A Small Step Toward Lifting the Ban on U.S. Crude Exports

In previous articles, I have argued against the ban on U.S. crude oil exports. The four-decades-long ban must be lifted if the U.S. is to fully capitalize on its oil bonanza. Producers such as Continental Resources have been urging the U.S. government to lift the ban. Oil producers will certainly benefit immensely if the ban is lifted. And now they have a reason to cheer, as the Obama Administration has taken a small step toward lifting the ban.

Crude oil export ban
The crude oil export ban was put in place in the 1970s following the Arab oil embargo, which led to an oil price shock. The ban is only limited to crude oil. The export of refined products is allowed. The ban certainly made sense when U.S. oil production was limited. However, the shale boom has meant that the U.S. is now on the verge of becoming the world's top oil producer. In fact, the International Energy Agency believes that the U.S. could surpass Saudi Arabia as the top oil producer as early as next year.

In such a scenario, the crude oil export ban doesn't make sense, especially given that the U.S. doesn't have the capacity to refine all the light, sweet crude produced in the country. Indeed, the inability of Gulf Coast refiners to process all the U.S. oil has created a significant spread between WTI and Brent crude. While the spread has benefited refiners, as I have noted before, it is hurting producers. Lifting the ban on crude exports could potentially narrow the spread between WTI and the global benchmark. Not surprisingly, producers have been in favor of lifting the ban.

Refiners argue that lifting the ban would push gasoline prices higher, as WTI would become expensive. However, as I have argued in previous articles, if the ban remains in place, then U.S. oil production will be hurt because lower WTI prices would discourage producers from increasing output. And if U.S. oil production drops, refiners will be forced to import more expensive Brent crude, which would push gasoline prices higher.

The lifting of the ban is important if the U.S. is to fully capitalize on its oil boom. I noted in an article back in May that the White House was taking an active look at strains caused by the U.S. shale-oil boom. A development this week suggests that the Obama Administration is indeed seriously looking at the crude export ban.

Permission to export very light oil
Pioneer Natural Resources and Enterprise Products Partners have been allowed to export very light oil with minimal processing. Pioneer said this week that condensate, an ultralight oil that is abundant in shale formations, can be sold abroad after passing through a minimal level of processing known as stabilization. Pioneer had petitioned for approval to export condensate that has passed through its distillation unit since it qualified as a processed product.

As I noted before, the U.S. allows the export of processed product even as it bans crude exports. The Commerce Department has agreed with Pioneer, allowing the company to export its ultralight oil.

The White House clarified on Wednesday that there had been no change to the U.S. ban on exports of crude oil. Josh Earnest, White House spokesman, said that there has been some misunderstanding about the implications of the Commerce Department's decision, and the fact is there is no change to the policy on crude oil exports. Earnest added that the oil that goes through a process to become a petroleum product is no longer considered crude oil.

While the White House is downplaying the Commerce Department's decision, it is certainly a small step toward the lifting of ban. The ultralight oil permitted by the Commerce Department for exports does go through processing, but that processing is minimal. The Commerce Department has definitely shown some flexibility with the law.

The development will be taken positively by producers. The decision, though, is likely to cause some discomfort to refiners. On Wednesday, independent refiner Valero Energy , which has opposed lifting the ban, saw a sharp decline in its shares. The 8% drop in Valero Energy shares doesn't come as a surprise given the negative impact lifting of the ban would have on refiners' margins.

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The article A Small Step Toward Lifting the Ban on U.S. Crude Exports originally appeared on Fool.com.

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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