US crude oil production is booming, and controversy over possibly exporting some of this abundance has quickly heated up in early 2014. Most recently, Alaska’s Lisa Murkowski, the top-ranking Republican on the Senate Energy Committee, spoke out on Jan. 7 in favor of easing US restrictions on oil exports, which were largely enacted in the 1970s when domestic energy was scarce and lines at the gasoline pump were long. The topic of crude exports is polarizing politically and, given the recent lack of collaboration in Washington, it’s poised to be a recurring headline for some time.
If the restrictions are lifted, and the US is able to widely sell its crude oil overseas, we would foresee a positive effect on exploration and production (E&P) companies and service and supply companies — and a negative effect on refiners. Below, we explore why.
Not all oil is the same
To the casual observer, talk about US oil exports may seem premature. While recent technological advances have boosted production, we still produced around 7 million barrels a day less than we consumed in 2012, with imports making up the difference. The issue is that the surge in oil growth is resulting in an oversupply of the type of crude that can be processed by domestic refineries.
US oil production growth is being driven by light, sweet crude. Back in the mid-2000s, when US oil production was at a low point and the Canadian tar sands were the “next big thing,” North American refiners overhauled facilities to refine the heavy, sour crudes that come from the tar sands. In fact, five major refinery projects since late 2011 have reduced the nation’s light oil processing capacity by 500,000 barrels per day, while increasing heavy oil processing capacity by 600,000 barrels per day.
In the absence of a U-turn by the refiners, in which they invest in projects to increase light crude processing capacity, exports offer a clear avenue for monetizing the US’s oil production. The issue, of course, is that current law forbids exports except in very limited circumstances.
The exception to the rules
A network of laws exerts controls on US oil exports. Within this structure, the Bureau of Industry & Security (BIS) at the US Department of Commerce has the authority to grant one-year crude oil export licenses in certain cases, including oil destined for use in Canada, oil coming from certain fields in Alaska, and situations in which applicants can demonstrate the oil they would export has no viable market in the US. Some believe that the last point on this list could be used to justify exports.
Cause and effect
If the US stays on its current path of booming production, limited refining capacity additions for light, sweet crude and no export strategy, price differentials will continue to widen between Brent crude, which comes from the UK’s North Sea, and crude linked to US prices, such as West Texas Intermediate (WTI). That would create a low input cost for the refiners and a high selling price for their refined products. That would allow refiners to generate higher profit per barrel of refined product relative to their historical trends.
On the other hand, if the US modifies refining capacity to address the situation — or if US exports are allowed — the price of US oil could rise, meaning higher input costs for refiners, but also higher cash flows for E&P companies and higher capital expenditures upstream, which could benefit service and supply companies.
For more information on the US energy picture, and associated investment opportunities, watch the most recent edition of the Invesco Interactive webcast series, or read our white paper on the prospects for US energy independence.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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