America lifts its ban on oil exports

FOR decades, the word “market” has been a misnomer for global trade in oil. Not only has the business been manipulated by an international cartel, OPEC, with varying degrees of success. Since 1975 America has also distorted it by banning the export of almost all crude oil.

On December 18th Congress voted to put an end to the problem by lifting the 40-year-old export ban as part of an omnibus budget bill. Republicans championed the proposal, which is backed by the oil industry. Reluctant Democrats supported it because in exchange they were able to negotiate an additional five years of tax credits for wind and solar power, which they are keen on. The deal showed a spirit of compromise often absent on Capitol Hill.

The move has three potentially positive outcomes. It will increase the market for the light, sweet crude pumped out of America’s shale deposits, which may eventually give the fracking industry a fillip. It will give refineries outside America access to a greater variety of oil, enabling them to operate more efficiently. And it will make West Texas Intermediate (WTI), the reference price in the United States, a global benchmark for light, high-grade crudes to rival Brent, an international benchmark that is based on a mix of heavier crudes. That would make oil trading more efficient.

Already the impact is visible in the declining price premium of Brent to WTI in recent days (see chart). Since the shale revolution led to a surge of American oil and gas output about five years ago, the price of WTI had fallen well below Brent. That is largely because American refineries are better equipped to handle heavy, sour crude than the light, sweet shale oil that was suddenly in abundance. With exports barred, the price was forced down until it was worth local refineries’ while to buy it.

Some argue plausibly that with so small a price discount on WTI, the ending of the export ban will not lead to a sudden surge in foreign sales, because it costs about three dollars to ship American barrels from the Gulf coast to European refineries. “Spending three dollars in order to lose money is not something sane people do,” argues Michael Levi of the Council on Foreign Relations, an American think-tank.

But Brian Busch of Genscape, which gathers data on the oil industry, says 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. For instance, he says, Asian refiners that use light, sweet crude may find that exports of American shale oil are better value than a close substitute shipped from West Africa. Other refineries may want to take shipments of American oil just to experiment with. “A lot of refineries will buy at least one cargo just to run it through and see what is produced,” he says.

Olivier Jakob of Petromatrix, a Swiss-based research firm, says American exporters may start to produce their own “refinery-specific export cocktails” by mixing heavier crude from Canada with lighter shale oil. He also says global oil-trading companies, which often secure access to oil flows in emerging markets by pre-financing production, may do the same in America. “This could provide some relief to US producers and delay further the efforts of Saudi Arabia to shut down shale oil,” he says.

Eventually, when oil prices recover from this year’s slump, the lifting of the ban is likely to encourage shale-oil producers to pump more oil. That is why it is championed by the industry, but opposed by environmentalists who want to see oil companies producing less, not more. Yet by granting new tax credits on power sales from wind farms, and on investments in solar generation, the bill defuses environmental objections. That means Congress is freeing up one part of the energy industry while picking winners in another—but consistency was never its strong suit.