In Wednesday’s editorial article in the Financial Times, the point is made that prohibition of US crude oil exports, coming into effect forty years ago at the peak of the Arab oil embargo, is an antiquated strategy, quite against the spirit of free markets, and in effect, another ‘pork barrel’ policy treating favorably certain industries in the name of consumer protection and national interest. The fact that US crude oil cannot be exported but refined petroleum products can, it means that US based refineries can have a competitive advantage bequeathed to them favorably not from market forces. Landlocked but high quality US crude oil West Texas Intermediate (WTI) has historically has been priced, based on market forces, higher to Brent oil and other international blends, which are usually of lower quality but more easily trade-able on the international markets; however, in the last several years, since shale oil came to production in the US, WTI is casually priced at discount (sometimes heavy discount of more than 20%) to Brent and other easily trade-able blends. As a result, US refineries have been getting access to cheap oil, and particularly refineries in the continental / Midwest of the country have been making money ‘hand over fist’ given that they get access to heavily discounted, landlocked oil. Since it is legal for refined oil products to be exported, the refiners’ access to cheap oil does not necessarily translate to cheap gas for the US driver and consumer. A US refiner could as easily sell their product to the international market if that would maximize their profit. The fact that an international business newspaper like the Financial Times makes the argument in favor of letting the free markets operate by allowing exports of US-produced crude oil is not shocking. It’s a fair call about free markets and leveled competition, including fair trade practices (anyone remembers the US taking China to the WTO in reference to rare earth metals last year?) In the domestic oil business, besides the recent editorial, there have been a few more but never frequent or loud enough ‘voice(s) shouting in the wilderness’ about the same effect. However, it’s fairly hard envisioning the US Congress acting in favor of such law. There could be some political cost, of course, and some activists would play the ‘national interest’ card for absolutely its maximum value. Besides, there are several well-established interests that would lobby very hard to maintain the status quo. Logically, the refinery industry would be at the front of the line protecting their shale oil ‘moat’; however, oil companies, to the extent involved in shale oil, would love to have the ability to sell internationally. In repealing the US crude oil ‘embargo’ most likely will be a killer for the Keystone XL pipeline as the most highly promoted argument in favor of its construction is the assumption that refineries along the US Gulf will have access to more oil, especially heavier and sour-er Canadian sands oil as compared to WTI, which is more profitable to the US refineries that were built and geared toward lower quality imported oil (from Venezuela for instance, and to a lesser degree from Middle East); the point is that US refineries working on cheaper heavy and sour imported crude likely could be more profitable, while foreign refineries (that are mostly geared for light and sweet blends) would be willing to pay a higher price than presently to acquire US blends like WTI and Louisiana Light Sweet (LLS) and other high quality crude. In the following two graphs prepared by Karatzas Marine Advisors & Co. on data sourced from the U.S. Energy Information Administration (EIA), despite the fact that US crude oil production increased from about 160 thousand barrels per diem in January 2008 to approximately 230 thousand barrels at present (up about 43%), the average price of retail gasoline has not declined overall, but it has rather shown a small increase. At least on this benchmark, it doesn’t seem that the US driver has seen much of benefit from increased US oil production and it’s mandatory refining in the US.
On the other hand, while overall production of gasoline by US refineries has remained constant more or less since January 2008, from the following graph it’s clear that total refined petroleum products have been a growth export market, showing an approximate 176% increase since January 2008.
Taking a look closer at home, any action by Congress to repeal Energy Policy and Conservation Act of 1975, and the Export Administration Act of 1979 would have a tremendous impact on shipping, both for the domestic, cabotage Jones Act tanker market but also for the international tanker market. The shale oil boom had been a tremendous blessing for the usually ‘sleepy’ Jones Act tanker market (as compared to the international trade) with both activity and rates in the segment shown signs of vivid life, on the back of the need to transport domestically (at any price) oil along the US Gulf Coast or up the Atlantic and East Coasts. On the other hand, the shale oil boom (among other factors such as higher fuel efficiency standards in the US) has been the death knell for the international crude oil tanker market (recently, the US has lost its long-held biggest oil importer in the world, a ‘privilege’ that was passed on to China (in September, China imported 6.47 million barrels per diem of crude and refined petroleum products vs 6.2 million barrels per diem for the US.) However, the shale oil has been also a blessing to the international product tanker market as refined petroleum products can be exported from the US refiners on foreign-flagged and owned vessels. A casual perusal of the shipping stock tables could not be more clear with well-established and respected companies like Frontline (ticker: FRO) are struggling for survival while product tanker upstarts like Scorpio Tankers (ticker: STNG) have been having the time of their lives. The odds for now are still significantly in favor that the US will maintain the ban on crude oil exports. Should there have been a change to implement free market practices, there will be another major inflection point for shipping: down with the Jones Act tanker market and the international products tanker market, and hoorah for the crude oil tankers. As proud as shipping wants to be about its international pedigree and an industry mostly related to ‘perfect competition’, government policy can always make or break a fortune. But again, it seems that often in free-market societies all the more often fortunes are made based on some preferential treatment not associated with market forces. © 2013 Basil M Karatzas & Karatzas Marine Advisors & Co. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.