December 11, 2015
More than a year ago, it was on the very same blog that I said that the US export ban would be lifted since maintaining it was not economically viable, and doing so would be beneficial to the economies of both the US and Europe. What would change then if the US were to start exporting its oil?
- The immediate effect of ending the oil export ban would be a reduction in the price difference between WTI and Brent crudes resulting mainly from an increase in oil prices on the American market (following the easing of pressure associated with the oversupply of light crudes). The price of WTI may even surpass that of Brent as financial markets have a tendency to overreact. However, over a longer term (four to six quarters), the price gap between American and European oil should return to current levels, i.e. some four US dollars per barrel.
- A higher price of crude on the American market (compared to a scenario where the export ban is sustained) would make oil production a more profitable activity. Production companies would not be forced to sell their oil at a discount, which contributes to the uncertainty of oil prices. The production of oil in the US and its global supply would be higher than if the ban were to remain in force.
- Additional volumes of shale oil and condensates produced in the US would be exported. The technological capacities of American refineries to process light crudes are currently fully utilised and will remain to be so for several years to come. Given the uncertainty as to whether the ban on exporting oil will be sustained or not, and the anticipated expansion of the refining potential in emerging economies, refineries are unwilling to invest in reconversion capacities.
- Apart from Canada, which already imports American oil, the US is the most likely to export its crude to Europe, which remains a net importer of light crudes, and American shale oil is consistent with the configuration of many European refineries. What is more, the costs of transporting oil from the Gulf of Mexico to Europe are relatively low.
- The additional supply of American oil would ease oil price growth on non-US markets, including in Europe. However, the scale of this effect is difficult to predict, since it would depend on both global economic growth and the demand for crude oil (a net effect of low prices is an increase in global demand), as well as with decisions of other producers (OPEC, Russia, South America, Africa).
From the European perspective, how the price of the Brent crude changes (which is hard to predict) is less important than the WTI/Brent differential, which is bound to shrink compared to levels seen over the past few years. The increase in WTI prices compared to Brent would be the most beneficial to European refineries as the artificially-enhanced competitiveness of American refineries would return to normal levels.adamczyzewski