U.S. Oil Export Investing

The United States is about to have a long and uncomfortable discussion about exporting oil.

The very notion is steeped in a political minefield, but if people calm down and examine the situation from a market perspective, exporting crude is not as outrageous as it seems.

For the first time since the 1970s, the United States is having the conversation of rolling back its 1979 ban on crude exports. At the time, the law was largely in response to a fear of limited domestic supplies, a 1973 OPEC embargo imposed on the United States, and the overthrow of the Shah of Iran.

But as crude production continues to expand in the post-modern world, there could be enough oil supplies to begin exporting in the near future. And the U.S. stands a high chance of competing head-on with Saudi Arabia and its OPEC cartel.

U.S. production may increase to 3.9 billion barrels per day by 2018. Last year alone, U.S. crude production reached 766,000 bpd, Bloomberg reports. In fact, the U.S. could become fully independent of OPEC imports by 2035, according to a projection by the International Energy Agency.

Thanks to a commerce license, Canada is the primary beneficiary of U.S. oil exports.

The Midwest and parts of Alaska have been traditional exporting hubs to Canadian refineries, but a greater amount of lighter and sweeter crude has been exported from the Gulf Coast and the East Coast. Traditionally, the U.S. exported an average of 24,000 bpd of crude shipments to Canada. With the oil boom in full swing, that number hiked to 100,000 bpd of crude imports in early 2013.

Canadians mix sweet crude from places like the Bakken with their heavier variety as a way of reducing light, sweet imports from Africa.

At the same time, U.S. refiners did not anticipate the shale oil boom in the United States, and many had retrofitted their plants to accommodate heavier crude from Venezuela and Saudi Arabia. Most U.S. refiners would be ecstatic about receiving more domestic crude, and some refiners are already cutting costs by processing U.S. crude. But other refiners have invested too much capital in adapting their plants to receive foreign imports, and there are some refiners still banking on Brent crude.

But you can’t blame them, since few anticipated such an extravagant oil boom.

U.S. Crude Exports

Adam Sieminksi, head of the Energy Information Administration, is a prominent supporter of exporting crude abroad. He believes an excess supply of sweet crude could prompt many refiners to restructure their refineries to begin processing light crude. However, there are weighty costs involved in making heavier-crude refineries more suited to the domestic market.

But since U.S. crude is cheaper to process than heavier OPEC grades, more refineries may find it worthwhile to make the necessary to changes.

U.S. crude exports could be vital in keeping the American production boom alive. Sieminski believes an oversupply of light and sweeter crude may keep gasoline prices low in the short-term but will eventually forestall exploration and production of crude in the long haul.

There is no telling how gasoline prices will be affected with U.S. export booms; some analysts believe there will be little change in gas prices, while others believe gasoline prices will jump, and those who share Sieminski’s view believe gasoline consumers could benefit at the pump from crude exports on a long-term basis.

Essentially, crude would run into the same scenario as natural gas. Many natural gas dealers would love to export liquefied natural gas to foreign markets but cannot due to the Department of Energy’s sluggish role in approving more exports. And there are companies like Dow Chemical (NYSE: DOW) that have a vested interest in keeping natural gas prices flat to fuel factories and manufacture more products.

But Exxon Mobil (NYSE: XOM) has been vocal in the press about allowing the market to decide how much natural gas needs to be exported, and the Texas-based company even went so far as to accuse Dow of lobbying for export caps.

Many believe the market should also be able to weigh in on how much crude is exported. A crude export economy has the potential to create jobs and add value to the economy.

And the U.S. could have a chance to introduce the world market to its light crude – something that can compete directly with Brent crude’s thicker variety.

With the lifting of the crude export ban, we could one day see a resurgence of West Texas Intermediate on the world stage – but only if the export ban is lifted. And there needs to be more U.S. pipelines and other infrastructure so WTI can remain competitive.

Sellers going by the WTI price standard will not have to suffer from price decreases compared to Brent sellers, and WTI itself could one day compete neck and neck with Brent.

But the big elephant in the room regarding the Canadian and U.S. drilling booms is infrastructure. Both nations have suffered from backlogs and discounts as a result of limited pipeline capacity.

More energy companies have relied on trains, but it is not enough to keep pace with growing national production. There are not enough refineries or pipelines to support growing production, and the web of political controversy and regulation makes it difficult to build new systems.

It makes sense for companies to export oil, but in the face-value world of politics, exporting crude is a political loser for whichever party or candidate supports it in this current political atmosphere. Sieminsnki may support exports, but he does not see them happening anytime soon.

But the U.S. economy could benefit from shipping lighter and more expensive crude while importing cheaper grades from OPEC. Some believe reducing OPEC reliance on imports is a way to counter high prices, but others believe in taking the fight directly to Saudi Arabia by entering its exporting turf.

The U.S. is on track to surpass Saudi Arabia in the area of oil production by 2020. If that happens, it would be a wasted opportunity to remain grounded by a 1979 law that is non-applicable in today’s energy market.

Investment Takeaway

Eventually, crude exports will happen, whether it is in the next five years or in the coming decades. The fact that the U.S. is already having this conversation is a sign that U.S. crude production is here to stay and will continue to climb. From the standpoint of investing, the idea of U.S. crude exports will be icing on the cake.

The U.S. already exports petroleum-based commodities like diesel abroad, and the economy is not suffering by exporting to Canada. Companies that have engaged in Canadian exports are Irving Oil, Trafigura Energy, and Suncor Energy (NYSE: SU). Oil trading firm Vitol Holding applied for an export license last year.

American refinery Valero Energy (NYSE: VLO) recently won an oil export license from the Bureau of Industry and Security, a wing of the U.S. Commerce Department, to ship crude to its Quebec refinery. The license will allow Valero to ship 90,000 bpd. Valero is one refinery that no longer accepts foreign, light crude, since domestic production is filling most of that demand.

In 2012, BP (NYSE: BP) also received a license to export crude to Canadian refineries. Not to be outdone, Royal Dutch Shell (NYSE: RDS-A) received a similar permit that same year.

Even though energy infrastructure will be a problem, investors should not be too concerned. Railway transportation is less efficient and more costly, but it does get the job done in transporting crude. And there are smaller pipeline projects in the works to push more crude from Texas to Cushing, Oklahoma.

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