For the first time in nearly 40 years, the Commerce Department ruled that two US companies can export condensate, a type of crude oil previously banned from sale abroad. Insiders explain that shipments are likely to be small, but they could serve as a valuable precedent to allow broad exportation of US unrefined oil products. While this appears as the government playing favorites for now, any move to allow markets to function without government intervention should be viewed as positive.
The ban on unrefined oil exports dates back to the oil embargo of the 1970s. Over the past 40 years, the law benefited large firms that could produce crude oil then refine it prior to export. Now smaller producers including Pioneer Natural Resources Co. and Enterprise Products Partners LP involved in the hydraulic fracturing boom, often called “fracking,” can better compete with vertically integrated giants like Chevron and ExxonMobil.
President Ford signed the EPCA bill into law following the 1973 embargo which first exposed the issue of US crude oil dependency. Oil prices spiked tanking the domestic economy, the transportation industry and stoked inflation which wouldn’t be beaten until well into the 1980s.
The protectionist EPCA had a few positive side effects like higher fuel economy standards and the creation of the Strategic Petroleum Reserve (SPR). SPR sites around the US were topped off with oil in 1977, and would not be tapped until 2025 with the exception of some tiny releases to combat disasters like Hurricane Katrina in 2005.
A more free market approach to crude oil exportation bodes well for the fracking boom. With recent improvements in technology, oil reserves held in shale deposits have been more easily tapped by US energy companies, namely in North Dakota and Texas. The recent relaxation of EPCA by the US Commerce Department specifically approved condensate, or unrefined crude that comes from Texas shale oil. The small producers involved in this rapidly growing industry are first movers to lobby Washington to allow exports of the specific product they extract from the ground. Larger players are slower to identify new trends and take steps necessary to remove political headwinds to their businesses.
Energy experts Daniel Yergin and Kurt Barrow argue that US refiners are more adept to process “heavy” oil, whereas “lighter” shale output is best processed overseas. In their commentary, published by the Wall Street Journal, both argue that “allowing exports would enable light-oil producers to get world market prices, and their revenues would flow back into higher investment in domestic production.” Energy analysts concur that by easing export restrictions, production should increase to better regulate global oil prices. Furthermore, as globally earned revenues are repatriated to the US, plant investment in long-term assets could boost economic growth here.
Click here to listen to Alan Greenspan’s remarks regarding the stagnating US economy and how investment in long-term assets could lift US GDP:
Naysayers argue that with greater oil exports come only modest improvements in the domestic economy. But as former Chairman Greenspan portends, without a substantial increase in investment in long-term assets, one can expect a watered down economic recovery. A more relaxed attitude toward domestic crude exports could provide a much needed secondary stimulus the recovery needs. In a recent report PDF by the American Petroleum Institute, the oil and petroleum lobby group argue that “each direct job in the oil and natural gas industry supported approximately 2.7 jobs elsewhere in the US economy in 2011.”