oil industry has a very tricky needle to thread right now: It must convince
the American public that exporting crude oil is in its best interest, when it
The reason the industry wants to export crude oil is simple. U.S. refineries can't use all the crude coming from shale plays like the Bakken formation in North
Dakota and the Eagle Ford in Texas. This boom in "tight oil"
has created a bit of a glut for those specific grades of "light, sweet crude"
because before the fracking revolution, most of the domestic refining complex
was reconfigured to take in heavier sour crude grades of the sort we
import from places like Saudi
Arabia and Venezuela.
The oversupply has forced tight oil producers to sell their
crude to refiners at a discount to the U.S. benchmark grade, West Texas
Intermediate (WTI). For most of the past two years, for example, Bakken crude
has sold for $5 to $15 per barrel (bbl) less than WTI.
Not only does the glut limit the profits of tight oil
producers, it also threatens their ability to maintain their drilling rates,
which are funded primarily with debt.
While tight oil producers and their boosters (most
prominently, economist Ed Morse of Citigroup) talk about tight oil operations being profitable
down to $70/bbl or less, they're often referring to the best "sweet
spots" in the shale plays. In McKenzie, Williams, Mountrail and Dunn
counties in the Bakken region, producers can break even at less than $40 a barrel, according
to Lynn Helms, director of the North Dakota Mineral Resources Department.
But Bakken producers generally need a price of $80 to $85/bbl to attract capital to maintain
to Reuters, and at $70/bbl or lower, spending would be jeopardized.
The $80/bbl threshold was reached more than once in recent years.
In July 2012, some Bakken producers were forced to sell their oil for
$65 to 70/bbl. Margins were generally acceptable in 2013, but prices fell to $71.42/bbl in November and $73.47/bbl in December, according to data released last week by the North Dakota Mineral Resources Department.
In short, the profit horizon for investors in debt-fueled
drilling has been just a bit on the thin side, and it isn't getting any thicker. According to IHS Herold, more money has been invested in shale gas and tight oil exploration and
production than the sale of those fuels has generated since 2008, leading to
write-downs for many companies involved. (I detailed some of those losses
The problem for producers is that overseas exports of U.S. crude were
banned after the Arab oil embargo of 1973. (Crude exports to Canada and Mexico are permitted, and exports
of refined products like gasoline and diesel are unrestricted.) But U.S. refineries
are pretty well maxed-out, and domestic demand for gasoline has been muted. The
rest of the world runs on diesel, so diesel exports have been strong.
Business vs. business
The ban has had two consequences. The first is that domestic
prices for gasoline have been lower in the United States than they would be without the crude export
ban. The second is higher profits for refiners, because they can buy crude from
tight oil plays at a discount, while fetching higher world prices for exports
of refined products like diesel.
Producers need to find a way to get around the ban so they
can export their oil to foreign refiners, where it would fetch at least $10/bbl
more, and keep that investment cash flowing. If they can't do that, as I
explained one year ago, the tight oil boom could go bust.
But they can't just come out and say that. Americans only
want to hear about the promise of "energy independence;" they don't
want to hear that independence will ultimately mean higher prices.
Instead, the oil companies deploy their business lobbyists,
like Karen Harbert, president of the U.S. Chamber of Commerce's energy arm, the
Institute for 21st Century Energy. "We have a mismatch between what we are
producing and what our refining capacity is, and our refiners are not going to
expend a tremendous amount of capital to meet this," Harbert
told the National Journal. "We need to adjust to these market
inefficiencies, which will benefit the American consumer over time." How,
exactly, the American consumer will benefit, she didn't say.
Instead, they trot out their proxies in Congress, like Republican
Senator Lisa Murkowski, ranking member of the Senate Energy and Natural
Resources Committee, who has been stumping for lifting the crude export ban. "From
a policy perspective, it's good policy, again, to allow for that level of trade.
My interest is not to protect the refineries' bottom line," she
said. And that's true. As a senator from Alaska, her interests are to protect the producers'
Instead, we are treated to high-minded
lectures by oil company economists about the virtues of open markets, as if our
objective were to craft exemplary trade policy, instead of carefully stewarding
our remaining resources and looking out for the best interests of U.S.
Instead, they get their pals at a Houston newspaper to pen a
snarky political editorial about how "antiquated" the export ban
is, invoking every moldy memory from President Jimmy Carter's so-called
"malaise" speech of July 15, 1979 (in which he never uttered the
word) to Nehru jackets and fondue sets. "When it comes to energy policy, the
'70s aren't just 'so yesterday'; they're prehistoric," the editorial whined. C'mon, America, get
hip! Don't you see how "now" and "today" crude exports are,
some 44 years past the peak in U.S.
The other way to get higher prices for domestic crude would
be for tight oil producers to cut back on their output to match the demand of refiners.
But that would be silly. I mean, who ever heard of such a crazy notion? Like,
you wouldn't expect a donut shop to only make as many donuts as people in town
can eat, would you? Surely we all understand that we have to "drill, baby,
drill" as fast as possible, and go get that money right now? Surely we
know that the quest for "energy independence" can't wait?
Naturally, the refiners are against lifting the ban. Bill
Day, a spokesman for Valero Energy, one of the largest American independent
refiners, offered a bit of refreshing candor. “Since the sole reason to allow
crude oil exports would be to give oil producers access to higher world prices,
greater exports would lead to higher domestic oil prices,” he
And naturally, the
unions oppose lifting it because it could hurt jobs, presumably in the
refining, pipeline, and infrastructure sectors.
Everybody's interested in lining their
pockets, and nobody cares about the long-term prosperity of the country,
or the well-being of American consumers. Shocking, I know.
The last sip
As petroleum geologist Art
Berman has quipped, the U.S.
experience with fracking shale is "more of a retirement party than a
revolution." We have burned through the big, accumulated reservoirs of oil,
and now we're getting into the shale below them, or what geologists call the
"source rocks" that created the oil. Once we get to the point where
we can't produce oil and gas profitably from shale, we're done. Kaput. Toast.
That's why Berman calls it the "last gasp." Or, as
I called it in 2012, the
As I explained then, there's only so much oil and gas we can
reasonably expect to produce from these marginal, expensive shale resources. It's
like a beer: We can drink it slowly or quickly, but it's not bottomless.
The real question for the United States is not about optimal trade
policy or economic theory, but whether we want to extract the last drops of our
oil endowment as quickly as possible by enabling the debt-fueled land rush that
has brought us a gratifying, but temporary, bump in production, or whether we
want to make it last as long as possible, knowing that two or three decades
from now the world will be absolutely desperate for the stuff, with scarce
exports and unimaginably high prices.
Good, transparent data analysis by Canadian geologist David Hughes of U.S. tight oil production
suggests that it will peak around
2016. The latest projection from the U.S. Energy Information Administration (EIA) sees tight oil peaking by 2021. Either way, within a decade we'll be right back to competing with the rest of the world for
the dregs. Even if the U.S. could ramp up production to the "energy independence" rate, it would simply cut the lifespan of our remaining oil in
In fact, U.S.
"energy independence" is a chimera. The United States still imports about 40
percent of its petroleum. Credible analysts, including the EIA, do not foresee a day when U.S. crude oil
imports will be eliminated. Ever. "Energy independence" is just
a political slogan designed to manufacture consent for ever-more-disruptive
drilling, and make the hearts of investors go pitter-pat.
More importantly to consumers, more fracking drives fuel prices
Senator Ron Wyden, D-Oregon, has scheduled a hearing on the
oil export question for Jan. 30. If you care about your future, I suggest you let your elected representatives know that saving some of our
remaining oil for a rainy day is a better idea than lifting the crude export
ban so we can suck the shale dry tomorrow. Out there in the not-too-distant
future is not just rain, but a flood.
(Photo courtesy of Daniel Ramirez, Flickr Creative Commons)
This post was originally published on Smartplanet.com