Report reveals benefit of lifting U.S. crude oil ban

By Luke Geiver | February 26, 2014

A Washington-based think-tank believes lifting a ban on U.S. crude oil exports will reduce gasoline prices. A team of economists and energy experts was assembled by Alan Krupnick, director for the Center for Energy Economics and Policy of the group Resources for the Future. “Current U.S. policy to ban oil exports has taken on a lot of importance in U.S. energy policy circles in recent months,” said Stephen Brown, professor of economics at the University of Nevada Las Vegas. “We believed that we could contribute some valuable work to better understanding the issue.”

Brown, who led the study, said the team focused its research on how lifting the ban on U.S.-produced crude oil would affect U.S. crude oil prices and refined products prices. Tight oil production in the Bakken and Eagle Ford plays has vastly increased the amount of oil available for refinement in the U.S. According to the research team’s assessment of situation regarding excess oil, limited pipeline and rail infrastructure has created a bottleneck in moving the oil from the Midwest to available refiners. And, “the situation has been exacerbated by the inability of most U.S. refiners to efficiently process the light crude coming from these fields, particularly in refinery hubs along the Lousiana and Texas Gulf Coast,” the research report said.

`The reaction to the situation has been predictable, the report added. The majority of the oil and gas industry wants the export ban lifted, as additional demand for its products could potentially increase profits. Refiners, however, are benefiting from bottlenecked supplies because they can process the discounted crude into gasoline and other products and sell those products on the world market where the products are not discounted.

To assess the impact of lifting the U.S.-produced crude oil ban, the research team looked at several factors, including: crude oil market response, OPEC’s potential responses, U.S. refined products, oil security and carbon dioxide emissions. “The most difficult factor to estimate was the improved efficiency of global refinery operations,” Brown said, and, “the most difficult factors for us to explain were the likely OPEC response and, again, the improved efficiency of refinery operations.”

In the report, the team offered several potential OPEC responses and found that many U.S. refiners would have to update or improve operational models and strategies for refining light sweet crude opposed to the heavy oil many have been retrofitted for.

Lifting the ban would increase the supply of non-OPEC oil, subsequently reducing the demand of refineries for OPEC oil, a situation that would increase the elasticity of the demand for OPEC oil, “both of which would induce OPEC to produce less, but with the net effect of increased global supplies.”

In that event, the market price for oil would fall, the report said. Similar dynamics were present in the 1980s, when North Sea oil came online. During that time period, OPEC’s ability to prop up prices was badly compromised, the report noted.

“We believe that the economic arguments for lifting the ban are strong,” Brown and the others said. Those benefiting from lifting the ban will be U.S. consumers, refiners outside the Midwest and crude oil producers in Canada and the Bakken area. Those losing if the ban is lifted will be Midwest refiners and oil producers outside the U.S. “We hope that readers of the report will realize that the surplus oil in the Midwest does not benefit consumers in that part of the country, and that consumers throughout the U.S. will see reduced gasoline prices if the ban on U.S. crude oil exports is lifted,” Brown said.

To view the full report, click here