Petroleum & Other Liquids

Effects of Removing Restrictions on U.S. Crude Oil Exports

Release date: September 1, 2015


Preface

This report examines the implications of removing current restrictions on U.S. crude oil exports for the price of domestic and global marker crude oil streams, gasoline prices, domestic crude oil production, domestic refining activity, and trade in crude oil and petroleum products. The analysis, which builds on and extends previous studies and activities related to the implications of growing domestic crude production that the U.S. Energy Information Administration (EIA) has undertaken since May 2014, uses cases drawn from EIA's Annual Energy Outlook 2015 (AEO2015) that incorporate a range of assumptions regarding domestic resource availability and world oil prices.

EIA studies/activities related to implications of increased crude production and possible relaxation or removal of crude export restrictions
Study/Activity Publication Date
U.S. Crude Oil Production Forecast: Analysis of Crude Types May 2014
Condensate Workshop September 2014
What Drives U.S. Gasoline Prices? October 2014
EIA’s U.S. Crude Oil Import Tracking Tool: Selected Sample Applications November 2014
Technical Options for Processing Additional Light Tight Oil Volumes within the United States April 2015
Implications of Increasing Light Oil Production for U.S. Refining May 2015
U.S. Crude Oil Production to 2025: Updated Projection of Crude Types May 2015
Effects of Removing Restrictions on U.S. Crude Oil Exports this study (September 2015)

U.S. oil production has grown rapidly in recent years. Data reflecting combined U.S. production of crude oil and lease condensate show a rise from 5.6 million barrels per day (b/d) in 2011 to 8.7 million b/d in 2014. EIA's August 2015 Short-Term Energy Outlook forecasts U.S. crude oil production of 9.4 million b/d in 2015 and 9.0 million b/d in 2016, with the decrease in production between 2015 and 2016 reflecting recent and forecast changes in drilling activity following the sharp decline in oil prices since mid-2014. AEO2015 projects domestic production growth beyond 2016, although the pace and duration remain uncertain.

Recognizing that some options, such as like-for-like replacement of import streams, are inherently limited, the question of how the relaxation or removal of current limitations on crude exports might affect domestic and international markets for both crude oil and products continues to hold great interest for policymakers, industry, and the public.

 

Executive Summary

Recent increases in domestic crude oil production and the prospect of continued supply growth have sparked discussion on the topic of how rising domestic crude oil volumes might be absorbed, including the possibility of removing or relaxing current restrictions on U.S. crude oil exports.

In response to requests from Congress1 and the Administration, EIA developed several analyses that address these issues. Recent EIA reports have addressed gasoline price determinants (EIA, What Drives U.S. Gasoline Prices?, October 2014), changes in U.S. crude oil imports to accommodate increased domestic production (EIA, "Crude oil imports continue to decline", This Week in Petroleum, January 23, 2014), options for refinery capacity expansion (EIA, Technical Options for Processing Additional Light Tight Oil Volumes within the United States, April 2015), and refinery responses to higher, but fixed, levels of domestic crude oil production under both current crude oil export restrictions and with unrestricted crude oil exports (EIA, Implications of Increasing Light Tight Oil Production for U.S. Refining, May 2015). EIA also developed projections of domestic crude oil production by crude type through 2025 (EIA, U.S. Crude Oil Production to 2025: Updated Projection of Crude Types, May 2015), supplementing the overall production projection provided in the Annual Energy Outlook 2015 (AEO2015) and updating a previous report issued in May 2014.

This report builds on these earlier efforts by applying EIA's energy models to directly compare cases over the next decade with and without the removal of current restrictions on crude oil exports. Four baseline cases using EIA's National Energy Modeling System are considered to reflect a range of outlooks for resources and technology as well as prices, which are key drivers of domestic crude oil production.

Current laws and regulations allow for unlimited exports of petroleum products, but require licensing of crude oil exports. Exports of crude oil to Canada for use there are presumptively granted licenses, as are exports of crude oil from Alaska’s North Slope (ANS crude), re-exports of foreign-sourced crude, and certain exports from California. In addition, recent rulings by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) have clarified that condensate processed through a distillation tower is classified as a petroleum product and is therefore exportable without a license.2 For this analysis, EIA generally assumes that all streams with API gravity of 50 degrees and above (API 50+) would be eligible for processing and export under recent BIS guidance. Through the first five months of 2015, crude oil exports averaged 491,000 b/d. In addition, exports of processed condensate through the first five months of 2015 are estimated to have reached an average of 84,000 b/d.

Although the current policies outlined above are characterized by some as a crude oil export ban, crude oil exports have been rising steadily in recent years (EIA, "Crude exports and re-exports continue to rise; some volumes sent to Europe and Asia," Today in Energy, October 31, 2014). Even with current restrictions, a further increase in crude exports, including additional flows to Canada and more exports of ANS crude, is possible. In this analysis, projections under current policies are compared to alternative cases that allow unrestricted exports of crude oil, paralleling the current treatment of petroleum product exports.

Key analysis results

The effects of eliminating restrictions on crude oil exports depend on the level of future domestic production, which itself depends on the characterization of resources and technology as well as future crude oil prices. Under current policies, projected domestic crude oil production (including lease condensate) in 2025 ranges from 9.5 million b/d in the Low Oil Price (LP) case to 13.6 million b/d in the High Oil and Gas Resource (HOGR) case, with production in other cases (the Reference case, and a case that combines HOGR with the LP case (HOGR/LP)) falling within this range (Table ES-1).

The discount of West Texas Intermediate (WTI) crude to North Sea Brent, the latter a key marker for waterborne light crudes, is expected to increase to more than $10/b in cases where current crude oil export policy is maintained and domestic production reaches or exceeds about 11.7 million b/d by 2025. Under current export policies, the Brent-WTI spread averages roughly $15/b over 2020-25 in the HOGR case, reflecting the price discount required to spur investment in additional processing capacity to convert incremental volumes of domestic crude oil into exportable petroleum products. In the Reference case, where production averages 10.4 million b/d over 2020-25, there is no need for a wider Brent-WTI spread to encourage more investment in domestic processing capacity additions. The average annual Brent-WTI spread remains close to $6/b in the Reference case whether or not restrictions on crude oil exports are removed, and unlike the HOGR case, projected total U.S. distillation capacity is the same whether current crude oil export restrictions are maintained or removed (Table ES-1). It should be noted that the $6/b-$8/b range for the Brent-WTI spread with unrestricted crude exports differs significantly from historic experience in which Brent and WTI typically traded close to parity. A Brent-WTI spread in the $6/b-$8/b range is consistent with the costs of moving WTI from Cushing, Oklahoma to overseas markets where it might compete with Brent. The historical situation of approximate parity reflected competition between Brent- and WTI-based crudes in the Gulf Coast and Cushing where Brent-based crudes have now been largely displaced.

In cases where the Brent-WTI spread grows beyond $6/b–$8/b, removal of current restrictions on crude oil exports would result in higher wellhead prices for domestic producers, who would then respond with additional production. This effect is evident in the HOGR and HOGR/LP cases, where projected levels of domestic production in 2025 in cases without export restrictions are, respectively, 3.5% (470,000 b/d) and 3.2% (380,000 b/d) higher than in corresponding cases that maintain current export policies. In contrast, in the Reference and LP cases, where projected annual average Brent-WTI spreads generally remain in the $6/b–$8/b range under current export restrictions, the removal of those restrictions does not increase wellhead prices or projected domestic crude oil production. In EIA's analysis, domestic production responds to the increase in domestic crude oil prices, if any, when crude export restrictions are removed in each case. Any increase in domestic crude oil production that occurs because of the removal of restrictions on crude oil exports that is not offset by reduced production outside the United States would also represent an increase in global crude oil supplies, which in turn places downward pressure on global crude oil prices, as represented by Brent. To the extent that higher domestic production results in lower global crude prices, the increase in the absolute level of domestic crude prices will be smaller than the reduction in the Brent-WTI spread, which reflects both higher WTI prices and lower Brent prices.

Petroleum product prices in the United States, including gasoline prices, would be either unchanged or slightly reduced by the removal of current restrictions on crude oil exports. As shown in a previous EIA report (EIA, What Drives U.S. Gasoline Prices?, October 2014) petroleum product prices throughout the United States have a much stronger relationship to Brent prices than to WTI prices. In the high production cases considered in this study (HOGR and HOGR/LP), the elimination of current restrictions on crude oil exports narrows the Brent-WTI spread by raising the WTI price. As domestic producers respond to the higher WTI price with higher production, the global supply/demand balance becomes looser unless increased domestic production is fully offset by production cuts elsewhere. The looser balance implies lower Brent prices, which in turn results in lower petroleum product prices for U.S. consumers.

Combined net exports of crude oil and petroleum products from the United States are generally higher in cases with higher levels of U.S. crude oil production regardless of U.S. crude oil export policies. However, crude oil export policies materially affect the mix between crude and product exports, particularly in the HOGR and HOGR/LP cases, which have high levels of domestic production. The result regarding combined net exports of crude and petroleum products reflects a market in which domestic consumption of petroleum products is mainly driven by the economy, efficiency policies, and petroleum product prices and does not depend significantly on the level of U.S. crude oil production. Looking at the composition of trade, crude oil exports tend to represent a larger share of combined crude and product exports in cases where crude oil exports are unrestricted. Also, in cases where the level of domestic crude production increases with the removal of crude oil export restrictions, total combined crude and product exports are higher than in parallel cases with current crude export restrictions in place.

Refiner margins (measured as the spread between crude input costs and wholesale product prices), which tend to increase as the Brent-WTI spread widens, would be lower without current restrictions on crude oil exports than with them in high-production cases where export restrictions lead to a widening Brent-WTI spread. If domestic crude oil production reaches a level where current restrictions on crude oil exports result in a need for significant additional processing capacity to convert domestic crude into petroleum products that can be exported, the discount of domestic crude prices compared with global crudes such as Brent will widen to encourage investment in such capacity, notwithstanding the risk of future changes in crude oil export policy or market conditions. For owners of existing refinery capacity, a wider Brent-WTI spread will provide higher margins as refined product prices continue to move with global crude prices. In high-production cases, the removal of export restrictions limits growth of the Brent-WTI spread (Table ES-1), limiting growth in refining margins. However, even with the removal of export restrictions, the projected Brent-WTI spread would still be higher than its average level in 2014. For upstream oil producer margins, the opposite prevails – in addition to an increase in production in cases where unrestricted crude oil exports result in higher domestic prices, production that would occur with or without a change in crude oil export policy is more profitable with domestic wellhead prices that are not held down by crude oil export restrictions.

Although unrestricted exports of U.S. crude oil would either leave global crude prices unchanged or result in a small price reduction compared to parallel cases that maintain current restrictions on crude oil exports, other factors affecting global supply and demand will largely determine whether global crude prices remain close to their current level, as in the Low Oil Price case, or rise along a path closer to the Reference case trajectory. While removing restrictions on U.S. crude oil exports either leaves global prices unchanged or lowers them modestly, global price drivers unrelated to U.S. crude oil export policy will affect growth in U.S. crude oil production and exports of crude oil and products whether or not current export restrictions are removed.

Caveats

The results of this study are sensitive to key assumptions used in the modeling as well as the structural features of EIA’s model. Differences between the results obtained in this study and other analyses that address the same subject may result from differences in models or assumptions.

Characterization of current crude oil export policies. As noted above, current policies restrict, but do not ban, crude oil exports, and they are also assumed to allow exports of API 50 and greater material that is processed through a distillation tower. The use of a more restrictive characterization of current policies, which some other studies have applied, would likely show crude oil export restrictions to be binding at lower domestic production volumes and show larger effects from their removal for cases in this analysis in which they already have an impact on domestic production and crude export volumes.

Ability to back out existing crude oil imports. To date, import substitution has been a key part of the response to increased domestic crude oil production (EIA "U.S. crude oil production growth helps reduce Gulf Coast imports," Today in Energy, June 22, 2015). Between 2011 and 2014, U.S. light crude imports (35 API or greater) decreased by 1.0 million b/d, while imports of medium crude (27 API up to 35 API) decreased by 0.8 million b/d. Heavy crude imports (below 27 API) remained relatively flat in 2011 and 2012, but they have increased since 2013. Consistent with recent experience, the analysis assumes that import substitution or import shifting (for example, reducing imports of medium crudes and increasing imports of heavy crude for blending with light domestic streams) continues to be an option. However, import substitution must remain economic to continue. For example, refiners would be unlikely to back out heavy crude imports needed to keep their coking units fully charged, particularly since suppliers of such crudes may not be able to find alternative markets, and may therefore discount their prices. More severe limits on continued import substitution, up to and including the assumption in some studies that it is nearly impossible to back out any remaining imports, would result in domestic processing capacity to become constrained at somewhat lower levels of domestic crude oil production than in this analysis.

Additions of domestic processing capacity. After increasing significantly in 2012, U.S. crude processing capacity has been rising more slowly over the past few years. Nevertheless, several splitter and refinery projects are currently underway. This report allows for additional expansion of domestic processing capacity in high production cases, although potential investors in such projects are assumed to require high and rapid return on their investment in new processing facilities, whose economic value could be adversely affected by future changes in crude oil export policy. More restrictive assumptions regarding barriers to incremental refining capacity investments, including an assumption in some studies that no new investment in U.S. processing capacity could occur given the risk of a subsequent change in crude oil export policy, could increase the challenge to increased domestic crude production under current crude export policies. The effects of more restrictive assumptions regarding investment in processing capacity would likely be most significant in cases that assume high resource availability (HOGR, HOGR/LP).

Global production response to incremental U.S. production. This study assumes a partial global offset to increases in U.S. crude oil production. A larger (e.g., full offset) or smaller (e.g., no offset) global production response would respectively increase or reduce the size of the projected increase in domestic crude prices and domestic production associated with the removal of export restrictions in the high resource (HOGR and HOGR/LP) cases, while respectively reducing or increasing the projected decline in crude and petroleum product prices at home and abroad.

Table ES1. Summary results for U.S. petroleum markets with (res) and without (unr) crude oil export restrictions across EIA cases in 2025
    2025
  History Reference case LP case HOGR case HOGR/LP case
Selected results 2013 2014 1q15 res unr dif res unr dif res unr dif res unr dif
Crude oil (million b/d)
Total domestic crude production 7.46 8.71 9.48 10.28 10.28 0.00 9.46 9.47 0.00 13.63 14.10 0.47 11.69 12.07 0.38
Net crude imports 7.60 6.99 6.84 6.23 6.22 (0.01) 6.56 6.57 0.01 4.22 2.03 (2.19) 4.83 4.19 (0.64)
    Crude imports 7.73 7.34 7.28 6.88 6.86 (0.02) 7.19 7.20 0.01 5.41 5.68 0.26 6.16 6.55 0.39
    Crude exports 0.13 0.35 0.45 0.65 0.64 (0.01) 0.63 0.63 0.00 1.20 3.64 2.45 1.33 2.36 1.03
Non-crude petroleum and other liquids supply (million b/d)
Net product imports (1.36) (1.95) (1.89) (3.33) (3.32) 0.01 (2.07) (2.08) (0.01) (5.40) (3.63) 1.78 (3.12) (2.88) 0.24
      Product imports 2.13 1.88 2.12 2.39 2.39 0.00 2.99 2.98 (0.01) 2.24 2.25 0.02 2.83 2.82 0.00
      Product exports 3.49 3.83 4.01 5.72 5.71 (0.01) 5.06 5.07 0.00 7.64 5.88 (1.76) 5.95 5.70 (0.24)
All other non-crude supply1 5.14 5.54 5.44 6.51 6.51 0.00 6.24 6.24 0.01 7.61 7.53 (0.07) 7.06 7.10 0.04
Total primary supply for domestic use2 18.83 19.30 19.87 19.69 19.70 0.00 20.19 20.19 0.00 20.05 20.04 (0.01) 20.46 20.48 0.02
Crude oil and petroleum product trade (million b/d)
Net crude oil and petroleum product imports 6.24 5.04 4.95 2.90 2.90 0.00 4.49 4.48 (0.01) (1.19) (1.60) (0.41) 1.71 1.31 (0.40)
       Crude oil and        petroleum        product imports 9.86 9.22 9.40 9.27 9.25 (0.02) 10.18 10.18 0.00 7.65 7.93 0.28 8.99 9.38 0.39
       Crude oil and        petroleum        product exports 3.62 4.18 4.45 6.37 6.35 (0.01) 5.69 5.70 0.00 8.84 9.53 0.69 7.28 8.06 0.79
Processing operations3
Total distillation capacity (million b/cd)4 17.82 17.92 17.97 19.25 19.25 0.00 19.25 19.25 0.00 20.15 19.25 (0.90) 19.36 19.25 (0.11)
Total distillation unit inputs (million b/d)5 15.72 16.15 15.78 16.51 16.50 0.00 16.03 16.04 0.01 17.84 16.13 (1.71) 16.52 16.26 (0.26)
Crude oil prices (2013 $/b)6
   Brent spot 108.56 97.22 53.45 90.40 90.23 (0.18) 63.01 63.01 0.00 81.39 80.47 (0.92) 56.31 55.78 (0.54)
   West Texas     Intermediate spot 97.98 91.60 48.07 84.32 84.15 (0.17) 57.50 57.47 (0.03) 66.39 72.26 5.87 42.33 47.65 5.32
   Brent-WTI spread 10.58 5.62 5.38 6.08 6.08 0.00 5.51 5.54 0.03 15.00 8.21 (6.79) 13.98 8.13 (5.85)
Average petroleum product prices (2013 $/gallon)6
   Motor gasoline (all    sectors)7 3.58 3.38 2.34 2.91 2.90 0.00 2.37 2.37 0.00 2.66 2.65 (0.01) 2.20 2.19 (0.01)
   Diesel  transportation    sector)8 3.92 3.76 2.89 3.46 3.46 0.00 2.78 2.78 0.00 3.18 3.17 0.00 2.53 2.52 (0.01)

Sources: U.S. Energy Information Administration, Petroleum Supply Monthly, Short-Term Energy Outlook, Refinery Capacity Report, and AEO2015 Reference, Low Oil Price, High Oil and Gas Resource, and High Oil and Gas Resource/Low Oil Price cases, with and without current crude oil export restrictions.
Note: Projections from National Energy Modeling System. Totals may not equal sum or difference of components due to independent rounding.
1All other non-crude supply includes refinery processing gain, product stock withdrawal, natural gas plant liquids, supply from renewable sources, liquids from gas, liquids from coal, and other supply.
2Historical values equal total petroleum product supplied (or U.S. petroleum product consumption) plus the average daily change in crude oil and petroleum product inventories.
3Includes both splitter and atmospheric distillation unit capacity and throughput.
4Equals total operable atmospheric crude oil distillation capacity as of January 1 of each calendar year.
5Historical volumes include unfinished oils, whereas projected volumes include only crude oil volumes.
6Historical prices calculated with historical values from the Short-Term Energy Outlook, adjusted to 2013 prices using the Consumer Price Index (all urban consumers).
7U.S. all grades retail price, including taxes.
8U.S. retail price, including taxes.

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Footnotes

1Requests from Congress include letters from Senators Murkowski and Landrieu (April 10, 2014) and Senators Cantwell and Wyden (February 3, 2014), which are provided in Appendix A. Questions on this matter have also been directed to Administrator Sieminski at several recent hearings.

2In addition, the Department of Commerce Bureau of Industry and Security is recently-reported to have approved one or more applications for the exchange of domestically produced light crude oil for heavy crude oil produced in Mexico (Reuters, "U.S. approves landmark crude oil export swaps with Mexico," August 14, 2015, http://www.reuters.com/article/2015/08/14/us-usa-oil-exports-exclusive-idUSKCN0QJ1RI20150814). This study does not consider this action or its impact on U.S. crude oil export and import volumes.