Crude Behavior: How Lifting the Oil Export Ban Reduces Gasoline Prices in the U.S.
Chuck Mason, University of Wyoming –
Prior to the “fracking” revolution, world oil production had been shifting toward heavier crudes. U.S. refiners accommodated the shift by investing in cracking facilities that could convert the heavier crudes to the lighter products most valued in the market, such as gasoline, jet fuel and diesel. Other refiners in the Western Hemisphere did not invest as heavily in cracking facilities, and their operations remained more dependent on working with lighter crude oils to yield light products.
The “fracking” revolution brought considerably more light crude oil onto the U.S. market and created excess supplies of it. The ban on U.S. exports of crude oil means that the excess supply of light crude oil stuck in the United States cannot be sent to refiners elsewhere in the Western Hemisphere, and the surfeit of light crude keeps the heavier crudes produced outside the United States from being refined in the United States.
Because the ban on U.S. exports of crude oil has created a situation in which light crude oil is bottlenecked in the Midwest, lifting the ban would cause the price of light crude oil in the Midwest to rise much closer to world prices. In addition, the increased supply of crude oil reaching the international market would put some downward pressure on international crude oil prices, assuming OPEC doesn’t respond with matching cutbacks in its output.
In addition, the improved efficiency of refinery operations and competitive pressure would slightly reduce what is known as the crack spread (the difference between prices for refined products and crude oil). A reduced crack spread would slightly boost the international demand for crude oil, which would put upward pressure on international crude oil prices. Whether international crude oil prices would rise or fall on net would depend on the relative increases in supply and demand.
We find that crude oil in the Midwest was substantially underpriced as of March 2014. If the ban on U.S. crude oil exports were lifted, more oil would be produced in the Midwest and the areas of Canada supplying the Midwest. Our estimate is that oil production in Canada and the Midwest would gradually increase by slightly more than 200,000 barrels per day, with a similar net increase in world oil production. At the same time, competitive pressures and the increased efficiency of Western Hemisphere refinery operations would boost world oil demand, which would push world oil prices upward. We estimate the net effect on the world price of crude oil by about $0.01 per barrel decrease, with an increase in the Midwest price of crude oil by between $10 and $15 per barrel.
With the increased efficiency of Western Hemisphere refinery operations that would come from lifting the ban, U.S. prices for refined products will be reduced. Given our projections for the change in crude oil prices and increased efficiency in refinery operations, we estimate U.S. gasoline prices would be reduced by 2.8 to 6.9 cents per gallon.