TALK IS CHEAP, SO IS OIL: WHERE DO WE GO NOW THAT WE'VE LIFTED THE U.S. CRUDE OIL EXPORT BAN.

Author:Kao, Angela
 
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  1. INTRODUCTION II. BACKGROUND A. A Brief History of U.S. Oil B. The Status Quo of the U.S. Oil and Gas Industry III. ANALYSIS A. The Supply Glut B. Weak Demand C. Why Should We Care? D. Time to Negotiate IV. CONCLUSION "By fighting you never get enough, but by yielding you get more than you expected." (1)

  2. INTRODUCTION

    "Drill, baby, drill!" the chant of the Republican Party since 2008, is used to express both Republican and public sentiment for increased oil and gas production within the United States. (2) But with increased oil and gas production comes a glut of excess supply. (3) On August 14, 2015, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) decided to allow oil swaps between the United States and Mexico. (4) This landmark decision has sparked discussion about lifting the U.S. crude oil export ban as a solution to the excess supply of light, sweet crude produced domestically. (5) Supporters of lifting the crude oil export ban argue that the policy is antiquated, creates detrimental consequences to both oil producers and consumers, and creates inefficiencies to U.S. refining capacity. (6) Conversely, opponents of lifting the crude oil export ban argue that lifting the ban would hurt U.S. energy security; increase prices of gasoline, hurting consumers; potentially increase the total level of greenhouse gas emissions; and hurt U.S. refineries who benefit from low crude oil prices. (7)

    On December 18, 2015, after much debate, Congress passed and President Barack Obama signed into law a $1.15 trillion spending bill that included provisions to lift the decades-old U.S. crude oil export ban. (8) This Comment attempts three things. First, it will briefly discuss the legislative history of the U.S. crude oil export ban and its reversal. Then, it will discuss the current world market conditions of oil and how, despite a complete policy reversal of the crude oil export ban, U.S. crude oil exports will not be a likely reality anytime soon. Lastly, it will argue that while lifting the U.S. crude oil export ban is a step in the right direction, the United States must attempt to coordinate with other oil-producing countries in order for true global energy stability to be realized.

  3. BACKGROUND

    In 1859, Edwin Drake drilled the first commercially producing oil well known as the "Drake Well" in Titusville, Pennsylvania, just two years prior to the start of the American Civil War. (9) The modern petroleum industry, however, did not launch until the infamous Spindletop well was drilled in Beaumont, Texas in 1901; this spurred innovation of new oilfield technologies that changed both the American transportation and oil and gas industries forever. (10) This began the American addiction to "black gold." (11)

    1. A Brief History of U.S. Oil

      In the 1940s, U.S. oil consumption surpassed oil production for the first time and the United States began to import oil from other nations in order to satisfy its appetite for black gold. (12) Most U.S. oil imports arrived from the Middle East. (13) Later, Middle Eastern oil-rich nations formed the Organization of the Petroleum Exporting Countries (OPEC) in order to coordinate and strengthen their energy industries. (14)

      The symbiotic relationship between the United States and its trading partners in OPEC continued until 1973, when the United States declared support of Israel in its war with Egypt and Syria. (15) Due to their political differences, OPEC cut off its supplies of crude oil to the United States in an event known as the Arab Oil Embargo. (16) Simultaneously, OPEC announced that its oil producing nations would cut back on oil production, thus decreasing the existing global supply and raising the posted price of oil." American consumers immediately felt the effect of the oil embargo. Long lines formed at gas stations across America due to the fear of a gasoline shortage. (18) This in turn caused prices of gasoline to skyrocket even more, contributing to a major economic downturn in the United States. (19)

      In response to OPEC's actions and the general sentiment that the United States was too dependent on Middle Eastern oil, the U.S. Congress passed the Energy Policy and Conservation Act (EPCA) in 1975. (20) It prohibited the exportation of crude oil and natural gas exports, with some exceptions, in order to boost U.S. energy security. (21) Recently, however, the laws and regulations surrounding the exportation of natural resources were altered to permit the unlimited exportation of petroleum products and the exportation of crude oil products so long as these products comply with the applicable licensing requirements. (22)

      Canada, the United States' northern neighbor, enjoys freely granted licenses as well as crude oil from the Alaskan North Slope, "re-exports of foreign-sourced crude, and certain exports from California." (23) In fact, Canada is the primary destination for U.S. crude oil exports, with imports that exceeded 570,000 barrels per day (bbl/d) in May 2015--a record high. (24)

      On August 14, 2015, the BIS announced its approval of licenses for limited exchanges of crude oil between the United States and Mexico to allow U.S. producers to swap their lighter, sweeter crude oil for Mexico's heavier-grade crude. (25) In this decision, the BIS cautioned that approval of these licenses did not depart from existing law. (26) Rather, BIS approval of U.S. and Mexico oil swaps "is based on language in the 1975 Energy Policy [and] Conservation Act." (27) This Act "directs [the Department of Commerce] to consider historical trade relations with Canada and Mexico when limiting crude exports." (28) Furthermore, in its application for U.S. crude oil swaps, "Mexican state oil company Pemex [stated that] it wanted to exchange about 100,000 barrels a day--about 1 percent of United States output." (29) Hence, the exchanges are unlikely to make a significant dent in the United States' domestic supply of light, sweet crude. Nonetheless, debate regarding the symbolic potential of the BIS's August 2015 decision exploded throughout the nation, culminating in a significant policy reversal by the United States on its crude oil export ban. (30)

    2. The Status Quo of the U.S. Oil and Gas Industry

      Technologies such as hydraulic fracturing and horizontal drilling are the primary reason for the surge in oil and gas production in the United States. (31) Through these new technologies, the United States has surpassed Saudi Arabia as the top oil and natural gas producer. (32)

      1. Lack of Refining Capacity to Process Light, Sweet Crude

        The U.S. Energy Information Administration (EIA) estimated that U.S. crude oil production would average about 9.3 million bbl/d in 2015 and 9.5 million bbl/d in 2016--a stark increase from the 5.6 million bbl/d produced in 2011. (33) A majority of the increased production is due to the fracking and drilling of light tight crude oil from low permeability, or tight resource formations such as the Bakken, Permian Basin, and Eagle Ford. (34)

        Yet, the increase in supply of domestically produced crude oil has not prevented the continued import of foreign crude oil. (35) Despite excess supply of crude oil, U.S. imports of foreign crude oil remain high. (36) This is primarily due to the fact that most refineries in the United States are configured to process heavier types of oil like those produced in Canada or Venezuela. (37) The oil drilled and produced by the United States is typically a light, sweet crude. (38)

        The difference between the two crudes is significant, particularly in terms of market value. (39) Light, sweet crude is easy and cheap to process into other petroleum products because it has low density and sulfur contents and thus has a higher price. (40) In contrast, heavy, sour crudes denote high density and high sulfur content and, as a result, are more difficult to process into gasoline and diesel fuel; hence, its lower price. (41)

        One should not, however, discount the value of heavy, sour crude. Prior to the use and development of fracking technology, oil production throughout the world was geared toward the extraction and development of heavy crudes. (42) U.S. refineries invested in "cracking" facilities to convert heavier crudes into lighter products like gasoline, jet fuel, and diesel--some of the most valued crude products on the market. (43) Currently, U.S. refineries process light, sweet crude that is domestically produced by blending it with heavier, sour crude oils because there is limited ability to process light, sweet crude. (44) Despite the fact that the United States is now experiencing record oil and gas production, the country's refineries are unable to efficiently process the light, sweet crude that is being brought to surface.

        In comparison, most refineries outside of the United States are technologically equipped to refine light, sweet crude. (45) As such, it would be both environmentally and economically efficient to allow the United States to export its light, sweet crude to foreign refineries for processing. In exchange, U.S. refiners would be able to continue to import heavy, sour crude to refine in its "cracking" facilities. Until recently, the EPCA prohibited U.S. producers from unloading their excess supply of crude oil by selling it to other nations (aside from countries such as Canada that hold a license from the U.S. Department of Commerce). (46) This all changed on December 18, 2015. (47)

      2. Lifting the Crude Oil Export Ban

        The road to lifting the export ban put in place by the EPCA has been strenuous. Those in favor of lifting the crude oil export ban argued that it is antiquated and should be lifted because of the following circumstances: 1) the excess supply of light, sweet crude in the United States; 2) the lack of U.S. refining capabilities to efficiently process light, sweet crude; and 3) changing global conditions in the Middle East. (48) Arguments against lifting the crude oil export ban focus instead on how doing so could: 1) hurt U.S....

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