Wednesday, February 27, 2013

Speaking of Distortions...

In my new Cato paper, I discuss the distortions and economic loss caused by current US export restrictions on natural gas and crude oil - one of the big reasons why fundamental reform of our export licensing systems is desperately needed.  Most of the current policy debate has focused on the natural gas market, but the economic distortions are just as prevalent for crude oil.  Case in point: this new Bloomberg article (emphasis mine):
A glut of shale oil in fields from Texas to North Dakota is forcing producers to find ways around the U.S.’s three-decade-old ban on crude exports in order to seek higher prices in foreign markets.

Kinder Morgan Energy Partners LP (KMP) is among companies setting up mini-refineries to process certain grades of crude just enough to qualify them as refined fuels, which are legal to export.

The industry’s best hope is ultra-light oil, which is so abundant in shale rock that it has flooded the Gulf Coast and traded for a record discount to global benchmark Brent crude last quarter. Potential revenue for exports is $40 billion a year based on global prices, or about $9.7 billion more than what the same oil fetches in the U.S....

Because there are not enough buyers where it’s pumped, the easy-to-refine crude has become the vanguard of an effort by the oil industry to get Congress to further weaken U.S. limits on most crude oil and natural gas exports that have been in place since the early 20th century....

Valero Energy Corp. (VLO), Kinder Morgan and Marathon Petroleum Corp. (MPC) are spending $850 million to build mini-refineries or upgrade existing plants to process the ultra-light crude. The soonest to come online is Kinder’s, set for the first quarter of 2014.

The plants will do little more than heat oil and condensate to a boiling point and distill them into separate fluids. Prices for condensate average about $4.57 less per barrel than heavier U.S. crude, crimping producer profits by as much as $1.7 billion a year, according to calculations based on RBN Energy data....

The units, called splitters, may be able to process as much as 300,000 barrels of crude a day, Luaces said. The mini- refineries being built “split” the condensate into naphtha, a feedstock for making plastic and other chemicals, and kerosene, which can be exported to markets in Asia and Latin America, he said.

Those chemically simpler products may not fetch as much as finished gasoline or diesel fuel, but the lower cost of running the splitter makes it attractive to sell them on international markets, said Judith Dwarkin, chief economist at ITG Investment Research Inc. in Calgary.

“It’s a cheap way around the export limitation,” Dwarkin said in an interview.

There are no limits on refined products. U.S. fuel exports reached an all-time high last year of an average 2.6 million barrels a day, according to Energy Department data. U.S. fuel imports from OPEC have fallen 37 percent, and the country’s petroleum deficit, the difference between the cost of its hydrocarbon imports and exports, fell to $18.7 billion, the lowest since 2004, according to data compiled by Bloomberg.

“Some molecules are painted with a no export sign,” said Braziel, of RBN. “Other molecules are painted with the OK to export sign, and there doesn’t seem to be any rhyme or reason as to why some molecules are OK and some aren’t.”
So because of US crude oil export restrictions, domestic oil producers are spending billions of dollars to construct mini-refineries that produce a slightly-refined product that may be freely exported but sells at a discount to crude on the international market.  Meanwhile, simply getting the US government out of the way and permitting unlimited crude oil exports would generate $40 billion per year for US energy producers and their workers.

That seems... inefficient.

So isn't it time we established some rhyme and reason to the system?

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