IHS study recommends lifting export restrictions on U.S. crude

Petrol being pumped into a car.
Source: DollarPhotoClub

Lifting the 1970’s-era restrictions on U.S. crude oil exports would lead to further increases in domestic oil production, resulting in lower gasoline prices while supporting nearly 1 million additional jobs at the peak, according to a comprehensive new study by IHS.

The study, titled U.S. Crude Oil Export Decision: Assessing the Impact of the Export Ban and Free Trade on the U.S. Economy says that making U.S. oil available to global markets would unlock the current supply and refining gridlock in the United States. It would lead to a total of $746 billion in additional investment during the study period (2016-2030) and an average of 1.2 million barrels per day (b/d) more oil production per year, the study finds.

The additional crude oil supply would lower gasoline prices by an annual average of 8 cents per gallon, the study says. The combined savings for U.S. motorists during the 2016-2030 period would translate to $265 billion compared to a situation where the restrictive trade policy remains in place.

The increased economic activity resulting from the rise in crude production would support an average of 394,000 additional U.S. jobs, with highs of 811,000 additional jobs supported in 2017 and a peak of 964,000 jobs in 2018.

The study finds that the growth in economic benefits would be rapid, with many of the economic impacts reaching peak levels in the next few years before maintaining elevated levels throughout the remainder of the study period. This is due to an immediate surge in investment that would result from pent up potential to be unlocked if crude exports were permitted. However, as a result of the increase in overall oil supply, the annual reductions in the price of gasoline remain largely consistent throughout.

If export restrictions were removed, the resulting increase in domestic oil production would be to such a degree that U.S net imports of petroleum would be less than they be would under current policies, the study says.

The removal of export restrictions would lower net petroleum imports to the United States by nearly one million b/d in 2016 for savings of more than $43 billion. The annual savings would continue to grow until peaking at nearly $87 billion (nearly 2 million b/d lower) in 2025. The savings remain significant for the remainder of the study period, averaging more than $74 billion (1.8 million b/d lower) per year during that time.

“The 1970’s-era policy restricting crude oil exports—a vestige from a price control system that ended in 1981—is a remnant from another time,” said Daniel Yergin, IHS vice chairman and author of The Quest. “It does not reflect the dramatic turnaround in domestic oil production, led by tight oil, which has reversed the United States’ oil position so significantly. The United States has cut its dependence on foreign oil in half since 2005 and its production gains have exceeded that of the rest of the world in recent years. The economic contributions of this turnaround have been substantial. Allowing the free trade of oil would expand those gains for consumers and the wider economy.”

If export restrictions were lifted, the economic benefits would come by way of relieving the gridlock in light tight oil supply that currently exists in the U.S., the study says. The rapid growth in U.S. “light tight oil production”—which has already increased U.S. domestic oil output from 5 million b/d in 2008 to 8.2 million b/d in March 2014—has outpaced domestic refining capacity for that specific type of crude oil (light tight oil), thus restricting further investment in production.

“There are different types of oil and they require different kinds of refining processes and facilities,” said IHS director and study co-author James Fallon. “And as a result of the boom in tight oil production, the U.S. is exceeding its capacity to process that type of crude. Current export restrictions mean that light crude has to be sold at a sharp discount to compensate for the extra cost of refining it in facilities that were not designed for it. That gridlock is preventing additional investment and production—and the additional economic benefits—that could otherwise take place.”

The study concludes that the assumption that allowing crude oil exports would result in higher gasoline prices for consumers is not accurate. U.S. gasoline, unlike crude oil, is part of a globally-traded gasoline market, meaning that U.S. prices at the pump reflect global prices. At present, the current policy is discouraging additional crude oil supplies from being brought to market, which actually makes gasoline prices higher than they otherwise would be.

“If crude oil export restrictions were lifted, the resulting increase in oil production would increase supply and actually lower gasoline prices,” said Kurt Barrow, study co-author and IHS vice president, downstream energy. “The gasoline trade and price fundamentals are clear.”

Among the study’s other key findings, if restrictions on U.S. crude oil exports were removed:

  • U.S. oil production would increase, beginning with an additional 949,000 b/d in 2016. The ability to export crude would then result in more than a million barrels per day in extra production each year going forward, peaking at 1.3 million b/d of additional production in 2030.
  • U.S. crude exports would reach 665,000 b/d in 2016 and rise to more than 1.5 million b/d in 2020. Crude exports would peak at more than 1.7 million b/d in 2025 before averaging more than 1.5 million b/d for the remainder of the study period.
  • The resulting increase in crude production would support 359,000 more jobs in 2016 before peaking at 964,000 additional jobs supported in 2018. 700,000 additional jobs would be supported in 2020 with an annual average of 222,000 additional jobs supported for the remaining years of the study period.
  • Gross domestic product would rise by nearly $73 billion in 2016. The amount would increase to more than $134 billion additional GDP in 2018 and settle at an additional $106 billion in 2020. It would then average an additional $73 billion annually for the remainder of the study period.
  • Total government revenues would increase by a combined $1.3 trillion over the course of the study period, beginning with nearly $29 billion additional revenues generated in 2016. That amount would rise to $42 billion in 2020 and grow to $105 billion in 2025 before reaching more than $158 billion in 2030.
  • The average disposable income per household would increase by an additional $391 in 2018 as benefits from increased investment, additional jobs and lower gasoline prices are passed along to consumers. That figure is expected to be an additional $332 in 2020 and average an additional $193 per year for the remainder of the study period.

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