Amid increasing energy costs impacting American households – the national average price for a gallon of gasoline (all grades) was $3.49 as of Nov. 15, higher than at any point since 2014. In California gasoline was $4.61 per gallon as of Nov. 15, with premium at $4.89. We have discussed the demand-supply mismatch and factors affecting U.S. production, both contributing to higher costs, and the need to support American oil and natural gas.
Some think a solution to higher gasoline prices is halting U.S. crude oil exports. A number of experts have weighed in on that, with IHS Markit cautioning a new crude export ban could make things worse.
In the Q&A below, API Chief Economist Dean Foreman and Kevin O’Scannlain, API vice president of Upstream Policy, talk about why the U.S. has exported crude oil since a 40-year export ban was lifted in 2015, and why reimposing the ban would be bad policy – for the U.S. and American consumers.
Q: Let’s revisit why it was important for the U.S. government to lift the ban on crude oil exports in 2015. If the U.S. continues to import crude oil, how is it beneficial to the U.S. to export crude oil?
Foreman: The U.S. energy revolution enabled a resurgence in domestic production, adding 4.5 million barrels per day of crude oil and 1.5 million barrels per day of natural gas liquids between 2008 and 2015. These new supplies helped to meet domestic demand growth and reduce U.S. crude oil imports by 2.5 million barrels per day over the period.
However, nearly all these supplies were of light oil and condensates – that is, liquids with relatively high API Gravity measures of 38 or higher – while a significant portion of U.S. capacity to refine crude oil has historically been geared toward extra heavy grades of crude oil, as commonly imported from Canada and formerly Venezuela.
Consequently, where domestic real crude oil prices were above international ones by an average of $3.34 per barrel in 2008, the relative price flipped in 2015 to domestic real prices being lower than international ones by $4.08 per barrel. It was amply clear that the U.S. had both the oil reserves and productive capability to produce more light oil than was needed domestically. So, allowing crude oil exports in 2016 unlocked growth for U.S. producers, stimulating the economy through investment across the energy and manufacturing value chains while simultaneously reducing the U.S. trade deficit. For petroleum and products, the trade deficit fell in real terms from $431 billion in 2008 to $217.6 billion in 2015 to being balanced in 2020, according to the U.S. Bureau of Economic Analysis. Really, this was a stunning reversal.
Despite this historic progress, the U.S. must still import crude oil for two main reasons. First, domestic refiners have continued to require heavy grades of crude oil that must be imported. And second, the East and West coasts of the U.S. lack pipeline infrastructure to supply all of their crude oil needs and are most economically supplied by crude oil imports from global markets. Global trade and the specialization in production of different crude oil grades has served U.S. petroleum markets well.
Q: How much crude oil does the U.S. export? How have export volumes progressed since Congress and President Obama lifted the export ban?
O’Scannlain: After the repeal of the crude oil export ban, the export market increased from 465,000 barrels per day in 10 countries in 2015 to almost 3 million barrels per day to 43 countries in 2019. According to the U.S. Energy Information Administration, domestic production increased by more than 3 million barrels per day – from approximately 9.3 million barrels per day just before the ban repeal to about 12.8 million barrels per day at the end of 2019.
Q: What kind of oil (light vs. heavy) is the U.S. largely exporting, and why is that significant – for example, to the U.S. refining sector?
O’Scannlain: Many U.S. refineries process a heavier type of crude oil which, prior to the repeal of the export ban, led to an oversupply of domestically produced light, sweet crude oil – due to expanded shale production from horizontal drilling and hydraulic fracturing. Disrupting international oil trade with a U.S. export ban would force buyers to find other oil, which historically has put upward pressure on global crude oil prices.
Q: If we kept that U.S. crude oil here at home, wouldn’t we import less?
Foreman: Those who want to return things to the way they were before 2016 believe that would keep relatively inexpensive oil at home and lower consumer prices. For a short period, that might be the case. But the reality is supply and demand will re-equilibrate. This is an economic reality, not theory, and domestic production would soon shrink to serve domestic demand and refining. This would likely decrease U.S. production and could strand hundreds of billions of dollars of investments that were made to supply allies and help check the pricing power that OPEC and Russia have historically exploited. At the same time, the sudden removal of roughly 2.9 million barrels per day of U.S. crude oil exports, as of October 2021, would shock global markets. International oil prices could spike, and we could see another economic recession. That in turn would reduce the appetite for other U.S. goods and services exports and potentially destabilize many economies around the world that already were fragile following the 2020 COVID-19 recession. If someone was looking for a scenario to cause an extreme global downturn, banning U.S. crude oil exports could be a flashpoint.
Q: We’ve seen domestic energy prices, including prices at the gasoline pump, climb. Why not halt, at least temporarily, U.S. exports of crude oil? Wouldn’t keeping more of America’s oil here at home help address costs for consumers?
Foreman: Even a temporary halt could spur shortages of crude oil globally. The U.S. is an integral contributor to global oil markets, and sudden removal of U.S. crude supply would be a shock similar to the quantity of production that was taken offline by the Abqaiq, Saudi Arabia, attack in September 2019. If an event like that occurred today, with oil prices at their highest levels since 2014, the global market reaction could be amplified and historic in its proportions.
Q: How do U.S. crude oil exports help American workers and the U.S. economy?
O’Scannlain: Exports mean jobs and economic growth. Exporting oil, petroleum products and natural gas directly supports thousands of U.S. jobs in engineering, manufacturing – including refining – construction, and operation of the export infrastructure, as well as others indirectly along the equipment supply chain. Exports also mean increased government revenue, without tax increases that can slow economic growth. The additional production associated with exports generates billions of dollars annually in much needed federal and state government revenue.
Further, the U.S. Government Accountability Office confirms another benefit to U.S. producers, which is the ability to sell on the global market, leading to increased crude oil exports and continued economic growth in domestic shale oil development and crude oil production.
Q: What is the importance of U.S. crude exports to America’s allies, America’s trade posture and American security?
O’Scannlain: Exports to America’s allies enhance our relationships because they strengthen our allies and increase good will toward the U.S. American foreign policy is further enhanced by reducing the power that foreign suppliers have over our allies. Exports also reduce U.S. trade deficits and benefit the U.S. economy through job creation, economic growth and government revenue. U.S. energy producers should not be placed at a competitive disadvantage to anyone, whether it is Russia, Iran or any oil-producing country.
Further, the flexibility to export product in times of market imbalance helps the industry operate efficiently and maintain production levels. This greatly enhances U.S. energy security by allowing the U.S. to sustain more reliable production levels.
Q: What would halting U.S. crude exports mean for the global market, and are there longer-term potential impacts?
Foreman: A sudden removal of roughly 3 million barrels per day of U.S. crude oil supplies would be a large shock that could be difficult for global oil markets to accommodate. And if that removal of U.S. crude oil supply substantially raised international oil prices, it would likely compound global economic stresses that have not yet resolved following the 2020 COVID-19 recession.
(American Petroleum Institute/Mark Green)