Iraq: Another Reminder That Exporting Oil Would Be a Bad Idea

Oil fires in Iraq after the first Gulf War. Photo credit: Flickr/Bryan Dorrough.

A few weeks ago, Continental Resources applied to export some of its crude oil out of the United States. The company is pushing for America to end its more than 40-year ban on oil exports so that it can get its oil into refineries that can better processes it. While there are a number of positives to be gained from lifting the ban, the recent violence in Iraq reminds us that ending the ban could end up being a very bad idea.

As violence in Iraq spikes, so does the price of oil
Last week, oil had its biggest weekly gain in almost a year. The price of Brent crude oil topped $114 per barrel as violence in Iraq worried oil traders. The big concern is that the potential exists for the violence to spread to the major oil-producing regions to the south. If that happens, it could push the price of Brent crude to more than $125 per barrel, according to some analysts.

Oil prices in the U.S., however, while elevated, are still lower than the global benchmark Brent price. America's key benchmark oil price is West Texas Intermediate, or WTI, which is currently just over $106 per barrel. America's surging oil production thanks to the development of the Bakken Shale by companies like Continental Resources, as well as the rise of the Eagle Ford Shale thanks to EOG Resources , is helping to keep American oil prices lower than the price the rest of the world pays. That energy advantage is keeping the price Americans pay at the pump lower than it would otherwise be, as well as reducing our dependence on foreign oil.

Photo credit: Flickr/Mark Rain.

Leaving money on the table?
The problem producers like Continental Resources are having is that these shale plays are producing more oil than our refineries can handle. This is one of the reasons our crude oil is trading at a discount. That situation is yielding less profit for producers, which is why Continental Resources wants to export oil.

Further, the price discount is holding back investment. According to a recent study from the IHS, allowing crude oil exports would help boost U.S. output by 1.2 million barrels per day and attract an additional $746 billion in investments between 2016 and 2030. It would also create American jobs to fuel our economy.

That said, by lifting the crude oil ban and removing the Brent-WTI spread, we'd also leave American oil prices wide open to global price spikes. Instead of saving Americans nearly $10 per barrel during times of crisis -- like what's happening in Iraq right now -- we'd be paying the full brunt of the "crisis premium" for the price of oil. It's a premium we've been trying to rid ourselves of for nearly four decades.

Photo credit: Flickr/rabiem22.

Investor takeaway
There's certainly money to be made from ending our crude oil export ban. Not only will producers make more money on each barrel produced, but we would also be able to drill in new areas that aren't currently economical to drill. That said, we'd be exposing ourselves to the very same oil shocks that the country has spent decades seeking ways to avoid. That's why I still think exporting oil is just a bad idea at this point. We'd be much better off increasing our own refinery capacity and exporting those higher-valued refined products than simply sending our oil overseas. 

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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