There was a lot of dismissive talk from experts about the overall impact of Congress lifting its 40-year-old ban on crude exports last month. Many commentators mirrored the arguments of the Council on Foreign Relations’ Michael Levi, who said that sustained oil exports were “unlikely to materialize” in the near-term, given how flooded the oil markets are with crude.
While Levi’s short-term framing reflects the conventional wisdom, it also conflicts with comments from Republican House Speaker Paul Ryan, who on Dec. 22 said that the export language included in a $1.1 trillion omnibus bill “is like having 100 Keystone pipelines.”
Granted, Ryan‘s profession often practices exaggeration, but he is viewed as less prone to hyperbole than most politicians, so it raises the question who will ultimately be right: those who see little impact from the ban’s lifting, or those who believe it a major tipping point in 21st century energy policy.
Now, only weeks after the ink is dry, we’re starting to glimpse of the deeper rationale behind allowing both the world’s largest consumer and producer of liquid petroleum – the United States – to reenter world crude markets. But before we make our New Year’s judgements, it’s worth remembering how and why the ban was lifted in the first place.
Some see the lifting of the export as simply serving an influential special interest like the Gulf Coast oil industry. But if that’s the case, why would the policy’s main champion in the Senate, Lisa Murkowski of Alaska, have worked so hard on the subject for the past two years, given that she represents the only state that already had an exemption to export oil since the mid-1990s?
The ban’s ending was a successful flanking maneuver that regained policy ground lost by the oil industry decades ago. By acquiescing to the ban’s lifting, congressional Democrats – and President Obama – implicitly admitted that conventional economic views on oil and gas supplies were wrong. Domestic supplies weren’t in inexorable decline.
Instead, the fracking revolution had given the U.S. a new-found “energy abundance,” that could be leveraged diplomatically with friends and foes overseas and used to dramatically improve the country’s chronic balance of payments deficit.
As a result, the internalization of the “abundance” argument on the part of swing-state Democrats and non-oil state Republicans signals the biggest political change in U.S. energy policy in a generation. The industry surely hopes momentum from the oil export vote is sustained through the next political-cycle.
If Republicans remain in charge in Congress in 2017, expect Murkowski and others to bring up national security and foreign policy when they try again (and they will try) to open drilling in the Arctic National Wildlife Refuge (ANWR), or state-federal revenue-sharing for off-shore production that would open up large parts of the southern Atlantic coastline for exploration. The lifting of the export ban also cleverly circumvented any issues regarding the Jones Act of 1920, a 95-year-old protectionist law that protects domestic maritime shippers from foreign competition.
As if on cue, less than two weeks after the ban was lifted, the Bahamas-registered oil tanker Theo T. chugged out of Corpus Christi, Texas, on Dec. 31 carrying roughly 400,000 barrels of crude worth between $10-15 million bound for a European refinery. While the arbitrage between U.S. and European markets is expected to be narrow or non-existent over the next year or two, market dynamics change all the time – just ask Bakken tight oil producers.
Resent research by the Rapidan Group sees the world entering a 10-15 year period of high-price volatility. This period will see a series of price-spikes and price-plunges in rapid succession because there is no single entity able to hold enough spare capacity to balance the market as it tighten around 2017-2018. Because OPEC no longer has enough spare capacity to matter, that burden will fall on U.S. tight oil producers, who were producing almost 5 million barrels a day (b/d) in the first half of 2015 before the price squeeze started to force drillers to lay-down drill rigs.
If Rapidan is right, expect a cycle of under-investment and additional geopolitical unrest in oil exporting countries between now and 2030. As the price cycle starts to move upward, over $50 a barrel, the impact of lifting the ban will start to take hold. Tight-oil production in the U.S. holds no exploration risk and can be turned back on in about four months’ time, compared to 3-7 years to bring a virgin conventional field to full production. This means the U.S. tight-oil industry, especially those located in the Eagle Ford and Permian Basins in Texas, could sell into tight seaborne, Brent markets for months at a time, over a period of many years.
If, for instance, market dynamics ever return to 2011-2012, when a major producer – Libya – fell off-line for years, taking more than 1 million b/d of oil supplies while global demand was strong, then demand for additional U.S. production would be massive. The next crisis could come from areas of unrest in the Persian Gulf, where just at the turn of the year; Saudi-Iran relations plunged to their lowest levels in decades after the execution of a prominent Shiite cleric from the oil-rich Eastern Province.
While it’s been a futile activity for decades to guess the strength of the social contract holding the Saudi Kingdom together, allowing U.S. ports to export crude at any given time may serve as a good insurance policy if nothing else. But if the worst-case scenario occurs and sectarian conflict traps 20 percent of the world’s oil behind the Strait of Hormuz for any period of time, the millions of barrels a day of possible crude coming out of the U.S. will be of great strategic and diplomatic value.