In the course of just seven years, the United States has evolved from a future defined by energy challenges to one of enormous energy opportunities. U.S. crude production has increased by 55 percent to eight million barrels per day just over the past five years.
Looking ahead, the Energy Information Administration (EIA) predicts that we may hit an all-time maximum of 9.6 million barrels per day in just a few more years, and this is one of the lower U.S. production outlooks. The increased crude oil production is solving what we have not been able to do since the Arab oil embargo – reduce our dependence on imports. Petroleum imports should fall from about 60 percent of U.S. “liquid fuel demand” to about 25 percent by 2016, much of that from Canada, our friend and ally to the north.
U.S. refineries are currently meeting domestic fuel demands, while also exporting finished products–creating jobs and economic growth in the process. All a good thing, and despite a few logistical issues, that’s not about to change. So the obvious question is why the rush to export crude oil?
More than one news story like here and here, have suggested that U.S. refineries have saturated or “maxed out” their ability to handle the staggering volume of light sweet crude coming from recent shale developments including the Bakken play. Nothing could be further from the truth. The argument is that after years of “heavying up,” meaning investing in equipment to process heavy crude, refiners aren’t capable of switching to light crude oil. Bunk! Refiners are resourceful and pardon the pun, are constantly refining their operations based on economic considerations.
Most refiners that use heavy crude oil also use light crude oil, and they can and are increasing use of domestic light crude. “How?” you may ask? Typically, a few options:
• Back out imports of light crude oils using Canadian and domestic light crudes in their place;
• Use any “unused” light sweet capacity;
• Back down intermediate crudes (especially sweet) to use more light sweet crude;
• If light-heavy price differentials are small enough, back down heavier crude oils; reducing use of coking unit to use more light; and
• Invest in changes to use more.
In the short term, US refiners have surplus capacity and soon-to-be finished investments that add about 400 KB/D of capability to use more U.S. light crude oil. Projects in the works likely to be finished soon add another 500 KB/D of capacity. That makes 900 KB/D of increased refining capability to use more crude. And there are more imports to back out and replace with U.S. crude oil. Bottom line: the United States has at least one million barrels per day more capability to use U.S. light crude oils in the short term, not counting the additional light oil volumes that could be used to continue to replace current light and medium crude oil imports.
AFPM is an organization that has been consistent in its promotion of economic development through free and open markets. But U.S. refiners are subject to many conflicting, often irrational policies that limit free trade within our borders and push down refining capacity. As policymakers debate crude exports, why not also look to fix internal barriers to a free and open market? Barriers erected by government intervention like a stalled Keystone XL Pipeline, an antiquated Jones Act which makes it cheaper to move fuel from the Gulf to Europe than it is to move it to the East Coast, and a Renewable Fuel Standard that picks winners and losers in the fuels market at the American consumers’ expense.
Given these barriers, the debate over lifting the crude export ban should include considerations about potential unintended consequences of addressing the policy in a vacuum. For example, what happens when U.S. light crude oil is diverted from East Coast refineries to overseas destinations, only to be turned into products that are imported back into the United States? It wasn’t too long ago that those East Coast refineries were at risk of closing and putting thousands out of work, but it didn’t happen because of Bakken crude oil. So between political issues, domestic investments and market dynamics, there are a lot of factors to consider in the crude export debate. However, questions over domestic refining capacity should be put to bed, since American fuel manufacturers are a long way from being “maxed out” on light crude oil.