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Nostalgia for the 1970s might include Outlaw Country music or Disco, but it does not extend to the OPEC oil embargo. No one reminisces fondly about sitting in long lines at gas stations, driving around on a late Saturday afternoon, in the hope of topping off the tank before Sunday, or setting the thermostat at 62°F.
Mostly, those days are long forgotten, but one lingering effect is still with us today. The U.S. oil industry is still restricted by 1975 legislation that prevents the export of crude oil, anywhere but Canada. Strictly in market terms, the ban never made all that much sense. It’s not like there was huge pressure to export, when there was a robust demand at home, but it made people feel better, and for many years the effect on the market was small. Also, there was a loophole large enough to drive a tanker truck through—refined petroleum products and gas were exempt from the ban.
Light and tight. As crude oil imports rose over the years, much of it was heavy, sour crude from Mexico, Venezuela and, increasingly, Canada. Refiners sank billions into building the refineries and infrastructure to process this heavy stuff. The revolution in light, tight oil (LTO) caught the refining industry off guard. LTO production, from shale and other tight-oil sources, has surged more than anybody ever thought it would, but the U.S. refining industry is in an enormous struggle to absorb the lighter, sweeter product. Given the current setup, it makes more economic sense to import heavy oil than to do the massive retooling that it would take to process the LTO, which is why the U.S. still imports about 40% of its crude oil.
Independent producers would like to export the light oil overseas, where they can get higher prices. It is not as critical an issue to the major oil companies, because of the above-mentioned loophole—they can export the oil as refined products. Almost 4 million bpd of petroleum products are exported, and we’re not always talking heavily refined products. Some of what is being called “refined” is minimally
processed, at best, just a step or two removed from light crude.
One of the biggest proponents of lifting the oil-export ban is Harold Hamm, CEO of Continental Resources. At a hearing of the Senate Energy and Natural Resources Committee, held at the end of January, Hamm called for an end to the export ban. “These outdated crude export restrictions have prevented domestic oil exploration and production from achieving its full potential, slowing potential job growth, restricting supply and negatively affecting global refined product balances,” he said.
He disputed the notion that lifting the ban would lead to higher fuel prices. “The opposite is actually true,” he said. Trade restrictions on a single part of the energy business, domestic crude, means the government is subsidizing some U.S. refiners by giving them an oil supply at well below market prices, and allows them to sell petroleum products at higher prices in world markets, he explained.
John Felmy, chief economist for the American Petroleum Institute, agrees. He told the Houston Chronicle that it was not the oil embargo that led to long gas lines. “It was the price controls that did that. All the embargo did was swirl the oil around the world. We didn’t buy from OPEC, but we bought from somebody else, and they bought from OPEC.”
Exporting American crude oil may even have the effect of lowering the price of oil worldwide, disrupting Saudi Arabia’s market share and its ability to set prices, if only the producers, particularly independent producers, were allowed to put it on world markets.
Stop Keystone XL? No, not really. But perfectly intelligent people have argued with me about the imperative of blocking construction on the pipeline, which is designed to bring bitumen diluted in NGLs and other lighter oils (“dilbit”) from Alberta, Canada, to Gulf Coast refineries. Given the current economics of oil, the dilbit is going to find its way to the refineries one way or another (rail, trucks and barges come to mind). A pipeline is a far safer, more efficient means of doing that. But Keystone XL has become a political symbol, acquiring a perceived importance far beyond its actual utility.
The real issue is not the pipeline, but the so-called “tar sands,” and the heavy oil upgraded therefrom. Suppose that, for whatever reason, you really want to stop this flow of gooey bitumen from Canada to the U.S., what is the most effective way to achieve that? Chain yourself to trees? (Excellent, for short periods of time.) Exert political pressure and/or pass legislation? (Maybe, but not necessarily reliable in the long term.)
Lower the price of oil? However you accomplished that—reducing demand or increasing supplies of cheap alternatives—less expensive crude oil would quickly knock the economics of the bitumen down below the break-even point. Unlike the heavy oil from places like Venezuela and Mexico, Alberta’s bitumen is an additional, expensive step removed from refining—it also requires upgraders to turn it into refinable crude. Currently, there is excess upgrading capacity in the Lower 48. The Alberta government reportedly has the ambitious target of upgrading two-thirds of its bitumen production by 2020. Accomplishing this will involve the construction of four new upgraders for about $10 billion, apiece (and will reportedly require more additional labor than the province currently possesses). The project involves an enormous investment, and assumes that oil prices will stay high for a long time.
If the average world price of oil were to drop to, say, $50/bbl because of cheap Saudi production or abundant LTO or whatever reason, then the pipelines would have nothing profitable to move. The dilbit might continue to flow, but the margins would be very, very tight. I’m not saying it would be a good thing, just that it could happen. Oil prices have fallen in the past, as I recall. 
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