Depending on how fast they are turning, revolving doors can be dangerous – Unless you get your timing right, you may miss the chance to get in as well as get out. Such is the case I am seeing now with the debate going on concerning lifting the ban on U.S. crude exports, which has been in place now for over 40 years. The ban was put in place by members of OPEC in retaliation for the United States support of Israel in the Yom Kippur war of 1973. The result was a rise in oil prices, which caused massive supply shortages and forced the introduction of price controls. The U.S. response to the embargo was to ban the export of domestic crude to lessen dependency on foreign imports and promote domestic production to increase energy security.
This was, I suppose, a good move back then and remained so for about 10 years, but things have changed and domestic demand has increased, as well as imports of “foreign” oil and these prices were not Made in the USA, but were set by… you guessed it… “foreign” global markets run by “foreigners.”
So, is the export ban something to get out of or are the political doors turning too fast?
Certainly North American oil production has moved fast in both the shale and oil sands, and this has resulted in an OPEC reverse embargo, meaning that OPEC is flooding the market to prevent the U.S. from becoming energy independent! Shale oil production is waning but very slowly. U.S. domestic commercial crude oil inventories are at 460 million barrels and the Strategic Petroleum Reserve is full at 700 million barrels! Yet the ban stays.
Unemployment in the oil patch is snowballing, yet the ban stays.
Standard and Poor’s is forecasting Q3, 2015 earnings in the energy sector will be down 64% versus Q3, 2014.
The ban has been in place over 40 years, and the U.S. is still not energy self-sufficient as it is still importing 7 million bpd of the dreaded foreign oil despite hoarding over 1 billion barrels of crude for what? I don’t know.
The answer is to lift the ban, which will increase demand from global markets thereby increasing the price of crude, which will bring the shale oil and oil sands producers out of the red and people back to work. Although many U.S. politicians say this will lower prices, this is only partially true.
What will happen to rack and pump prices?
Exporting crude will lower Brent crude prices based on mere competition. This will then lower feedstock costs for those using Brent as their benchmark, which only applies to refineries east of the Ohio Valley so street prices should fall. In the Midwest, prices will increase because both Western Canadian Select and Bakken crude prices will increase due to the export demand.
The danger here is that the Saudis and OPEC could counter yet again and flood the market. The only way to withstand this is for the North American production costs to be brought down so that the break even price of crude is lowered.
Although Congress is in favour of lifting the ban, President Obama has already said he will veto any such bill preferring to direct existing oil industry subsidies toward renewable windmill chasing, and trying to catch a sunbeam in a bottle.
This seems to me to be a man who isn’t walking through a revolving door, but walking up the down escalator and going nowhere, but he looks busy doing it.
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight