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U.S. energy giants use crude oil loophole to post record petroleum exports

Surpluses shrink vast trade deficits

- The Washington Times - Sunday, May 11, 2014

Even as big U.S. oil companies call for an end to a 1970s-era law banning exports of crude, they are exploiting a loophole that last year enabled them to export record amounts of gasoline and other petroleum products.

The loophole allows oil companies to export products that they refine from crude oil, though not the crude itself. With a major surplus of high-quality crude extracted by shale oil wells from Texas to North Dakota — and a declining appetite among American drivers — the little-known provision has resulted in an unprecedented boom in petroleum exports that is drawing down chronic U.S. trade deficits for the first time in decades.

Exports of gasoline, diesel, distillate, propane and other petroleum products soared to a record 4.3 million barrels a day in December, more than twice the 2.1 million barrels a day of petroleum products that the U.S. imported on average last year, according to the Energy Information Administration. The average 3.5 million barrels of petroleum exports a day in 2013 was double the 1.7 million five years ago.

"The U.S. is one of the largest petroleum exporters in the world," even without lifting the ban on crude exports, said Energy Information Administration chief Adam Sieminski.

He said the U.S. is exporting gasoline primarily to Latin America and diesel to Europe. He expects the U.S. to become a net exporter of natural gas and petroleum by 2017. The U.S. already is exporting a lot of liquids that are produced as byproducts of drilling for natural gas, such as naphtha and condensates, he said.

"It's a trade opportunity for the U.S.," he told the Natural Gas Roundtable last week, although the rapid expansion of exports does raise questions about fuel costs for Americans because they will be competing with consumers overseas who generally pay higher prices.

Fuel prices in Europe are significantly higher than in the U.S., so lower-priced U.S. fuel is in demand. Countries in Central America, South America and Africa import gasoline and other refined products from the U.S. because their own refineries cannot meet growing demand for fuel. Mexico imports gasoline from the U.S. while exporting much of its crude oil to U.S. Gulf Coast refineries because they have the technologies and facilities needed to convert heavy crude into consumable products.

Stealth boon

The stealth surge in petroleum exports drove down the U.S. current account deficit to $81 billion — the lowest in 14 years — in the final quarter of 2013. For all of last year, the trade deficit fell to $474.9 billion from $535.7 billion in 2012.

"The declining trade deficit is good news," and it is largely because of rapidly growing exports of surplus petroleum products in the past five years, said Jerry Jasinowski, former president of the National Association of Manufacturers. "All of a sudden the U.S. energy picture — thanks to refinements in fracking technology — is much more robust than anyone thought possible."

Because U.S. shale oil must be refined at factories on the Gulf Coast, East Coast or West Coast before it is sent overseas, the refining revival also has contributed in a big way to the rebound in U.S. manufacturing output, exports and jobs since the recession. Investment in oil- and gas-producing facilities has led all investment by U.S. businesses in recent years.

Moreover, the availability of inexpensive oil and natural gas has been an elixir for other U.S. manufacturers and exporters that are heavily dependent on energy, including plastics, chemicals and agriculture. As a result, the energy revival has fed a renaissance in manufacturing. That, in turn, has served to drive up U.S. exports of goods and services by 3 percent in the past year, helping narrow the trade deficit.

"The falling trade deficit is a clear confirmation of our competitive gains in both energy and manufacturing," said Mr. Jasinowski.

Like Mr. Sieminski, he noted that the energy export boom has only begun. Construction is under way on several export terminals for liquefied natural gas, which the U.S. has the ability to produce in abundance as a result of the shale revolution.

"By 2016, we will probably be exporting more oil and natural gas than we import," and will have achieved energy independence, he said.

Hitting a wall?

While exports of gasoline have been soaring, analysts say, the trend could be cut short if U.S. refiners reach a limit on how much surplus crude oil they can absorb. Before the premium shale oil boom, U.S. refiners spent billions of dollars retooling their factories to handle heavy crude that they expected to import from the Canadian oil sands, Venezuela, Mexico and other sources. Now, they have too much capacity for such heavy crude and may be nearing the limits of how much light, sweet crude they can handle, some analysts say.

Michael Fitzsimmons, an engineer and energy analyst, said U.S. refiners may be unable to absorb much more surplus premium crude. With U.S. refineries hitting capacity, particularly those in the huge refining complex along the Gulf Coast of Louisiana and Texas, he said, they are in a position to take advantage of the crude producers upstream, forcing drilling companies to heavily discount the price of high-quality crude and enabling the refiners use the low-cost oil to fatten profit margins on their own refined products.

Refiners such as Phillips 66, Valero and Chevron have been profiting at the expense of shale oil drillers such as Continental Resources and Whiting Petroleum, which don't own refining operations, Mr. Fitzsimmons said.

Mr. Sieminski questioned whether refiners are likely to reach a point where they cannot absorb any more surplus crude oil. He noted that facilities that process light, sweet crude do not have to be as big and complex as the refineries that process heavy crude, and "there's a lot of construction" right now to build those simpler refineries, called "splitters."

Mr. Sieminski estimated that U.S. refineries will have added enough splitters by 2016 to process another 800,000 barrels of crude oil a day. The gasoline they produce will go mainly for export.

Calls for crude exports

The refining bonanza has fueled a growing campaign to lift the ban on crude exports, which was enacted during the 1970s oil crisis. Mr. Sieminski said his agency has received many requests from Congress for studies on possible effects of crude oil exports, including whether such exports would result in higher fuel prices for Americans.

Squeezed by declining prices for Midwestern crude, major oil companies such as ConocoPhillips and Exxon Mobil have been arguing to lift the export ban so they can earn higher prices overseas. ConocoPhillips CEO Ryan Lance noted last month that Mexico and many South American and European countries have the capacity to refine premium crude and could serve as outlets to ease restraints at U.S. factories.

Sen. Lisa Murkowski, Alaska Republican, has taken the lead in advocating an end to the ban in Congress. Short of lifting the ban, she said, President Obama could use his executive authority to create exceptions to the ban if he determines it is in the national interest. For years, the U.S. has exported crude oil from Alaska to Japan, for example, under a presidential exemption from the export ban.

The Senate Energy and Natural Resources Committee held a hearing on the issue of crude oil exports in January, and Ms. Murkowski and Chairwoman Mary L. Landrieu, Louisiana Democrat, asked the Energy Information Administration last month to study the effects of lifting the ban.

"While we are aware that the EIA has limited resources and numerous reporting requirements to the Congress, we would like to convey the interest of our committee in the issue of crude oil exports, which are largely banned by statute," the lawmakers wrote.

Mr. Fitzsimmons said he doesn't expect the government to allow the export of crude oil, which remains a politically fraught topic. But even the idea that Mr. Obama could approve exemptions from the export ban is discouraging refiners from tooling up to handle more premium crude, he said, increasing the pressure on shale oil companies and their prices for crude.

He expects the refining boom to continue at the expense of the shale oil revolutionaries who made the export boom possible. "Shale oil producers will be victims of their own success," he said.

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