- March 18, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
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.
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).
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.
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.
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.
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.