Oil Supply Surge Brings Calls to Ease U.S. Export Ban

U.S. oil production is nearing a record, stoking calls to eliminate 1970s-era limits on petroleum exports as analysts warn that refineries could be overwhelmed as early as July.

Aided by new drilling techniques, U.S. production will grow to 9.5 million barrels a day in 2016, close to a record, according to the U.S. Energy Information Administration’s Annual Energy Outlook that was released yesterday.

That surge has prompted an unusual assortment of policymakers -- and the industry -- to suggest it’s time to reassess the restrictions on crude-oil exports, something opponents say could lead to higher prices at home. U.S. Energy Secretary Ernest Moniz says Congress should review the restrictions. Senator Lisa Murkowski, a Republican from the oil-producing state of Alaska, plans to do that in a report next month, said Robert Dillon, her spokesman.

“The tough part of this is convincing Americans that exporting crude oil developed in the United States helps keep the global price down and ultimately helps consumers,” said Michael McKenna, a Republican strategist and president of MWR Strategies Inc., a Midlothian, Virginia-based lobbying firm.

The U.S. is meeting 86 percent of its own energy needs, the most since 1986, Energy Department data show. It will overtake Russia and Saudi Arabia as the world’s largest oil producer by 2015, the Paris-based International Energy Agency estimates.

Refinery Limits

A surplus of crude could overwhelm Gulf Coast and Canadian refineries that weren’t built for the type of oil now in abundance from new fields in North Dakota and Texas, forcing the issue, McKenna said.

“We’re going to have two choices, really -- export production or shut-in production,” McKenna said. “That’s an ugly choice.”

Related: North America to Drown in Oil as Mexico Ends Monopoly

Any attempt to ship more oil overseas will trigger public concerns about higher prices at home, McKenna said.

In a letter yesterday to President Barack Obama, Senator Robert Menendez, a New Jersey Democrat, said easing export limits “might be a win for Big Oil, but it would hurt American consumers.”

U.S. oil production grew 18 percent to a 25-year high in the past 12 months, according to the EIA. Most of the growth is in lighter grades extracted by horizontal drilling and hydraulic fracturing, or fracking, from shale-rock formations in Texas and North Dakota.

1975 Law

Domestic light oil is already replacing imports. Refiners on the Gulf Coast and East Coast imported 1.31 million barrels a day of light oil in August, compared with 1.99 million a year earlier and 3.13 million in August 2005, according to government data compiled by Citigroup Inc.

While exporting crude oil from the U.S. is mostly banned under a 1975 law, the Commerce Department can issue licenses for exceptions, according to the Congressional Research Service. Exports rose 57 percent to 105,000 barrels a day in the first eight months compared with a year earlier, almost all going to Canada, according to the Energy Department. The U.S. uses about 15.6 million barrels a day.

The restrictions may be outdated, Moniz said last week at an oil conference in New York. Limits were imposed after the Organization of Petroleum Exporting Countries embargoed sales to the U.S. in 1973-1974, which triggered shortages that pushed up prices and led to long lines at gas stations.

‘New Analysis’

“There are lot of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that looks nothing like the 1970s,” he said.

The American Petroleum Institute, which represents the U.S. oil and gas industry in Washington, is developing legal challenges to export restrictions. These include “highlighting potential violations of World Trade Organization rules,” according to a June 12 planning document obtained by Bloomberg.

“It’s a debate we have to have,” John Felmy, the organization’s chief economist, said in an interview last month.

The industry’s push to export will face resistance from members of Congress concerned that gasoline prices would rise.

“Big Oil’s push for increased domestic drilling has nothing to do with increasing our nation’s energy security, or else the industry wouldn’t be seeking to export U.S. crude oil abroad,” Senator Edward Markey, a Massachusetts Democrat, said in a statement. “This oil should be kept here in America, to benefit our consumers and to reduce our dependence on imports from the Middle East.”

U.S. refineries invested more than $100 billion in the past two decades on upgrades to handle heavy crudes from Mexico, Venezuela and the Middle East, according to Michael Wojciechowski, a Houston-based refining analyst at Wood Mackenzie, an industry research and consulting company.

Fuel Exports

Once refined, oil may be exported as fuels, which aren’t restricted. The U.S. became a net exporter of petroleum products in June 2011 and shipped a record 3.37 million barrels a day for three weeks in October, Energy Department data show.

While U.S. refineries can process about 18 million barrels a day, they may run out of room for the type of oil coming from domestic wells, according to Robin West, senior adviser to the Washington-based Center for Strategic and International Studies. West updated his June prediction that production would outstrip the capacity of domestic refiners within a couple of years.

“If anything, its happening sooner,” West said in an interview. “This is becoming an urgent issue.”

Others aren’t so sure. Production forecasts may fall short of expectations. Output from shale wells declines by 60 percent to 70 percent in the first year, compared with traditional wells that take two years for their production to fall by 50 percent, according to Drillinginfo, which tracks output. For production to extend gains, drillers have to add new wells and improve productivity.

U.S. Representative Kevin Cramer, a Republican from North Dakota, said refining oil creates more value and more jobs than loading crude onto a tanker for sale overseas.

“If we wanted to look at a policy that encouraged more refining, I’d consider that,” Cramer said in an interview. “You have to start these discussions someplace. Whatever happens, it’s not going to be a fast fix.”

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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