Shale Takes The Fight To OPEC

December 23rd, 2015 by

oil-tanker with US oil exports

Oil freedom heading for Europe

Oil futures are up more than 2% for the second day in a row, on the unwinding of short trades ahead of year-end, and news of the ban on US oil exports being lifted.

The lifting of the 40-year ban on US oil exports is already bearing fruit for shale drillers and other domestic oil producers.  The move opens international markets to American crude companies, which frees them from being at the mercy of US refiners. The news has already lifted US crude futures above Brent contracts for the first time since January.

Captive Supplier No More

oil stockpilesUntil now, US crude producers were forced to accept the prices offers by North American refiners (Canada and Mexico were exempt from the US oil export ban.) Now, they can shop their oil around the world to find the highest bidder. This will allow US oil companies to compete in Europe and Asia against Russia and OPEC, taking away a market advantage that they have enjoyed since the 1970s.

The Benefits of the Free Market

With the lifting of restrictions on US oil exports, American oil production can have more of an effect on global oil prices. A domestic benefit will be the easing of demand on US crude storage facilities, which were full nearly to bursting. Oil producers were looking at the possibility of being forced to stop pumping due to no where to store the output. Selling more crude abroad will cause storage fees in the US to fall as demand decreases.

Why Was There a Ban on US Oil Exports?

Gulf-oil-statesThe ban on US oil exports was a reaction to the Arab Oil Embargo of the 1970s. Arab oil exporters cut off the oil supply to the US as punishment for supporting Israel. This led to skyrocketing prices for gasoline, heating oil, and even plastics.

In order to prevent the US economy from being held hostage by OPEC again, Congress enacted a ban on US oil exports. Today, the US oil industry is massively larger than it was in the 1970s, and fuel efficiency in autos, energy generation, and manufacturing stretches each barrel of oil much further than it did back then.


Why Are We Still Importing Oil?

With all the pressure to lift the ban on US oil exports, people point to the fact that were are still importing 6.8 million barrels of crude a DAY, and ask why are we exporting oil?

industry-820031_640One big reason is that there are different “flavors” of oil. America primarily produces light, “sweet” crude. Many other nations have what is called “sour” heavy crude. It is easier (and cheaper) to make some products from light crude, and others from heavier crude. Also, many refineries along the US Gulf Coast were built to process the heavier crude from Mexico and Venezuela. These refineries would have to be converted at great expense to process domestic light crude.

The rail system doesn't have the capacity to meet sudden surge in petroleum shipments

Another reason is transportation costs. It can be cheaper to import Mexican oil than it is to pay for transporting domestic oil across the continent by rail. Rail is the most expense way to move crude, especially when there is a shortage of tanker cars.

Higher Margins for Finished Product

gasolineWith West Texas Intermediate now trading at a premium to Brent crude, US oil exports to Europe or Asia will not be jumping soon. What will continue to grow is the export of gasoline, lubricants, heating oil, and other refined products. Thanks to more refining capacity and better fuel efficiency in autos and industry, the US has gone from importing two million barrels a day of refined petroleum products to exporting two million barrels a day in 2015.

The profit margin for refined products is much greater than that of crude oil. This makes shipping fuel and other finished petroleum products to Europe and Asia is a much better use of limited tanker capacity. Refined petroleum products is one area where the US has a global advantage. Refinery capacity in the US is much higher and more efficient than in OPEC nations, or Russia.


The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.