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Impacts of Repealing the U.S. Crude Oil Export Ban and not the Jones Act

Oil export ban repeal effects

December 2015 the Federal Government repealed a 40-year old regulation that banned most U.S. crude oil exports.  Restricting exports was originally done to protect U.S. Energy Security from another major oil supply imports disruption and energy crisis similar to the 1973 Arab OPEC oil embargo.  Due to a combination of recent increased U.S. domestic ‘Shale (crude) Oil’ production, existing domestic oil infrastructure constraints and some oversupplied local markets, Congress passed and the President approved a bill lifting the past U.S. crude oil export ban.  Allowing increased crude oil exports is intended to alleviate existing domestic production-distribution constraints and improve the economy.

The pros and cons of lifting the U.S. crude oil export ban have been strongly debated for many years.  Based on recent analyses such as the EIA’s crude exports report the Federal Government decided it was time to deregulate exporting domestic crude oil production.  While Government Officials believe the price impacts on U.S. Consumers will be relatively insignificant and the overall economy will benefit from unrestricted exports, all regulatory changes can have different consequences.  The unintended consequences of repealing the export ban could include negative impacts on future U.S. Energy Security and Refining Sector, and World carbon emissions.  This Federal action could also make the current U.S. port-to-port marine shipments constraint impacts of the century old ‘Jones Act’ even worse.  What are these potential economic and Energy Security risks of repealing the crude oil export ban and how could they effectively be mitigated?

Brief History of U.S. Crude Oil Exports – To mitigate another U.S. Energy Crisis caused by the Arab OPEC Oil Embargo the Federal Government passed the Energy Policy and Conservation Act (EPACT 1975) that banned nearly all U.S. crude oil exports.  Purpose of the ban was to improve future U.S. Energy Security by keeping domestic crude oil production within North America and minimizing the need for higher (disruption) risk imports.  The Federal Commerce Department was given the authority to grant exceptions such as crude oil exports to Canada and Mexico.  As a result U.S. crude oil exports have been relatively small since 1973.  Refer to Figure 1.

Figure 1 – U.S. Crude and Petroleum Oil Exports – 1973-2015

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Data Source: EIA MER Table 3b Petroleum Trade: Imports and Exports by Type 

 EIA data shows until recently the Commerce Department approved less than 250 thousand barrels per day (KBD) of crude oil exports.  The majority of these exports were effectively ‘exchanges’ of crude oil exports to and imports from Canada and Mexico.  With the recent expansion of Canadian Oil Sands and U.S. Shale Oil, the level of U.S. exports to Canada has increased up to 500 KBD.  Over the past two years the Commerce Department began approving limited permits (20-50 KBD) for exporting of minimally processed or ‘stabilized’ Shale Oil to Countries outside North America.

Upstream Crude Oil Production Impacts – Lifting the export ban should eliminate some existing domestic infrastructure constrains and make further increased production economically more attractive.  The EIA predicts that total U.S. crude oil exports could increase by 2-3 million barrels per day (MBD) over the next 10 years.  This level of  crude oil exports, however, may not be feasible for some time due to the recently depressed crude oil prices of about $30 per barrel and the likelihood that World crude oil market prices could remain very low for multiple years.

With Saudi Arabia’s decision to maintain its market share and the recent lifting of Sanctions against Iranian crude oil exports, World crude oil markets will likely continue to be depressed due to oversupply for at least another 1-2 years.  Depressed crude oil market prices will significantly shrink U.S. domestic production in the near future.  In this case, Crude Oil Production benefits from increased exports will be reduced for at least 1-2 years.

Crude Oil Refining Impacts – The U.S. Oil Refining Sector has been exempt from any petroleum products exports restrictions since before the 1970’s.  As shown in Figure 1 the export of refined petroleum products has far exceeded crude oil historically and has grown substantially in recent years.  This has been due to strong World petroleum markets’ demand, which has enabled nearly continuous growth in U.S. domestic Refining capacities.  With the recent U.S. Shale Oil growth, local oversupplied domestic markets and favorable domestic market prices vs. imports, these factors have contributed significantly to the recent growth in U.S. Petroleum Products exports.  Cheaper domestic WTI crude oil vs. world average Brent crude prices has benefited the Refining Sector, both economically and increased jobs’ creation despite the recent economic recession, slow recovery and declining world crude oil prices.

The net result of these factors enabled U.S. Refining to grow significantly since the 2007-2009 Great Recession, despite a 6% or 1.2 MBD drop in total domestic petroleum consumption   (2007-2015 ‘petroleum products supplied’).  This has been a major positive factor towards sustaining and growing the Refining Sector’s significant contributions to the U.S. economy, which has yielded substantially better business performance-jobs creation compared to most U.S. durable goods Manufacturers since 2009.

Lifting the U.S. crude oil export ban will directionally not benefit the domestic Refining Sector.  The largest potential impact could be further reducing the Brent-WTI price spreads, which means increased feedstock costs for U.S. Refiners and reduced profit margins.  How significant this potentially negative impact will be on the U.S. Refining Sector depends on short- and long-term World petroleum markets, the level of future U.S. crude oil exports, and the level of total domestic production.

U.S. Energy Security and Jones Act Impacts – Although repealing the export ban generally allows any Company to purchase and export U.S. domestic crude oil, it does not repeal the President’s authority to re-impose a future ban on domestic crude oil exports.  In the event of another large disruption of crude oil imports, the Administration will continue to have the authority to ban exports as necessary to protect U.S. Energy Security and avoid another energy crisis.

There is another likely increased risk to future U.S. Energy Security: the 1920 Jones Act.  The Jones Act requires that all oil tankers that make shipments directly between U.S. ports must be built, owned and operated by U.S. Companies.  While this regulation has definitely benefited domestic Shipyards and Unions since World War I, it has caused the expenses to ship domestic oil from the Gulf Coast to the East Coast, for example, to be 3-times greater than the cost to ship (imported) oil from the Middle East.  These increased shipment costs are due to the fact that U.S. built Jones Act oil tankers cost almost double ships built overseas and the Jones Act tanker operating expenses are 3-5 times higher than ships operated by Foreign Companies.  As a result of higher costs 90% of all crude and petroleum oil deliveries to most U.S. ports are made by foreign tankers, from imports.

While lifting the export ban may have small-to-no negative impacts on the East Coast (PADD 1) and Gulf Coast/Mid-continent (PADD’s 2-4) oil supplies, the potential risk to the West Coast (PADD 5) could grow substantially.  As covered in previous TEC article (refer to Figure 3) PADD 5 historically has been at greatest risk to disruption of crude and petroleum oil supplies due to importing over 1/3 of its current total consumption from outside North America, and, restricted access to U.S. emergency SPR supplies.

Lifting the export ban could make it increasingly attractive for Producers to export ANS crude oil vs. supplying PADD 5 markets.  Due to the high costs of Jones Act tankers used to currently ship ANS crude oil to Washington and California, Upstream Producers and Downstream Refiners could find it much more economic to export ANS crude oil and increase total foreign crude oil imports.  These factors will further increase PADD 5’s reliance on higher (disruption) risk crude oil imports from outside North America.  If Iran were to follow-up on their threat to shutdown the Strait of Hormuz someday, this situation would be disastrous for PADD 5.  Exporting ANS crude oil will also reduce the need for expensive Jones Act oil tankers and ultimately lead to accelerated retirement of the existing expensive Jones Act fleet.

World Carbon Footprint Impacts – Increased domestic crude oil exports may benefit U.S. Upstream Producers, but with possibly increased ‘carbon footprints’ of World Markets.  The current justification for lifting the export ban is based primarily on reducing existing domestic crude oil markets’ oversupply of Shale Oil.  As covered in a recent TEC article (refer to Figure 1) (all) U.S. Refineries are designed to operate (most efficiently) on limited ranges of crude oil feedstock physical properties.  Shale Oil is significantly lighter (gravity) and sweeter (lower sulfur) than what average U.S. Refineries are designed to process efficiently.  To process increased levels of light-sweet Shale Oil most Refineries must either blend it with heavier gravity crudes or modify their processing units to efficiently charge increased lighter, sweeter crudes.

Prior to lifting the export ban many Refiners had the economic incentive and were planning processing unit modifications in order to efficiently process increased volumes of Shale Oil.  Besides the economic incentive of these investments, lighter-sweeter crude oil feedstocks are less energy intensive (consume less fossil fuels energy per barrel of feedstock processed).  Lifting the domestic crude oil ban has very effectively killed the economic incentives to modify most existing Refineries’ abilities’ to process increased light-sweet Shale Oil.  Most, if not all, these domestic Refinery upgrade projects will likely be cancelled, which will cancel the benefits of refining increased, lower carbon intensity Shale Oil.

Due to this loss of these U.S. Refining investment incentives and the substantially higher costs of Jones Act tankers required to transport domestic crude oil from the Gulf Coast to the East Coast (where existing U.S. Refineries are already designed to process lighter-sweeter imported crude oils), U.S. Producers will be economically encouraged to export domestic Shale Oil and Refiners are encouraged to increase total crude oil imports.  In other words, rather than being encouraged to maximize consumption of domestic crude oil consumption, which maximizes Energy Security and minimizes ‘full-lifecycle’ carbon emissions of shipping-refining light-sweet domestic Shale Oil, the U.S. Oil Industry is being encouraged to increase crude oil exports and total imports, which will increase World carbon emissions; primarily from increased intercontinental tanker shipments.

Minimizing the Negative Impacts of Increased U.S. Crude Oil Exports – The negative consequences of just lifting the crude oil export ban can be reduced significantly by removing the constraints on shipping oil directly between U.S. ports.  This means repealing the Jones Act, which constrains most efficiently shipping of oil between all U.S. Coastal Ports.  By allowing Companies to use Foreign Ships to make U.S. port-to-port shipments, instead of more costly Jones Act Ships, will reduce overall costs and marine fossil fuels consumption.  This means eliminating the economic incentives to wastefully export and increase imports of similar crude oils (qualities & volumes), and, directionally maximize consumption of lower carbon, light-sweet Shale Oil supplies.

In Conclusion – Lifting the U.S. crude oil export ban will definitely benefit Upstream Producers in the future.  However, U.S. Energy Security and World carbon emissions will likely be negatively impacted.  To minimize and possibly eliminate these unintended negative consequences of just lifting the crude oil export ban, Congress and the Administration need to also lift the ban on using Foreign tankers for shipping U.S. domestic crude oil (and other commerce) directly between U.S. ports by cancelling existing Jones Act shipping restrictions.

There could also be added economic and/or carbon emissions level benefits by allowing all domestically produced durable goods (commerce) to be possibly more efficiently-economically shipped between U.S. ports and Coastal Markets vs. the current Jones Act restrictions that most often forces shipments inland via truck and/or rail, which also leads to increased exports & imports for many goods & commodities in addition to crude oil.

Content Discussion

Bob Meinetz's picture
Bob Meinetz on February 20, 2016

John, would an amendment to the Jones Act which permits overseas construction of tankers but still requires domestic ownership/registration sufficiently address dependency concerns?

It seems those are still valid. But with American manufacturing so much more expensive in 2016, we’re not only increasing our vulnerability to foreign sources of oil, but taxing our competitiveness with shipping to foreign ports by requiring our tankers be built here.

Throw in the wrinkle that the line between domestic/foreign ownership becomes more blurred every day (?)

John Miller's picture
John Miller on February 26, 2016

Bob, amending the Jones Act to reduce the overall costs by allowing tankers to be foreign built, but still owned/registered domestically will definitely reduce the costs of U.S. domestic port-to-port commerce shipments and improve the economic attractiveness of increasing U.S. shipping fleets sizes.  This change would directionally make our oil transport industry closer to how most international ‘free markets’ operate, with the overall benefits to both the U.S. and Foreign economies.  Getting the Government controls out of most markets (other than needed safety/environmental regulations perhaps) generally benefits most economies and eliminates a lot of waste.