World Energy Blog

Oil Market Woes in Congress, to Export or Not to Export

7/22/2015 9:49:38 AM

I remember reading rumors about the vast amounts of oil locked in the Mid West as Internet spam, and the conspiracy theory that the US was using imported oil before allowing its oil to be developed.  Rumors that hyper efficient cars or electric cars were being stifled by the industry and rumors of price fixing.  It seems now that every time the price of oil kicks up the conspiracies come back with a vengeance.  So has anything changed, as the price goes up will we once again see the conspiracy theories abound?

But what has changed is where the price controls reside.  In the past the price controls were held first by Texas, then by OPEC, now the United States and Russia are competing for that price control.  Thanks to the technologies the industry has applied the rumors of the vast oil in North Dakota have been proven to be true.  Similar plays are popping up all over the world.  If you look at natural gas, the US has become the largest producer and soon will be one of the largest exporters of gas in the world.  

In fact if you count only shale gas in North America is would be the third largest producing country on its own. The country of Shale Gas would fit nicely between Russia and Iran and follow the United States conventional gas production.  

Our oil story is equally as good; we have been the largest consumer of oil for quite some time, now we are rapidly becoming the largest producer of oil.  The Bakken, the Eagle Ford and other shale oil plays have provided that bounty.

If you are in the industry this provides a conundrum of how to handle the excess.  Oil is fungible; it really doesn’t matter where you get it, so US crude competes with crude from all over the world… or does it?  The reality of today’s bounty is that through legislation passed in the 70s, before we unlocked our supply, our crude is captured within our shores.  

The net effect is that our production is throttled by an inability to escape our shores.  A producer has to decide whether to explore in the US where prices can be very low or explore elsewhere and deliver the crude to the highest market.    Many would argue that until our needs are fulfilled we should not allow exports, but they are forgetting that we are limited by our infrastructure on how much US crude can be transported, stored and refined on a daily basis.  Additionally not all crude is created equally as our refining fleet is designed to take certain types of crude, leaving crude in storage to wait its turn.

Some would question why this is a problem, offering the very sane advice that we should produce as much domestic crude as we can and only allow exports after that need is satisfied.  Sage advice, but we don’t restrict imports, just exports.  What I mean by that is, if you don’t allow exports the only fair way to balance that market would be to require refineries to take US crude first. (Wait a minute, that’s not fair or is it? We protect corn farmers by requiring ethanol.)

As the largest producer of natural gas we are headed to exports, arguably the market for natural gas in the US is saturated and we should allow producers to seek markets elsewhere.  

However, a mix of crude coming from all over the world satisfies the market for oil in the US. When the price is high we produce every drop we can in the US, as the price falls OPEC used to adjust production to accommodate.  Now, the industry in the US is swing player, we have to stack rigs, layoff hundreds of people, and watch small explorers go out of business to regulate the supply.

For the consumer the only base line marker is the price at the pump, keep it low at all costs and the industry will just have to react.  For the government low oil prices are a problem, they are still pushing a renewable agenda and low oil and natural gas prices don’t help.  Without consumers wanting to pay more for gasoline or support from the Government to regulate the market we seemingly doom our domestic industry to boom or bust.

So why is allowing exports of natural gas and crude oil an answer that helps everyone?  Nothing stimulates production better than a market.  If a producer is assured there is a market for their crude they will explore and produce.  As production goes up, prices naturally come down.  At the same time, nothing spurs consumption better than a ready supply.  If a consumer can count on low prices they will use the product.  This is why gasoline consumption and SUV sales are up in the US. 

Right now our oil market is one sided and this has left us open to manipulation by outside forces (think 1972).  The difference is that while we cannot be affected by withholding supply we can be affected by lower prices and too much supply.  By allowing the Saudi’s to lower prices to attain market share in North America our smaller swing players are put out of business.  At the same time we are not allowed to sell into markets where the price is higher. Effectively the Saudi’s are using our own treaty against us.

As congress debates changing the laws, they need to consider the checks and balances.  Allowing exports of crude does not mean that all crude is exported; it means that our producers can compete on a level playing field.  If OPEC wants to sell us cheaper crude, fine the global market will fix the issue.  US production will go to other markets.

The only other option congress has is to force our refineries to use US crude first.  Allowing US oil producers that level of protection really would be favoritism and would be seen as such, making it a better choice to go the other direction.  However, the current lopsided system is outdated and hurts our domestic industry. 

At the end of the day it seems the conspiracy theories are set to hit us again.  US production is going to be falling rapidly, prices globally are going to go back up and the consumer will be facing $3-$4 pump prices again.   At a time when US production is at its highest levels in years being subjected to artificial manipulation from others is simply unacceptable.  We can either let the market sort it out on level playing field or we can protect our US producers the way we protect corn farmers, but doing nothing is out of the question.