A real heavyweight title match is about to begin in Washington.
In one corner is a group of the nation’s largest oil and natural gas producers eager to see the 39-year-old ban on the export of American crude oil to foreign nations lifted in part or in whole.
In the other corner is a group of some of the nation’s largest independent oil refiners that are dedicated to keeping all or most of the export ban’s provisions in place.
All we’re waiting on now is for the election to be over and for Congress to return work. Of course, whether this Congress, which is known more for its political gridlock than getting things done, will actually act on the issue, or even take it up for consideration, is anyone’s guess.
Refiners Form CRUDE
In late October, Gary Heminger, CEO of Marathon Petroleum Corp., a refining/pipeline/marketing company that split off from oil producer Marathon Oil three years ago, officially threw his company’s lot in with other refiners. Heminger says oil producers’ assertions that increased North American crude production and limited refining capacity are causing an unhealthy build-up of crude supply in the U.S. are, well, nonsense.
“We are in the market buying $5 billion of crude oil every month, and we do not see a glut of light, sweet crude,” Heminger said in a late October conference call with analysts and investors. “In fact, there have been times during the year when producers could not deliver the volumes they committed to sell us.”
Marathon Petroleum and other refiners have banded together to form the advocacy and lobby group Consumers and Refiners United for Domestic Energy (CRUDE) that opposes lifting the crude export ban. But given the widely held belief that exporting U.S. crude will lead to lower pump prices, it’s not clear that CRUDE has enough consumers the fold to qualify as consumer-supported group. As a result, wags already have taken to calling “Just RUDE.”
The battle is a classic case of self-serving advocacy on both sides. Consumers – few of whom likely have developed actual positions on the issue – generally are presumed to side with the oil and gas producers because of the expectation that it would lead to lower retail gasoline prices. But even that assumption, and the economic expectation on which it is based, is set up for serious debate.
Marathon’s own third quarter financial results demonstrate clearly why refiners like the export ban and want to see it remain in place. The Ohio-based company reported a huge increase in profits; $672 million, or $2.36 a share, up 300 percent over the $168 million, or 56 cents a share from the same period a year ago. The reason for that remarkable improvement: crude prices tumbled during the quarter for more than the prices of refined products.
Oil and gas producers point to those circumstances as clear proof of a fast-building glut of crude. Today the nation produces 8.3 million barrels per day and imports just 7 million barrels per day, a reversal of long-time circumstances in which the U.S. imported significantly more oil than it produced. And U.S. production rates continue to climb, especially relative to import rates.
Refiners, though happy with the recent favorable shift their way, say it’s just the result of a temporary imbalance in market economics that will smooth out over the next six to 12 months as new refining capacity comes online. Refiners are making significant investments to retrofit, upgrade and expand their refineries and condensate splitters and other facilities to process more domestic oil. Marathon estimates that the amount of crude needed to push these expanded refining facilities to beyond their new capacity limits is greater than the amount of crude that producers can possibly pump out of ground, even counting full production coming up from all of North America’s unconventional shale plays.
Heminger argues that the only way the United States can achieve the kind of energy security that has been envisioned for 40 years is to keep the export ban in place as refining capacity increases. “That vision can be a reality, but it can only be achieved with a vibrant refining industry to process the light crude oil we produce in this country into usable products. For that to happen, refiners need certainty.”
Lifting Ban Would Benefit Oil, Gas Producers
On the other side of the debate, oil and gas producers argue that consumers and the overall U.S. economy would benefit greatly from lifting the crude export ban. As more foreign interests buy more U.S. crude, the U.S. trade deficit would be reduced both rapidly and significantly, thereby creating a better environment for corporate investment, job creation and increased consumer spending on things other than gasoline, or so their argument goes.
Of course, the oil and gas refiners expect to do quite well themselves if the ban is lifted. The U.S. drilling boom years is expected to continue unabated and soon will put the U.S. back on top as the world’s biggest oil producer, ahead of both Saudi Arabia and Russia. But for several economic and technical reasons – including the strong dollar and, arguably, the U.S. ban on crude exporting – U.S. crude is priced significantly lower than foreign produced crude.
Today there’s more than $4-a-barrel difference in the price of the U.S. benchmark crude, West Texas Intermediate, and Europe’s benchmark Brent crude. Actually that difference has narrowed significantly from the $18-plus-a-barrel spread a year ago. But U.S. crude producers are eager to sell their products in global markets where there is a built-in price increase. And they’ve banded together to form Producers for American Crude Oil Exports (PACE) to make a big push in Washington to get the export ban lifted.
So, what will Washington do?
That’s entirely unclear. The Obama administration has made small, incremental decisions that could indicate a slightly favorable attitude toward lifting the ban. But those signs are small. And lifting the crude export ban seems to be well down the Administration’s to-do list at a time when it is faced with enormous foreign, healthcare, economic and social policy battles, defending itself against a long list of scandal-driven criticisms and severe political problems tied to the President’s low popularity scores and the likely (at the time of this writing) loss of Democratic control of the Senate. Additionally, the Administration’s strong ties to the environmental community could impact any decision on lifting the crude export ban.
And Congress itself may not be eager to take up the crude export ban issue once it returns to work after the elections. If, as expected, Republicans win the Senate, the post-election session will be a lame duck one for the controlling Democrats. While Republicans are believed to be mostly supportive, though only mildly, of the efforts to lift, partially or completely, the ban, Democrats could be divided on the issue. Only a handful have argued publicly for retaining the ban. Most have remained silent.
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