For 40 years, U.S. leaders have fretted about the country’s dependence on oil imports and vowed to pursue energy independence. Now, even as the U.S. is still importing seven million barrels per day of crude, there is a growing clamour to end a ban on crude exports that has been in effect since the Arab oil embargo of 1973 shocked Americans out of their sense of energy security.
It won’t happen overnight, and there is already considerable resistance from Democrats in Congress and from some refiners who benefit from the prohibition on foreign crude sales. The surge in U.S. oil and natural gas production is a boon to refiners and manufacturers who are benefiting from cheaper supplies than offshore competitors.
Opponents also play the patriotism card: American crude should be used to ensure the security of Americans. It’s an argument that has powerful political appeal.
So why are producers such as Exxon Mobil Corp. and prominent politicians such as Alaska’s Republican Senator Lisa Murkowski urging an end to the prohibition?
The answer has three main elements: With falling U.S. demand, domestic oil producers want to diversify their markets and gain greater access abroad. Because the pipeline system is limited in delivering U.S. crude to the coasts, there is a geographic mismatch between producers and consumers. And many U.S. refiners are ill-equipped to process the growing supply of domestic light oil after making huge investments to handle heavier crude such as diluted bitumen from Alberta’s oil sands.
Here is a rundown of key questions:
Is U.S. oil production ever expected to exceed U.S. consumption?
In its latest forecast released in December, the U.S. Energy Information Administration projects continued reliance on imported crude to 2040.
The EIA expects American production to peak at 9.6 million barrels per day in 2019, and then slowly decline. Demand will also fall after 2020, but not as quickly as domestic production. As a result, imports – which peaked at 60 per cent of the U.S. market in 2005 – will decline to 25 per cent late in this decade, but then edge up to 32 per cent by 2040.
But some analysts say a vibrant export market could spur production and make North America – the United States and Canada – essentially self-sufficient in oil. In a high-growth scenario, American production could climb to 12 million barrels per day by 2022, with 5.5 million barrels of Canadian production, according to Turner, Mason & Co., a consulting engineering firm based in Houston. That scenario envisions roughly three million barrels per day of exports from North America, but only 1.5 million barrels of offshore imports.
Why do many U.S. refiners not want the crude from regions such as North Dakota’s Bakken or Texas’s Eagle Ford?
As recently as 10 years ago, refiners on the U.S. Gulf Coast and in the Great Lakes region were expecting a steep, worldwide drop in the production of light crude and were investing billions of dollars to revamp their plants so they could efficiently process heavy grades from Canada, Venezuela, Mexico and Saudi Arabia. The “tight, light oil” boom in the U.S. has played havoc with that strategy, especially given that Venezuelan and Mexican production has declined.
On the U. S. Gulf Coast, rising domestic supplies have replaced virtually all imports of light oil. Refiners are gearing up to use more light crude and, with billions of dollars in investment, could potentially process another 750,000 barrels per day, according to Platts.
It would be better, proponents say, if producers of light oil could export their crude and get full value, while refiners equipped to process medium and heavier grades imported it from Canada or Mexico.
Can’t the light crude be shipped to the East and West Coasts to replace imported oil that is processed there?
The U.S. pipeline network is not geared to move crude from the middle of the continent to the East or West Coast. Hence the growing use of 100-car crude trains taking oil from the Bakken to refineries in places like Philadelphia or New Jersey, but rail can’t supply all the demand.
Transport by ship from Texas to the U.S. East Coast would seem to be a natural solution, but is severely constrained. That’s due to another U.S. law, the Jones Act, which requires that ships travelling between domestic ports be built, owned and crewed by Americans. That requirement can add $3 (U.S.) per barrel to transportation costs and limits the number of vessels that can be used to transport crude.
How do Canadian producers stand to win or lose?
Simple: U.S. exports would bolster North American prices. Continuing with the prohibition in the face of a rapidly growing supply of light oil will keep North American prices under pressure, and encourage refiners to process more light and less heavy oil.
Flint Hills Resources is spending $250-million on its refinery in Corpus Christie, Tex., to gain capacity to process more light crude from the state’s booming Eagle Ford play and displace heavier grades of imported oil that it now runs.
The investment by the Koch Brothers refining company is part of a massive market response to the U.S. energy renaissance that is not only squeezing out imports but fuelling a growing campaign to scrap a 40-year-old ban on crude exports.
In fact, the U.S. is a long way from completely eliminating the need for oil imports, particularly if you include Canada as a foreign country rather than think of it as a domestic source as many analysts do.
But the surge in light oil production in places such as North Dakota and Texas has left our biggest oil customer with some critical challenges if it wants American consumers to consume products made from American oil. It’s a problem Canadian producers know too well – a lack of access to markets that drives down domestic crude prices relative to international prices.
Those challenges include: a refining sector that built up its ability to produce heavy crude; a pipeline system that can’t bring western crude to refineries on the east or west coasts; an ancient maritime law that discourages shipping crude by water from the Gulf Coast to other U.S. markets.