US Export Oil Ban

Since the mid 70s oil crisis, the US has banned the export of oil to other nations to keep the home market fuelled up. They have allowed oil to be imported to fill the tanks though. US oil is mostly heavy although down south it is light and so many refineries are geared to the heavier sulphur laden crude.

For the past few years, oil prices have tumbled as OPEC has increased production and this has had an interesting effect on US stocks. Basically, the West Texas Intermediate (WTI) benchmark is much lower than the overall market pricing which means that thanks to the ban, oil from the US cannot be exported at a higher price thus reducing the profits of the local companies!

Barack Obama has agreed to open the taps to sell some of the light crude to Mexico in return for more heavy crude – which the refineries can deal with. Some see this as the end of the export ban as it sets a precedence. Allowing the US oil to be added in to the general market would increase supply and provided OPEC doesn’t wind back their production, would see oil prices drop further.

This gives the oil companies a dilemma, they desperately want to sell their oil overseas as they can see higher prices, but ….. if they do, then prices might drop below today’s WTI price due to over supply – and it could certainly bring the main oil pricing in line with the WTI price!

What I find fascinating is that countries want to swap their light and heavy crudes – it seems that Mexico wants the US sourced light to get rid of their heavy! Light crudes are easier and cheaper to refine, so can make bigger profit. The US has agreed to “swap” 100,000 barrels a day. Now, what is to stop Mexico benefiting by trading this oil further rather than using it inside the country? Perhaps we will see a lot more grumbles than we do today!

The oil export ban seems to be a classic case of Government intervention into the market place. It artificially imposes a price range on their own oil that makes it cheaper than imports. If this was a public company doing this you could be sure that the Government would fine them and order them to stop! It is clear that the oil companies have to “do as I say and not as I do” when it comes to dealing with the Government.