- The Washington Times - Sunday, November 16, 2014

The U.S. government has banned oil exports since the energy crisis of the 1970s, but that could change next year as Republicans take control of Congress and are backed by new studies showing that repeal of the ban would actually lower gasoline prices and be a surprising boon to consumers.

Sen. Lisa Murkowski, Alaska Republican and the expected new chairwoman of the Senate Committee on Energy and Natural Resources, has been the leading proponent in Congress for ending the ban, arguing that a sea change in the way oil and gas prices are determined in global markets has turned it into a relic of a past era of fuel scarcity, one that is increasingly harming the outlook for the nation’s booming shale oil industry.

Ms. Murkowski cites studies by the General Accountability Office and private firms that found lifting the ban would do the opposite of what politicians and consumers have always expected. Rather than raising gas prices as more U.S. oil is sent to global markets, it would drive pump prices down thanks to a recent change in the way gas prices are set.


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“The price American drivers pay for gasoline at their local station is linked to the price of oil set by the global market,” she noted recently. “Exporting U.S. oil to our friends and allies will not raise gasoline prices here at home and should, in fact, help drive down prices” by lowering the global price for oil.

Ms. Murkowski’s argument is likely to get backing soon from an authoritative source: The Energy Information Administration is due to publish a definitive report on the subject, and is expected to largely agree with private assessments that the prices for gasoline, diesel and jet fuel would go down or be little changed by a resumption of U.S. crude exports.



Despite the growing arguments for lifting the ban, analysts expect Ms. Murkowski to go slow in broaching the subject in Congress next year because of lingering opposition and political minefields that might be laid by Democrats. Energy Secretary Ernest Moniz a year ago said he was open to the idea and would study it, but he has since backpedaled in the face of objections raised by congressional Democrats. In recent statements, he has stressed that the U.S. needs to be cautious as it still must import a lot of oil to meet its own needs.

“Changes to export policies are controversial and complicated,” said Josh Zive, analyst at Bracewell & Giuliani, noting that two key Democratic senators this summer erupted in anger when the Department of Commerce unexpectedly loosened its export licensing restrictions for lightly processed condensates produced in shale wells — a move that was welcomed by the shale drilling industry and led to a surge in crude exports since June.

The ban, imposed in the wake of the 1973 Arab oil embargo, allows the sale abroad of refined fuel such as gasoline and diesel but blocks most exports of oil itself. Canada is the one major economy not affected by the ban.

The Commerce Department move was hailed as a step toward lifting the export ban, but the department vehemently denied any change in policy after receiving a tongue-lashing afterwards from Sen. Edward J. Markey, Massachusetts Democrat, and Sen. Robert Menendez, New Jersey Democrat. That episode showed how some liberal Democrats are still determined to preserve the ban and are likely to fight any effort to end it, Mr. Zive said.

Moreover, the export issue is complicated by the fact that it pits drilling companies against another powerful petroleum industry interest group — refiners — which benefits from today’s depressed prices for U.S. crude oil and which has objected to allowing the oil to be exported to markets overseas, where it would fetch higher prices, he said.

“Refiners and elected officials concerned about U.S. gasoline prices have defended existing restrictions as being in the best interest of U.S. consumers and national security,” he said. “Because of the difficult commercial and political issues involved in the energy export debate, it is unlikely that the president and the Congress will agree on any large policy [changes]. In the short term, legislative movement will likely be slow and incremental.”

Rising pressure for change

But many economists and oil experts say the need for change on the export ban could get urgent next year.

Rapidly falling oil prices, which have dropped below $80 a barrel for premium crude in New York this month from well over $100 during the summer, are putting a major pinch on shale drillers, many of whom cannot make money if the price goes much lower and may have to start cutting back production.

An analysis by Barclays Bank recently found that a sustained drop in oil prices to $70 in the next year could force up to half of U.S. shale producers out of business, leading to layoffs and cutbacks in what has been the most robustly expanding part of the U.S. economy. Lifting the export ban would be one of the quickest ways to relieve the pressures that force those producers to deeply discount their oil, because today they are forced to sell it to glutted refineries in the U.S. market and cannot export it to more welcoming buyers overseas.

Bret Jensen, analyst at TheStreet.com, said that while consumers are getting a big boost from falling prices, investors and legislators should be sensitive to the pain it is causing in the oil sector.

“A continued fall in oil prices could have negative impacts on the economy,” he said. “One of the few bright spots in what remains the weakest of 10 [post-World War II] recoveries is the huge boom in energy production.”

While drilling companies should be able to continue producing oil at a profit as long as prices remain above $75 a barrel, the nation is likely to start seeing layoffs and production cuts if it drops below that level, he said. Premium crude prices fell below $75 for the first time in four years in New York trading Thursday.

While increased exports would doubtless help oil companies earn more for their fuel, the EIA and other energy analysts are finding that — paradoxically — it could lead to lower prices for consumers. That’s because of a major change in the way gasoline prices have been determined in the last decade.

U.S. pump prices until 2010 were linked to the price of premium crude oil set on the New York Mercantile Exchange. That price, known in the industry as the “West Texas Intermediate,” or WTI, price, in recent years has been consistently lower than the global price of premium crude or “Brent” price set on the Intercontinental Exchange, which reflects strong global demand for similar light, sweet crudes produced in Libya, Nigeria and other countries.

But the globalization of the gasoline market in the last decade has broken the link between U.S. gasoline prices and the WTI price. The market became more global due to a surge in exports of gasoline by the U.S., Saudi Arabia and other countries that in the past mostly consumed all the products they refined from their own crude oil. To facilitate comparisons by buyers around the world, since 2010 prices for gasoline from the U.S. and other countries have been linked to the global Brent price for premium crude rather than their traditional regional or New York benchmarks.

The surprising result of the change in the global pricing regime is that while U.S. exporters could expect to get higher prices for their crude if they export more, economic studies show consumer prices would actually come down as the increased competitive pressures from U.S. exports pull down the global Brent price for crude.

The EIA last week forecast that, on the consumer side, U.S. drivers will pay an average of just $2.94 for a gallon of gas in 2015, down 45 cents from the projected average for 2014. Based on expected gasoline consumption, that’s a savings of $60.9 billion for consumers.

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