The U.S.-EU trade talks have barely started, and already, perilous potholes have been spotted on the road: the French cultural exception, the European ban on the import of genetically modified foods and the embarrassing discovery that American spooks might have been hacking into Chancellor Angela Merkel's Facebook account. But these are minor bumps compared to the looming crevasse on the horizon: America's continuing ban on the export of U.S. crude oil. This flagrant example of U.S. trade protectionism distorts oil prices, promotes inefficiency and denies the world the benefit of cheaper energy.
Even OPEC is beginning to factor in the U.S. oil production surge into its analysis of supply and demand. The cartel's monthly report conceded that a non-OPEC crude output surge of 1.1 million barrels per day (bpd) next year would cut into the appetite for OPEC crude, reducing demand for the cartel's output by some 300,000 bpd. Most of the extra global oil output is U.S. crude and the International Energy Agency agrees, forecasting that next year the market will experience the biggest surge in non-OPEC crude for two decades.
The question is whether politics and infrastructure will allow markets to do their job of spreading the benefit of greater supply throughout the global economy. Europe and the North Atlantic markets need U.S. oil and U.S. liquefied natural gas. Unfortunately, after decades of berating OPEC for rigging the oil market, Americans have failed to learn their own lesson and the federal government continues to prohibit crude exports, pandering to the notion that American crude oil is for Americans only.
The logical consequence of this economic illiteracy is an enlarging glut of U.S. crude oil, a collapse in the price of West Texas Intermediate, the U.S. crude benchmark, as well as that of its kid brother, Western Canada Select. This will in turn idle the drilling rigs in North Dakota and Alberta and wreck plans for further drilling in new shale discoveries. Thereafter, the oil glut will turn to drought as output weakens. American demand for foreign crude will then return and OPEC will oblige, unless it has died laughing.
In the recent rise in the price of WTI, U.S. light sweet crude has begun to narrow its discount to North Sea Brent, shedding its backwater status. For almost three years, oil futures traders derided the U.S. benchmark as a narrow regional indicator that failed to reflect global energy markets. A lack of infrastructure, pipeline bottlenecks and surging output sent American stockpiles of crude to an 80-year peak of almost 400 million barrels. These have now begun to erode as small improvements in infrastructure and increased American demand for crude take the pressure off the system.
It's not enough. Without a commitment to build more infrastructure and the lifting of the export ban, the anticipated surge in output will next year risk being followed by an oil price collapse. That will cause great damage to North America's energy renaissance and the U.S. recovery. If America turns it back on the free trade in energy, we run the risk of stifling a global economic recovery in the name of resource nationalism.
Carl Mortished