Alex Mills
By Alex Mills
The dramatic increase in U.S. oil production has produced tremendous benefits for Americans. The federal government, however, has constrained many of those benefits by limiting the ability to export crude oil.
The law that prohibits the export of crude oil from the U.S. was passed by Congress in the 1970s during a time of crude oil shortages, rising prices and even lines to purchase gasoline. A majority of Congress believed that it was wrong to allow the export of crude oil when there are shortages and lines at gas stations at home.
Since then there has been a dramatic increase in oil production that has created an oversupply of oil in the U.S. Oil production in West and South Texas, and the lack of takeaway infrastructure, is causing an even larger oversupply situation at the lease level.
The backlog of crude has created a pricing differential between West Texas Intermediate (WTI) and other locations where crude oil is sold. For example, in London North Sea Brent crude oil closed at $60.55 per barrel on March 4. On the futures market for 30-day delivery at the New York Mercantile Exchange crude oil closed at $51.33. The posted price for WTI at the lease in West Texas was $47.00, and there are additional deductions for transportation among other things.
In the end it is a balancing problem between the massive growth in production of light sweet crude oil out of the Permian Basin and the Eagle Ford when matched with the Gulf Coast refinery capabilities. Most Gulf Coast refineries are configured for heavier sour crude. They are having problems refining the influx of sweet crude, and they are near their maximum capacity for light, sweet (WTI) and condensate. Yet, these lighter crude oil supplies are growing by the day.
Oil production in the Permian Basin has increased almost one million barrels per day (b/d) in seven years and more than 1.3 million b/d in the Eagle Ford, according to the U.S. Energy Information Administration. In 2008, the Permian Basin produced about 800,000 barrels per day b/d compared to 1.7 million b/d today. The Eagle Ford produced less than 300,000 b/d in 2008, but today it averages about 1.6 million b/d.
The infrastructure cannot handle the massive amount of crude that must be shipped from West and South Texas to the Gulf Coast where most of the refining capacity exists. There are projects to build pipelines with capacity to handle 500,000 b/d in the works, but it takes time to build hundreds of miles of pipeline. That will certainly be helpful, but it will not solve the problem of the buildup of crude oil inventories on the Gulf Coast where already 187 million barrels are in storage.
Producers are investing in condensate splitters, and refiners are exporting record levels of refined products. Two companies have been approved to ship refined condensate from the Gulf Coast, which the federal government has exempted from the crude oil ban. Other companies would like to do the same, but the shipments must be approved by the feds first.
Crude oil producers obviously would like to export more when there is a large price differential between the price of oil at the lease in Texas and the price in Europe.
The law banning crude oil exports prevents crude oil producers in the U.S. from participating in free trade of a commodity that is traded worldwide. It should be lifted or we will likely see the oversupply of crude oil continue to grow and drive prices below costs for a large number of producers.
Removing the ban on crude oil exports would create more opportunities for Americans, increase employment and economic growth, and augment the overall efficiency of global oil markets.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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