Lifting the ban on crude oil exports is merely a legal step and does not mean that, if taken, exports will automatically take place. In fact, they might not take place at all for some time or start at modest levels. There will be some complex questions to consider before engaging in large scale exports of crude oil.
As a result of the October 6, 1973 Middle East war between Israel and Arab countries, OPEC’s Persian Gulf members decided to impose an oil embargo on friends of Israel. In December of the same year OPEC met in Tehran and more than doubled the price of oil, from $5 to almost $12 per barrel. “Within 48 hours,” recalls Henry Kissinger (Years of Upheaval, 1982; page 869), “the oil bill for the United States, Canada, Japan and Western Europe, increased by $40 billion a year: it was a colossal blow to their balance of payments … all the countries involved faced seismic changes in their domestic structures.”
Popularly known as the Arab Oil Embargo at the time, it caused major disruptions in U.S. economic and social life. Gasoline prices soared and long lines at service stations became a common sight. In response to this situation, the U.S. Congress passed the Energy Policy and Conservation Act of 1975, prohibiting the export of crude oil produced in the U.S. and creating a Strategic Petroleum Reserve to respond to similar future emergencies. According to this law, oil producing companies could request exemptions, if they were in “the national interest.” Since exports of refined petroleum products such as gasoline, jet fuel and condensate were not prohibited, they have kept increasing, reaching an average of almost 3 million barrels per day during 2014.
As U.S. proven oil reserves and levels of domestic production decreased through the years, the main emphasis of U.S. oil policy was to reduce dependence on oil imports by increasing use efficiency indices. However, these measures were unsuccessful. From 1985 to 1995 domestic U.S. oil and gas production fell from 11 to 8 million barrels per day and the volumes of oil imports continued growing. In recent years, a dramatic reversal has taken place. From 2005 to 2013 oil and gas domestic production has increased from 8 to 12 million barrels per day as a result of the technological improvements made in the drilling and fracking of shale oil and gas reservoirs. As a result, oil imports have decreased significantly, by almost 30% since 2005.
Today, the situation of the oil and gas sector in the United States has improved significantly in all respects. Rate of consumption has declined, domestic production is at an all-time high and dependence on oil imports has lessened considerably.
In line with this new situation the fear of major U.S. energy supply disruptions is becoming a thing of the past, to such an extent that the U.S. is now planning to sell about 70 million barrels of oil, about 10%, of its Strategic Petroleum Reserve. This sale would be progressive, from 2018 until 2025, under the provisions of a budget deal reached last October of this by the White House and top lawmakers from both parties. The sales revenue would be applied to the modernization of existing strategic reserves facilities.
Under this radically new and favorable domestic oil and gas environment, the pressures to lift the 1975 ban on crude oil exports have increased. From a purely technical aspect, such a move would present no problems. Domestic reserves of shale oil and gas are enormous and can sustain substantial increases in production. Domestic production is at an all-time high and could easily be higher under a favorable oil price scenario.
The prediction of oil prices in the mid-term is more of a problem. In addition to this difficulty, the issue of lifting the ban on crude oil exports appears to be split along party lines. While a Congress dominated by Republicans has already shown its willingness to do it, the move is finding strong opposition from President Obama, who argues that it would deepen the reliance of the U.S. economy on the production of fossil fuels, to which his policies have been highly unfavorable.
Lifting the ban on crude oil exports is merely a legal step and does not mean that, if taken, exports will automatically take place. In fact, they might not take place at all for some time or start at modest levels. There will be some complex questions to consider before engaging in large scale exports of crude oil: 1) Wouldn’t it better to replace foreign imports with domestic production rather than export it? 2) Will the economics of exporting crude oil be attractive enough to justify the capital investment that will be required to increase domestic production? 3) How will the global oil supply behave? 4) Would pressures from environmentalists force a restriction in the production of fossil fuels? 5) If so, how would such a restriction affect the type of crude oil that the U.S. is producing? and, 6) What would be the impact of exporting crude oil on the overall U.S. economy? Energy, economic and national security considerations such as these would determine the next steps to be taken in relation to this issue.
A bipartisan compromise, however, just before the Christmas holiday break, is credited with bringing the 40-year ban on crude oil exports to an end as Congress passed and President Obama signed the $1.8 trillion omnibus spending and tax bill. Some credit the dramatic policy shift on the issue with the low price of oil over the past 18 months ranging from $100 to around $30 a barrel. Today, for the first time since December 2003, oil prices plunged to below $30 a barrel, a 72% drop from its June 2014 $108 peak.
The decision to lift the ban now sets the stage for the oil and gas sector to make a decision to export or not to export, based on diverse technical, economic and environmental considerations. These considerations will be the object of a second article on this issue.
Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to SFPPR News & Analysis.