Nothing will change any time soon now that Congress has repealed a 40-year ban on oil exports, allowing U.S. producers to sell crude overseas. But the surprising change in policy—once strongly opposed by President Obama and fellow Democrats—could become rather significant when (or if) oil prices rise again.
With oil prices grounded near $35 per barrel—about 65% lower than the peak in 2014—many U.S. producers have cut back and some may end up going out of business. The break-even price for most U.S. oil producers is between $40 and $50, so there’s no incentive to sell oil overseas, or anywhere, if you’re going to take a loss on it.
The near-zero impact on consumers is one big reason Obama signed the law, which energy companies such as Exxon Mobil (XOM) and Continental Resources (CLR) have sought for years. Gasoline prices are low, and the repeal of the export ban is unlikely to change that. More oil will be flowing into global markets when Iran, which has been subject to sanctions, begins exporting oil again as the sanctions lift. Those low prices for raw crude are the main thing keeping the price of gasoline and other finished energy products low.
If oil rises above $50, however, the picture could change. And the higher prices go, the stronger the incentive will be for U.S. producers to crank up drilling and send the crude overseas. “With higher prices, U.S. producers would produce more again,” says analyst Mark Broadbent of research firm Wook Mackenzie. “In a stronger price environment I’d expect to see more exports and producers eager to ramp up prices.”
That sounds like it might be bad news for consumers, and an oversimplified read of cause and effect in the energy markets might make it seem that way. In reality, however, energy prices in the United States will be set by the global price of oil, which is set by worldwide supply and demand. If U.S. producers export more, it will be unlikely to change gas prices by much, even if prices are high.
That might sound counterintuitive, since it seems like the best way to keep prices low at home is to keep as much of the raw material as possible inside U.S. borders. Here’s the catch: Most of the U.S. oil is of the “light, sweet” variety, whereas most U.S. refineries are configured for heavier crude that comes from places like Canada, Saudi Arabia and Venezuela. Prior to the shale-oil boom—a phenomenon of the last 10 years—heavier crude was the main product available, so the companies that turned it into gasoline made the long-term decision to gear their equipment toward the product they had.
A few refineries have reconfigured their equipment to handle the lighter crude pulled from U.S. ground, but that’s expensive and risky, given that oil prices are so volatile to start with. And the construction of new refineries is fraught with costly regulatory headaches. So the majority of refiners still need the type of oil that comes from outside U.S. borders. The irony is obvious: The bounty of crude produced by the shale revolution has limited use as a domestic product.
Allowing those producers to sell light, sweet crude overseas, however, could reinvigorate the industry—but only if oil prices go considerably higher. If that were to happen, there would be a large new market for U.S. crude, which could generate an even bigger U.S. energy boom than we saw before prices plunged, beginning at the end of 2014. Gas prices would rise, because they depend on the global price of oil, but they’d rise even if all that light, sweet crude stayed inside U.S. borders.
The biggest losers, if oil prices spiked, would be U.S. refiners. Their margins would get squeezed as input prices rose and consumers cut back on the finished product, gasoline. Energy analysts are forecasting low prices for a long time, so maybe we’ll never find out what will happen when American oil hits overseas markets. But oil markets have a way of surprising everyone, and Washington may have unleashed more than it realizes.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .
- Commodity Markets
- oil prices