President Barack Obama has lifted the country's 1975 ban on crude oil exports.What does this mean for the oil price? Simon Wilson reports.
The US has ended a 40-year ban on crude oil exports, following a U-turn by President Barack Obama and a rare case of bipartisan co-operation at the top of US politics. The deal to lift the oil ban was driven by the Republicans; while support from the Democrats traditionally more protectionist and more concerned with environmental issues was won by giving a five-year extension on tax credits on renewables. It's a "rare example" of a trade-off that produces two good outcomes, reckons the Financial Times. And the lifting of the export ban is an "overdue victory for economic sanity", which should make markets more efficient in the long run, while bolstering the credibility of US support for free trade.
Why were exports banned?
To try to keep petrol prices down for American consumers. Congress passed the ban in 1975, in the wake of the oil-price shock of 1973, when the Arab Organisation of Petroleum Exporting Countries (Opec) nations slapped an embargo on exports to America (as well as the UK and several other nations).
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The idea behind the American export ban was that if domestic producers were unable to export their crude, domestic supplies would stay strong, keeping the price of refined products, such as petrol (gasoline), down. Given that America has historically been by some distance a net importer of crude, domestic producers didn't feel too heavily penalised by not being able to export the stuff.
So what changed?
The shale revolution means the US is no longer dependent on foreign oil. There's a decent domestic surplus, which producers have been agitating to sell abroad. The point at which the US produced more oil than it imported (for the first time in decades) was reached in 2013. Then, in June 2015, the US passed Russia and Saudi Arabia to become the world's biggest producer of oil and gas. That means that the export ban designed to protect US consumers has caused a huge build-up of inventories to record highs (this despite a partial easing of the ban, under rules which allow some exports to Canada and Mexico).
Why is that a problem?
It has left producers drowning in an excess of oil, forcing them to cut spending on rigs and jobs. According to Goldman Sachs, there was also a danger that if the industry's surplus breached "logistical and storage capacity", there could be a collapse in prices to the cost of production around $20 a barrel. That matters (say big producers and industry analysts) because if low domestic prices render drilling unprofitable, it poses a grave risk to the US energy industry, and to the long-term strategic goal of US energy independence.
What effects will the change have?
In the US, a study by consultants IHS earlier this year found that free trade in crude would boost output, investment, jobs, pay, profits and tax revenues, and push up GDP by $86bn. The same study found that ending the ban would not put up petrol prices (since these are set in the freely traded world market) they would probably fall a bit. Globally, the end of the export ban will have three "potentially positive outcomes", reckons The Economist.
It will increase the size of the market for the light, sweet crude pumped out of US shale deposits, which may eventually help the fracking industry. It will give refineries outside America access to a greater variety of crude oil, enabling them to operate more efficiently. And it will make West Texas Intermediate (WTI), already the reference price in the US, into a global benchmark for light, high-grade crudes to rival Brent, an international benchmark that is based on a mix of heavier crudes. That, in turn, would make oil trading more efficient, argue the free marketeers.
Will anyone want to buy American oil?
Given that the international oil market is already so over-supplied that prices this week hit an 11-year low, it's not obvious that customers will be lining up. Some analysts believe that, with the ban lifted, the price discount on WTI compared to Brent will continue to narrow, making it uneconomic to spend around three dollars a barrel shipping US oil to Europe. But Brian Busch of Genscape, which gathers data on the oil industry, reckons "pockets of interest will soon emerge, not least because lifting the ban will increase the world's access to the different grades of crude produced in America".
Asian refiners that use light, sweet crude may find US shale oil "better value than a close substitute shipped from west Africa. Other refineries may want to take shipments of US oil just to experiment with". US exporters may also start to produce their own "refinery-specific export cocktails" by mixing heavy Canadian crude with lighter shale oil.
What about the environment?
The lifting of the export ban will scarcely be a panacea forthe woes of the American oil industry, but eventually whenprices recover from this year's slump the move "is likely toencourage shale-oil producers to pump more oil", arguesThe Economist. "That is why it is championed by the industry,but opposed by environmentalists, who want to see oilcompanies producing less, not more.
Yet by granting new taxcredits on power sales from wind farms, and on investmentsin solar generation, the bill defuses environmental objections.That means Congress is freeing up one part of the energyindustry while picking winners in another but consistencywas never its strong suit."
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
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