The US To Become The Largest Oil Exporter by 2017? Not So Fast

A fascinating report from the IEA states that the United States will be the largest exporter of oil by 2017, surpassing Saudi Arabia. We hope this news is true, since it would benefit the economy and decrease the risk of war in many ways. However, we are pessimists by nature and believe that it is impossible to forecast the future. Additionally, politics is always an issue when it comes to oil production. If there was a large unfortunate oil spill, this could change public opinion to reduce oil dependence and make the goal of 2017 less likely.

The US To Become The Largest Oil Exporter by 2017? Not So Fast

Raymond James is out with a report today, noting some of the red tape involved with exporting crude oil. It is a great summary of the regulations, whether one agrees or disagrees with them, it is worth a read.  Raymond James asks the following and gives an answer, ‘thinking about exporting crude? Read this first… and then hire a lawyer.’ They note:

It is not often that our energy research work involves century-old legislation, but that is indeed the case here. Soon after the end of the World War I, and right at the start of the jazz era, the Minerals Leasing Act of 1920 created a federal regulatory framework for exporting crude that, with some tweaks, remains to this day. The Department of Commerce’s Bureau of Industry and Security (BIS) is the lead agency. The basic premise is that all U.S. crude exports require approval. There are seven specific categories under which BIS permits are normally given without much fuss. To be clear, most of these are not too relevant in practical terms – again, only the Canadian exception has been regularly used over the past decade – but they are all available in theory.

Here are some of the regulations that are related to oil exports as listed by Raymond James:

• Exports to Canada (except that crude from the Trans-Alaska Pipeline System is subject to restrictions)
• Exports from Alaska’s Cook Inlet (provided that the crude is not transported by a pipeline)
• Exports in connection with refining or exchange of crude from the Strategic Petroleum Reserve
• Exports of heavy California crude up to 25 Mbpd (must be 20 degrees API or lower)
• Exports of foreign origin crude (in other words, re-exports)
• Exports under international agreements
• Exports consistent with findings made by the president under several statutes

In all other cases, applications to export crude are made by the BIS on a case-by-case basis, based on a test of what’s in the national interest, using the following criteria.

• Will the exports result in imports of equal or better quality oil or petroleum products?
• Will the exports be conducted under contracts that can be ended if U.S. oil supplies are threatened?
• Can the applicant demonstrate that the crude cannot be reasonably marketed in the U.S.?
• Do the exports involve temporary exports or exchanges?

Additionally, the president has large discretion over certain measures. And  utility and manufacturing trade groups are actively lobbying against U.S. liquefied natural gas (LNG) export permits because, of course, any such exports would  incrementally raise domestic gas prices. Some politicians (from both parties) are receptive to these arguments in the context of economic nationalism – the same political opposition that has kept China from making large oil and gas resource acquisitions in the U.S. ever since CNOOC Limited (NYSE:CEO) (HKG:0883) was blocked from buying Unocal in 2005.

Raymond james notes that as applications for crude export permits become more common, they would anticipate analogous opposition to emerge, which means that the newly reelected Obama administration will probably suffer political backlash if it signs off on increasing exports of U.S. crude. (You can already imagine the future campaign ads: “As American families struggle with $4/gal gasoline, Washington bureaucrats sell American oil to foreign countries. Elect [fill in the blank], and I will put a stop to it.”) The irony here is that U.S. consumers pay a global price for gasoline, and exporting U.S. “landlocked” light sweet crude would actually help push down the global price of gasoline.

Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B), BP Plc (NYSE:BP) (LON:BP) and Vitol are among the companies that have applied for crude export licenses. Despite the election-year politics, BP Plc (NYSE:BP) (LON:BP) has received a license, though apparently it hasn’t shipped any exports yet. Again, as crude continues to build up in the Gulf Coast into 2013 and beyond, other big oil market players (producers as well as trading firms like Vitol) will seek permits.

The U.S. will remain a net importer of crude oil, at least through the end of the decade, so OPEC won’t be sending membership forms here just yet.