Earlier this year we discussed the trending topic of the U.S. crude export ban, noting that many industries and government officials have been increasing calls for abolishing the 40-year-old ban. That debate has only become more vocal recently. With the 1970 U.S. production record of 9.6 million barrels per day likely to be broken sometime this year and an agreement to lift sanctions on Iranian oil exports further sparking debate, politicians and market experts have pointed to a variety of signs that the export ban should be lifted, including market differentials.
The primary futures market differential used by proponents and detractors alike compares the International Brent and U.S. West Texas Intermediate (WTI) benchmarks. However, The Financial Times noted in early July the futures market differential between Brent and WTI was still significantly down at $4.64 from around $13 a barrel in March. This narrow differential “has the natural effect of defusing the political urgency of lawmakers” and “reflects the porosity of the ban” itself, they argued.
Some analysts and industry experts like Ryan Lance, the CEO of ConocoPhillips, believe this differential is an “artificial” construct that is hindering domestic crude oil development. Yet others point to an overall global reduction in the crude oil market — in part due to a glut of shale oil in the U.S. — as hindering domestic development, leaving “energy companies with less capital to invest in exploration and production.” Looking at both the price differential and the abundance of crude as possible causes of reduced domestic output, it helps to ask what theoretically would happen if the ban on U.S. crude exports were lifted. Lance believes a truly global crude oil price would increase the profits of companies like his, with the money getting reinvested, further increasing production later on.
But if U.S. domestic production increases even further with the lifting of an export ban, some market experts wonder if the global crude oil market will only be depressed further, with limited places for U.S. light crude to go. For example, The Financial Times noted that the crude inventories of northwestern Europe are at their highest level in two years. If stockpiles are already full in some countries, what will demand be like globally for U.S. crude, much of it light shale oil? U.S. Republicans have already been at work identifying possible trade targets, including Poland, Japan, and India. However, as the magazine Alberta Oil recently pointed out, Asia isn’t likely to be a top target for U.S. light shale oil, which prefers Canada’s heavy crude oil instead.
The other vital question: How would global markets react if the ban were lifted? We’ll discuss that topic in our next post.