.

There’s no doubt that exports will have to be on the table in some capacity, but both sides make good arguments.

For or Against Exports?

Aristotle believed that all things must come in moderation.

The issue of oil exports is a contentious one, but both sides can find common ground. Exporting too much can be harmful, while not exporting at all can be just as harmful to the economy.

There must be a balance.

Those against exporting shale oil are concerned about oil prices domestically and the impact it will have on consumers at the pump and on heating bills. Also, many are concerned that oil exports would reduce America’s energy independence and that any such resources should be used domestically.

While those on this side of the argument make good points, this idea can only last so long.

There’s no doubt that more shale oil production will cheapen gasoline prices as more refineries use the domestic oil instead of pricier imports.

Oregon Senator Ron Wyden (D) would be supportive of exports, but only if he sees evidence of consumers benefiting as well. But hardliners like Ed Markey (D) of Massachusetts have introduced moratorium legislation on oil and gas exporting – believing it will not benefit consumers.

But consumers will benefit over time.

If little to no exports took place, it would provide short-term relief at the pump, but this would produce an oversupply at refineries, only lowering demand for domestic oil over time. There would be little incentive to produce more domestic oil with minimal demand at home.

Those on the flip side of the argument believe oil exports will keep prices stable while maintaining production for the next few decades.

And not only would the U.S. government benefit from the export revenue, but it would be a chance for WTI to make a resurgence on the international stage. We know that WTI quality crude can outmatch Brent crude from the dwindling reserves of the North Sea.

It is also a chance for the U.S. to compete against Russia for the Asian market. Russia is gearing up for its ESPO benchmark, which could become the new international market for Asia if the Russians have their way. Countries in Europe are looking for alternative markets to stop importing oil from Russia, and Asia is looking for oil from whichever supplier offers the better deal.

And aside from international influence, exports will also benefit the domestic economy. With exports in full swing, more job growth opportunities would be available in the energy industry.

The fracking boom has already contributed to federal, state, and local economies through taxes and job growth for locals, and it has turned small towns in North Dakota and Texas into economic treasure troves.

Domestic Walls

This all sounds wonderful, but barriers stand in the way.

We will need the necessary infrastructure to match growing production if exports are approved. WTI has already suffered backlogs because the growth of pipeline networks has not kept up with production. More pipeline projects are in the works, and this is bringing WTI prices closer to Brent crude, but more needs to be done to foster national infrastructure growth.

Also, rules must be loosened regarding which companies can compete abroad.

The greatest leaders in the shale oil boom have been domestic companies. Big Oil companies like Royal Dutch Shell (NYSE: RDS-A) and Chevron (NYSE: CVX) have been slow in catching on to the shale oil production craze in the U.S., which is a shame since these companies have much more clout overseas.

U.S. companies are mostly relegated to the WTI market, which not only forces them to sell at a lower price, but it prevents them from fully introducing shale oil into international markets.

More U.S. companies must be allowed to participate in the international market in order to have real staying power in Europe and Asia.

Investment Potential

Despite the problems, things can be worked out with policy changes.

And you can benefit by joining whichever company decides to engage in exports. You can be sure that shale oil will be a fresh and in-demand commodity in the international market. The U.S. would have a head start over Russia, since North America is the only successful commercial shale producer.

Some experts predict that the U.S. will engage in shale exports in the next five to ten years. In the meantime, some companies gearing up for exports.

Marathon Oil (NYSE: MRO) and Valero Energy (NYSE: VLO), for example, are setting up small facilities to process light crude.

And while there are severe limits for crude, there is no limit on refined oil products. This has led to a surge of 2.6 million barrels a day of refined crude in 2012. BP (NYSE: BP) and Shell are two major companies heavily involved in this market.

BP won approval from the Commerce Department to export oil to refineries in Canada, and Shell has applied for a similar license.

And as the shale oil boom increases, you’re going to see more of a rush for approval.

Here’s hoping government approval won’t be as slow as the process in the liquefied natural gas market.

 

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