Economists, U.S. Refineries Defend Oil Export Ban

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By Llewellyn Hinkes-Jones

Oct. 27 — Since the House voted to remove the ban on oil exports earlier this month, economists and domestic oil refineries have staunchly defended the ban, claiming there would be a “cascade of detrimental impacts” to the U.S. economy if the ban were lifted.

According to Jay Hauck, the executive director of Consumers and Refiners United for Domestic Energy (CRUDE) which represents domestic refineries like Monroe Energy LLC and PBF Energy Inc., “East Coast refineries would be the worst hit because of competition from Northwest Europe.”

Additionally, Bill Day, Vice President Communications for Valero Energy maintained that “the current system in place—where certain exports are allowed with a license from Commerce Department—is fine and there's no need to change it.”

Robert Scott, an economist with the Economic Policy Institute, insisted that “most of the positives are for the oil industry; the negatives are shouldered by the rest of the country.” Those negatives include a higher price paid for oil and petrochemical products that will burden domestic manufacturing and reduce demand for U.S. goods.

The president has threatened to veto the bill, but oil industry executives remain optimistic that they can get the administration's signature (See previous story, 10/20/15).

Producers Cite $30 Billion in Losses

Oil producers claim that the restriction on exporting crude forces them to pay higher refining costs to domestic producers, leading to $30 billion in lost revenue. ConocoPhilips Chief Executive Officer Ryan Lance called removal of the oil export ban “No. 1 on my wish list.” Removing the ban would allow producers to sell crude to overseas refineries at a higher cost. Reports put out by the Brookings Institution, IHS, and Columbia University point to growth in jobs and lower gasoline prices if the export ban is lifted, but other economists have sharply disagreed.

According to Skip York, a vice president with the intelligence firm Wood Mackenzie, there will be no material impact on gas prices. “Currently, the differential between WTI and Brent crude is so narrow that removing the ban wouldn't change much.” Other theories that removing the ban would help drive down the price of gasoline are inaccurate, he said, since “increasing exports doesn't lead to more demand and won't significantly change the global supply.”

Charles Ebinger, a senior fellow with the Brookings Institution and co-author of the Brookings report supporting removal of the export ban, admitted that “the paper was written before the current glut in oil prices.” With global oil prices as low as they are, the conclusion of the paper was not as significant and “the economic impact [of removing the ban] would be minimal.”

Alan Stevens, president of Stancil & Co. who authored a report on crude oil pricing, also believes that lifting the ban would incur higher, not lower, gas prices to consumers of about 8 cents per gallon as well as higher petrochemical prices, and higher product prices because WTI (domestic) crude oil prices would rise to match the Brent (international) price.

Refinery Costs

According to Stevens, costs for domestic refineries will increase from higher feedstock costs and newfound competition from foreign producers. “Throughput will drop and the U.S. will lose millions of barrels in exports. Profitability will drop, smaller refineries will shut down, and there will be a greater dependence on foreign oil.”

The Brookings report and the Columbia report also warned about a lack of refining capacity for the light crude coming out of the Bakken oil deposits, because “most U.S. refineries are designed to process heavier crude oil from the Middle East, Venezuela or Mexico.”

Both Hauck and Stevens insisted that the capacity for light crude refining has been there for some time. “There's an upper limit [to U.S. refining capacity], but we're not close to it,” Hauck said.

A recent survey put out by the American Fuel & Petrochemical Manufacturers (AFPM), which represents petrochemical companies like BP PLC, CITGO Petroleum Corp., and ConocoPhilips, calculated that current domestic refining capacity was sufficient to handle increased production of light oil from the Bakken. AFPM supports lifting the ban but not in exchange for renewable energy credits, as has been proposed by some legislators.

CBO Rating Positive

A Congressional Budget Office estimate gave the House bill a positive rating, saying that it would “reduce net direct spending by $1.4 billion over the 2016-2025” period. But according to Hauck, “CBO failed to take the larger economic effects caused by unrestricted crude exports into account.” The CBO report does not include the economic effect on domestic refineries, increased gas and petrochemical prices, or increased trade deficit. A study by the U.S. Energy Information Administration put a rough calculation of economic loss to the country at $22.7 billion by the year 2025.

The Stancil report also calculates a dramatic reduction or elimination of the current trade surplus without the export ban. Currently, the U.S. is running a slight trade surplus, mainly as a result of increased domestic oil production in the Bakken region and increased refined oil exports. Because of declining domestic manufacturing, the trade deficit excluding oil is at a record high. While lifting the ban would “almost certainly lead to more jobs in oil production,” as claimed by York, those gains may be offset by potential losses in the domestic oil refining industry and oil shipping.

“The revenue for domestic refineries would stay the same, but their costs would go up because of the higher wellhead price for oil. One-third of their margins will disappear unless they can mitigate their losses with alternative sources of crude.”

Jones Act Costs

Domestic refining costs are also kept higher by the Jones Act, which limits shipping between U.S. ports to more expensive boats that are made in the U.S., insured in the U.S., crewed by Americans, and fly the U.S. flag. Such higher costs for shipping also would eat away at the margins of domestic refiners versus their European and international competition, or be taken out of the domestic shipping industry, if the ban were to be lifted.

In total, York believes that a significant portion of the net margin of U.S. industries would move overseas. “There will be a shift in production to international manufacturers that will affect industries all the way down the value chain.”

Numerous East coast refineries have been struggling financially over the past few years. Both Sunoco and ConocoPhilips were set to close down some of their Philadelphia area refineries. Those refineries supplied about 20 percent to 30 percent of diesel and heating oil for the Philadelphia area in 2012 and provided an estimated 36,000 jobs and $560 million in income for the region.

Delta Air Lines Inc. eventually purchased ConcoPhilips’ Trainer, Pa., facility through its subsidiary, Monroe Energy, as a source for jet fuel, and another facility was bought by Philadelphia Energy Solutions LLC.

Philadelphia Energy Solutions, which runs the largest crude oil refinery on the East Coast, halted plans for an initial public offering due to “unfavorable market conditions” immediately after the bill to lift the export ban was announced.

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at ljones@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com