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Falling gasoline prices dampen ExxonMobil’s plea for US crude exports

01.29.2014  |  HP News Services

Keywords: [ExxonMobil] [exports] [US] [gasoline] [crude oil]

By BRADLEY OLSON and DAN MURTAUGH
Bloomberg

ExxonMobil's push to export US oil overseas is facing a new obstacle: falling gasoline prices.

A flood of new oil from Texas to the Great Plains has swamped refineries, driving down prices at the pump 10% since March, while global oil prices have hovered at about $107/bbl. That suggests the world crude market is having waning influence on US gasoline, which instead is beginning to track lower-priced domestic oil.

US supplies are having a greater impact because they’re making up a bigger part of the gasoline market, supplying about 53% today, compared with 34% less than three years ago.

As cheaper oil translates to cheaper gasoline, Exxon and ConocoPhillips will have a tougher time convincing legislators that ending export restrictions that date back to 1970s oil shortages would benefit the nation, said Sandy Fielden, director of energy analytics at consultant RBN Energy.

If more exports are allowed, “The most obvious thing that’s going to happen is that crude prices will go up and so will gasoline,” Fielden said.

Investors are betting the trend will continue, and that West Texas Intermediate, the US benchmark for oil, will drop about 17% by December 2016. A contract for delivery in that month trades at about $80/bbl, compared with about $97 today.

Export Benefits

Lifting strict export limits would halt the decline in US crude prices while costing motorists as much as $10 billion a year in higher fuel prices, according to Barclays. Gasoline prices reached a three-year low last year and should continue to drop through 2015, according to the US Energy Information Administration.

Senator Lisa Murkowski, the top Republican on the Senate Energy and Natural Resources Committee, has joined Exxon, the American Petroleum Institute and the US Chamber of Commerce in calling for an end to crude export restrictions that were put in place after the Arab oil embargo in 1973 triggered gasoline shortages in the US.

“The reality is the market has moved from an era of scarcity to an era of abundance -- but we’re still saddled with statutes and regulations stuck in a mindset of scarcity,” said Kenneth Cohen, the vice president who oversees Exxon’s lobbying efforts, in a December interview.

The debate over exports is splitting the energy industry. Oil producers such as billionaire Harold Hamm’s Continental Resources want leeway to send their crude abroad for higher prices. Some refiners want US oil to remain landlocked, offering them a cheaper feedstock for their plants.

Favoring Refiners

In a strategic sense, the US is not alone in how its policies prioritize refining over exports. Countries from Saudi Arabia to Brazil are seeking to boost their refining capacity, spending billions to create manufacturing jobs or reduce imports, said Charles Kemp, a senior consultant at Baker & O’Brien.

Advocates of more oil exports have warned that unless the limits are lifted, the production boom that has boosted US oil output to the highest level in 25 years will slow. Opening the spigot of US crude to the world will lower the trade deficit and boost employment, replacing outdated regulations that now allow exports of refined products such as gasoline and diesel but limit crude, Murkowski said in a Jan. 7 speech.

A central argument for opening exports, made by Murkowski and ConocoPhillips CEO Ryan Lance, hinges on the contention that shipping American oil abroad would bring down world prices, and thus reduce gasoline prices. That’s because imports of crude from abroad have historically tied US gasoline markets more closely to the global Brent benchmark price for crude.

Crude Discounts

Falling gasoline prices, even with export restrictions remaining in place, are eroding that argument. New supplies of oil from North Dakota and Texas have outstripped processing capacity in some refineries, resulting in US crude selling for about $11/bbl less than global varieties.

Refiners who benefit from the lower costs of crude are passing about $3/bbl of that discount on to consumers, which translates into annual savings of more than $9.5 billion last year and an expected $9.6 billion this year, Barclays analyst Paul Cheng said in a Jan. 22 note to investors. The ultimate benefit is even greater as the savings ripple through the US economy in a multiplier effect, Cheng said.

Energy Security

After a ban on exporting Alaskan crude was lifted in 1996, pump prices on the West Coast surged to a premium of 15 cents/gal higher than elsewhere, 10 cents more than in 1995, according to an analysis released by the Center for American Progress.

“The lower domestic price for oil benefits families, businesses, and the overall economy,” the center said.

The US retail price for regular gasoline fell to $3.279/gal, according to Heathrow, Florida-based AAA, the nation’s largest motoring company. The countrywide average rose to within a cent and a half of $4 in April 2011.

Prices at the pump in the US have typically tracked closely with the global Brent oil benchmark in the UK’s North Sea as East Coast refiners used foreign oil priced against Brent because they couldn’t access domestic crude. European plants also sent gasoline to New York as US oil production slumped after peaking in 1970.

As oil output began rising in 2009, spurred by horizontal drilling and hydraulic fracturing that unlocked new resources in dense shale rock, the imports that helped set US prices began to slow. The US imported an average of 576,000 bpd of gasoline in 2013, the lowest since 2000, EIA data show.

Price Correlations

For most of January, gasoline prices tracked more closely with cheaper domestic oil than with the Brent price. This correlation means that gasoline prices have fallen in step with domestic West Texas Intermediate oil as crude production boosted supplies, according to data compiled by Bloomberg.

The lighter weight oil from shale fields, which has fewer impurities, tends to yield more gasoline, a factor that could further boost supply and potentially decrease prices if oil export restrictions remain in place, said John Auers, a senior vice president at industry consultant Turner Mason & Co.

“From a long term fundamental standpoint, gasoline prices are going to be pretty attractive,” Auers said. “We’ve seen those high, $5-a-gallon prices and we’re not going back to those for any length of time.”



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