Lifting the U.S. Oil Export Ban Is No Solution to Low Oil Prices

Posted in The Petroleum Truth Report on March 18, 2015

Tight oil producers are hoping for an end to the U.S. oil export ban. They hired IHS to write the second report on this topic in less than a year.  

In Unleashing The Supply Chain, IHS argues that U.S. jobs are the casualty from the export ban. The problem, they say, is that the U.S. lacks the capacity to refine all of the light tight oil being produced and that lowers the price.  

But there were plenty of jobs over the last several years when oil prices were high even though the export ban was in place.  That is because over-supply has lowered oil prices and over-production, not the export ban, is the problem. 

The chart below shows that tight oil production from the U.S. and Canada is the anomaly responsible for global over-supply. 

Leading Liquids Producers 17 Mar 2015
Leading liquids producing countries 2008-2014.  Source:  EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

And it’s a world problem of over-supply, not just an American problem. Oil companies everywhere are cutting staff and budgets.   All companies are being hurt by low oil prices because they need $100 oil to break even.

The IHS report claims that the oil export ban causes lower oil prices in the U.S. compared to international prices.  Actually, U.S. oil pricing has nothing to do with international prices.  It is a simple matter of supply and demand.  When U.S. companies supply more oil than is needed, the price goes down.  If there were less supply, the price would be higher.

In fact, there was no difference between U.S. WTI and International Brent prices until late 2010 when tight oil started to become a big factor in U.S. production (see chart below).

Chart_WTI-Brent_US Prod
U.S. vs. international oil prices and the onset of tight oil production.  Source:  EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

If the U.S. export ban were removed, U.S. companies would make more money per barrel for a short time until the extra U.S. supply pushed down the price of world oil even further. 

The biggest problem with making an economic argument to lift the oil export ban is that U.S. tight oil companies were losing money at WTI oil prices of more than $90 per barrel.  The table below summarizes 2014 year-end financial data from the oil-weighted U.S. land-based companies that I follow.

OIL WEIGHTED Sampled E&Ps 2014 10 March 2015

Summary table of 2014 year-end financial data from oil-weighted U.S. land-based E&P companies. All dollar amounts in millions of U.S. dollars. FCF=free cash flow; CF/CE=cash flow from operations/capital expenditures.  Source:  Google Finance and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The table is ordered by 2014 FCF (free cash flow: cash from operations minus capital expenditures). Only 3 of the sampled companies had positive free cash flow in 2014. All the rest spent more money than they earned.  

For the 20 sampled companies, total free cash flow was -$10.5 billion in 2014, -$4.9 billion more negative cash flow than in 2013. On average, these companies only made 75 cents for every dollar that they spent.  2014 debt was $90.3 billion, an increase of almost $7 billion from 2013. Average debt-to-equity was 92%.

WTI prices averaged $93 per barrel in 2014.  So, if oil-weighted companies were losing money at more than $90, how are they going to benefit by selling oil at international prices of $53 per barrel at the time of this post?

There is a strategic reason not to allow crude oil export: to keep enough of our own oil in reserve in case there are supply disruptions or our relationships with foreign suppliers sours. 

The U.S. does not have significant oil reserves in spite of what we read and hear in the mainstream media.  It is true that we are producing a lot of oil today, more liquids than Saudi Arabia. That does not mean that we will have enough for ourselves in a few years. In fact, the U.S. is only 11th in world for proven reserves with 33 billion barrels compared with Saudi Arabia’s 268 billion barrels.

Crude_Oil_Proved_Reserves_World vs US
World proven crude oil reserves.  Source:  EIA
(Click image to enlarge)

And while tight oil has added new reserves that we didn’t think we had a few years ago, it only amounts to about 2 years of supply if we had to rely solely on tight oil proven reserves to meet our annual consumption. There is another year-and-a-half if we add proven undeveloped reserves that have been identified but not yet drilled.

Chart_Tight Oil Years of Supply
Years of U.S. supply of tight oil.  Source:  EIA.
(Click image to enlarge)

The real issue is that U.S. tight oil producers have over-supplied both the domestic and world markets and that has led to depressed world oil prices.  Low oil prices are introducing discipline into U.S. tight oil production that companies are apparently unable to provide on their own.  Companies that couldn’t make money at $93 oil prices will not make money at $53 international prices.

Lifting the oil export ban would only perpetuate the problem of over-production. That is no solution to low oil prices, lost jobs or lower oil-related spending.

Over-production is the problem, not the oil export ban.


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16 comments on this entry


  1. Excellent read. This problem is one that permeates all aspects of society , nobody thinks about 5, 10 ,20 or god forbid 30 years into the future. The business cycle should be allowed to run it’s course, weak hands punished, strong hands rewarded. NO ECONOMY RUNS WITHOUT ENERGY. We need more people like you that can analyze data properly and have the long view for this industry and country.


  2. John,

    Thanks for your comments. The problem, of course, is that the emphasis is on short-term production growth as the only criterion that investors seem to care about in E&P companies. The producers say that they cannot refine all the oil that they produce so they want to be allowed to export it.

    On the other hand, a new survey of refiners by the American Fuel & Petrochemical Manufacturers says that there is enough capacity in the U.S. especially with the expansion projects currently underway.

    Here is a quote from March 18 Fuel Fix:

    “The American Fuel and Petrochemical Manufacturers trade association, which commissioned the analysis, hopes it will debunk oil producers’ chief argument for crude exports: that U.S. production is outpacing the ability of domestic refiners to process it.”

    Fuel Fix link: http://fuelfix.com/blog/2015/03/18/report-refiners-can-handle-the-flood-of-light-u-s-crude/

    AFPM Report link: http://www.afpm.org/uploadedFiles/Refining-US-Capacity.pdf

    Art


  3. Art, Great post as always. I do find your figure of two years supply of tight oil at current consumption more than a bit disconcerting. It would appear that the only way we will be energy independent is when we learn to live within a 5 mbpd budget of c+c and a bit more in the way of NGLs and bio fuels.

    Thank You for your work and best regards,

    Philip


  4. Phillip,

    No one apparently pays attention to the reserves. I often wonder if the people at EIA who forecast natural gas have bothered to calibrate their predictions of production growth into the 2030s with the reserve numbers that suggest 6 years of proven shale gas reserves and 9 years including proven undeveloped shale gas reserves.

    I don’t foresee the U.S. learning to live within our production capacity so we will continue to import at least 5 or 6 million barrels of crude oil per day for some time.

    Art


  5. Art,
    How do you feel about exporting natural gas. To date I believe Cheniere is the only company permitted to export LNG, but they haven’t started yet. Other applications are pending, I think. What would robust LNG exporting from the US do to the price of natural gas in the US? Obviously there is currently a huge difference in price in the US vs foreign markets. I would love to hear your thoughts.
    awbeattie


  6. AW,

    I think that natural gas export is a really terrible idea but we will export some before finding it to be profoundly unprofitable. The LNG business in the U.S. has always been 180 degrees off in their direction. Whatever they say is going to happen, I would bet against based on history.

    The problem with natural gas export is cost and competition. It was an easy call to make a year or so ago when LNG was selling in East Asia for $15/MMBtu and was selling at the Henry Hub for $3.50 that there must be a huge profit margin. Time is always the enemy because the world changes faster than companies can fund, permit and build the export facilities.

    Last year, Russia announced a huge pipeline deal with China that will deliver 1.4 Tcf/year at $10/MMBtu to the Chinese border so add another $1 and that’s the threshold price that LNG suppliers will have to compete with in a few years. Good luck with that after figuring in all of the liquefaction, transport and opex costs.

    Also, oil-indexed pricing is going away partly as a result of the announced Russia-China deal but also with lower oil prices. Current JKM spot price is $7.70/MMBtu. A lot of the high price expectation was based on the immediate post-Fukushima abandonment of nuclear power in Japan. Since then, more nuclear has come back and LNG demand seems to be fairly saturated.

    Add to that where I think that U.S. gas prices will go once it sinks in that U.S. gas production will probably peak in the early 2020s. Plus, we are going to export a lot of pipeline gas to Mexico. I think that at some point, it makes more sense to sell gas in the U.S. than to send it to Europe or Asia as LNG.

    Art


  7. If proven U.S. reserves are 33bb, this is only ten years left of American gasoline consumption at 3.3bby.
    Aren’t we already shipping oil as “condensate”..if the oil trains don’t blow up on the way to the port?


  8. John,

    The U.S. is exporting a relatively small volume of “lightly processed” condensate (put through condensate splitters to separate the naphtha and other stable components from the volatile components likely to explode) with more on the way because the Commerce Department’s Bureau of Industry and Security has apparently decided that this can be legitimately exported. Most producers are uncomfortable that this is actually approved for general application but a few companies–Pioneer Natural Resources and Enterprise Partners–have been given explicit permission to export condensate put through splitters.

    This same volatile component is what has caused the explosions of rail cars carrying Bakken light oil.

    The producers argue that they are producing more light crude oil and condensate than U.S. refiners can accommodate. The refinery industry contests this claim and says that substantial capacity upgrades are in process that will allow this extra volume to be processed by 2016.

    My take is that this will probably happen before the export ban can be debated and changed. I am unclear on exactly where large volumes of light crude and condensate can be shipped for refining outside the U.S. It seems like if it’s a problem here, it may be a problem elsewhere since most crude oil is heavier.

    This is a complex and contentious issue. I don’t fully understand why producers are so adamant to lift the export ban. It isn’t clear to me that there is a meaningful market for unrefined light crude oil and condensate or that producers can get a reasonable price for it.

    Art


  9. My guess is that there has been at least $5.5 billion of oil added to US storage in the past year (using prices in effect at the time of each addition). Who is paying for this and why? Unless they are forced to buy due to some contractual obligation, it would seem to be some deep pockets that believe this downturn in prices will be relatively short.

    PS: Your comment instructions says mandatory fields are marked with * – there are no * shown.


  10. Clueless,

    The claim is that oil has been added to storage because there is no refining capacity for the light crude and condensate. I think, however, that you are correct: a lot is going into storage because it makes more sense to pay the rental fee and hope that prices are higher in the near future.

    The evidence to date suggest a shorter than longer downturn in price.

    Art


  11. This is a wise post, Art. I have used similar arguments in the past, before the oil price crashed. They fell on deaf ears. The guiding principle of U.S. capitalism can be succinctly stated as follows: One f… today is equal to one f… tomorrow and one f… per day each day for the rest of my life. In this frame of mind, no long term thinking is possible, and reasonable arguments in favor of bettering (or even preserving) the future life of people in the U.S. will be ignored. And that’s that.


  12. Tad,

    Thanks for your comments. It is indeed difficult for facts to compete with short-term thinking and a story that we all want to believe.

    In some ways, I think the push for crude oil exports is a desperate act to find a way of losing less money rather than making money. First quarter earnings will fully reflect lower oil prices and will be a disaster. The failed attempt to lift the export ban in the short term will be an argument for why earnings were so bad along with oil price that, of course, was beyond everyone’s control.

    Assuming that the export ban were lifted, the challenge would be to find a buyer for the oil at a price any better than what might be found domestically. The refining industry is not famous for profitability so I don’t think U.S. light oil producers would find a windfall on international markets.

    Art

    Art


  13. […] of operators in the Eagle Ford Shale play have reasonably good balance sheets (see the table in my previous post) and are not particularly vulnerable to loan covenant threshold triggers. This cannot be said for […]


  14. You accuse IHS of being funded by the oil producers. Who’s funding you, the refineries and the airlines? Who selected you to pick winners among our US industries?

    On what planet does it make sense to penalize your own country’s oil production on terms that are more onerous than those terms received for the same products in other countries? This whole law makes as much economic sense as the price controls that they were initially implemented with in the 1970’s. How does it make any sense to allow the differential between Brent and WTI to persist – thereby slamming US companies harder than international companies in the current low price crude oil environment.

    If allowing this differential between WTI and Brent to disappear by giving our US producers the chance to arbitrage their sales price on a global market, surely we owe that to them.

    Fair trade is something we should preserve in most industries. To restrict the sale of crude oil to only US refineries, but allow the sale of gasoline on global markets makes no sense to me – and is a perfect example of a government who is trying to choose winners on the economic front.

    Negative cash flow from companies generally means that their level of investment exceeds their prior year cash flows. This occurs when they are expanding their capital base and are trying to take advantage or world oil prices that were probably maintained at too high a level by OPEC.

    Also, now would be a good time to produce US oil if it’s competitive. Oil is definitely in short supply relative to natural gas and the world is moving into the age of natural gas. Chances are that will last another fifty to seventy five years while oil production recedes across the world.

    You persist in using outdated numbers for the marginal costs for both oil and natural gas. While this article asserts that the marginal price for shale oil is $90 in the US – you yourself produced a set of graphs that showed some of the sweet spots in these plays were still productive at $45 a barrel.

    Yes, I coauthored a novel on peak oil entitled Oil Dusk. It was written about the same time that the US was building LNG import facilities. Suffice it to say, that fracking has dramatically changed the energy picture in the US for both oil and natural gas since. Your thinking and awareness seem to be stuck in 2009. While I do concur that oil seems likely to peak a lot sooner than natural gas will. Also, we’re going to see a lot more natural gas switching occurring in the US – and the biggest black swan will likely be as a result of CNG vehicles in the US.


  15. Oil Dusk,

    No one funds me. This web site is free. I take a lot of time to research and write these posts. If you don’t like the information, don’t visit the site.

    The point of the post is not to argue for or against the ban on oil export but to show that lifting the ban only hurts oil price recovery and doesn’t help the U.S. oil companies out of their self-made predicament of over-production that caused low oil prices.

    I stated in an earlier post that “I do not support the ban on exporting crude oil but it is the law” and that is where I stand.

    The Energy Policy and Conservation Act of 1975 was passed by Congress. It is not a regulation. If you or anyone else doesn’t like the law, it should be debated in Congress and voted on.

    Where in my post do I accuse IHS of being funded by the oil producers or accuse them of anything? I said the the oil producers “hired IHS to write the second report on this topic in less than a year.” There is no accusation, just a statement of fact. Groups hire consultancies all the time to write reports. There is nothing wrong with that.

    The shale companies have had negative cash flow since the inception of the plays and it gets more negative every year. That is not a criticism of these companies, just a statement of fact stated by them in their public filings.

    If you think that there are any areas beyond a few extraordinary single wells that break even at $45, then you need to read the 2014 10-Ks from the companies involved. They give you all the costs and revenues. Add them up and you will find, as most third party research has shown, that the marginal cost of tight oil plays varies by operator, play and area but averages in the $80-90/barrel range.

    If companies were breaking even at $45/barrel, we should see that reflected in their 2014 earnings when the average price of oil was more than $90/barrel. We don’t.

    Thanks for your comments,

    Art


  16. Art,

    I was surprised to see my post still visible on your site. Thanks for having the courtesy to display opposing viewpoints on a site that you obviously control.

    Your suggestion that I should avoid visiting the site is difficult to stomach when you insist on setting out so many opinions in public forums that are not consistent with the industry’s understanding of the upstream oil and gas business. Allowing you to communicate these curious beliefs to academia unchallenged leaves them with invalid and unsubstantiated assertions and is consistent with the curious bias we’ve been seeing in all sorts of attacks on fracking. You may not be flaming the academic bias against the oil and gas industry, but you’re certainly not helping it.

    It’s good to see that you have the intelligence to recognize that the ban against exports is a bad law. Laws that don’t make sense can be changed – particularly when the consequences are not in our nation’s best interests. Your original discussions on the subject seemed to deal with the fixation that the US imports more than we export. A true fact, but not one that is relevant on the impact of this particular law.

    Negative cash flows make sense if companies are greatly expanding their inventories of unconventional resources. Think of it as a type of “gold rush” where you have to secure the best leases. This has not been a error-free process and decisions have been made for a number of companies where they chose poorly or the best parcels changed. Current negative cash flow is of a different variety and is more of a strategic miss on oil prices.

    Yes, I do believe that companies have made considerable progress in their completion programs and in driving down their well drilling costs. These cheaper, more productive wells have lowered the break even costs considerably. In addition, the low natural gas prices in the US are a mostly a product of these productivity increases.

    It would be really nice to believe that you’re smarter than everyone else in the oil and gas industry. Many of your articles do seem well researched. There are plenty of exciting things to talk about in our business, why not use your energy and experience to address these issues?