Two little stories that show why the US really should drop the ban on the export of crude oil. Falling oil prices are slowing down the shale boom, that's true enough. But the infrastructure of oil refining in the US is also adding to that downward pressure and thus the shrinking of activity. For that refining industry is largely set up to deal with heavy, sour, crudes and what is being produced by the shale industry is largely light and sweet crudes. But it's illegal to export that light sweet crude to where it can be usefully processed. Thus prices are, internally in the US depressed over and above what is happening on the world market.
The first story:
The shale-oil drilling boom in the U.S. is showing early signs of cracking.
Rigs targeting oil sank by 14 to 1,568 this week, the lowest since Aug. 22,
Baker Hughes Inc. (BHI) said yesterday. The Eagle Ford shale formation in south Texas lost the most, dropping nine to 197. The nation’s oil rig count is down from a peak of 1,609 on Oct. 10.
Obviously, part to most of that is about the world oil price falling. But not all of it, as FT Alphaville explains:
Over the course of the last decade, under the mistaken belief that light sweet crude would soon become impossibly hard to get hold of at a fair price, huge sums of money flowed into the development of so-called complex refineries — units capable of processing cheap inferior crudes just as efficiently as light sweet grades.
What no-one saw coming, however, was that the shale-induced light sweet crude production explosion would soon turn the scenario on its head.
Which is where a lot of the US refining industry finds itself today. Namely, facing up to the uncomfortable reality that much of the recent investment in heavy sour crude processing capabilities — geared very specifically towards the efficient processing of foreign crude — may have been redundant.
Existing US refining capacity is largely focused on those heavy, sour, crudes that people thought they would have to be importing (from Venezuela just as one example). But the boom in production has come from shale, which largely produces the light sweet crudes that the refining system isn't all that good at processing.
That presents us with two problems. The first being that that shale oil trades at a discount to the global price. This doesn't make any difference to consumers as that discount is then swallowed up by those few refiners in the US who are capable of dealing with it. But it does mean that the drillers are getting a lower price for it and this obviously contributes to that falling away in drilling activity.
The second is that we have two options to solve this. The first being to upgrade the entire refinery sector to be able to handle this new oil feed. That's obviously something that will be very expensive to do. The second is simply to allow the export of crude oil again. There's plenty of refining capacity elsewhere in the world that can take that light and sweet shale oil. And the US refineries can continue to process the heavy material that they're currently set up to deal with.
It's just so much simpler and cheaper to allow crude oil exports. So, the ban should go.
