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What If The Oil Rebound Never Happens?  

The IEA’s September Oil Market…

Lifting The U.S. Oil Export Ban Is No Solution To Low Oil Prices

Lifting The U.S. Oil Export Ban Is No Solution To Low Oil Prices

Tight oil producers are hoping for an end to the U.S. oil export ban. They hired IHS to write the second report on this topic in less than a year.

In Unleashing The Supply Chain, IHS argues that U.S. jobs are the casualty from the export ban. The problem, they say, is that the U.S. lacks the capacity to refine all of the light tight oil being produced and that lowers the price.

But there were plenty of jobs over the last several years when oil prices were high even though the export ban was in place. That is because over-supply has lowered oil prices and over-production, not the export ban, is the problem.

The chart below shows that tight oil production from the U.S. and Canada is the anomaly responsible for global over-supply.

LeadingNations0814

Leading liquids producing countries 2008-2014. Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

And it’s a world problem of over-supply, not just an American problem. Oil companies everywhere are cutting staff and budgets. All companies are being hurt by low oil prices because they need $100 oil to break even.

Related: U.S. Pushes Energy Exports to Undermine Venezuela

The IHS report claims that the oil export ban causes lower oil prices in the U.S. compared to international prices. Actually, U.S. oil pricing has nothing to do with international prices. It is a simple matter of supply and demand. When U.S. companies supply more oil than is needed, the price goes down. If there were less supply, the price would be higher.

In fact, there was no difference between U.S. WTI and International Brent prices until late 2010 when tight oil started to become a big factor in U.S. production (see chart below).

USvIntntlPrice

U.S. vs. international oil prices and the onset of tight oil production. Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

If the U.S. export ban were removed, U.S. companies would make more money per barrel for a short time until the extra U.S. supply pushed down the price of world oil even further.

The biggest problem with making an economic argument to lift the oil export ban is that U.S. tight oil companies were losing money at WTI oil prices of more than $90 per barrel. The table below summarizes 2014 year-end financial data from the oil-weighted U.S. land-based companies that I follow.

EndOfYearData2014

Summary table of 2014 year-end financial data from oil-weighted U.S. land-based E&P companies. All dollar amounts in millions of U.S. dollars. FCF=free cash flow; CF/CE=cash flow from operations/capital expenditures. Source: Google Finance and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

The table is ordered by 2014 FCF (free cash flow: cash from operations minus capital expenditures). Only 3 of the sampled companies had positive free cash flow in 2014. All the rest spent more money than they earned.

Related: Renewed Calls To Allow US Crude Exports To Mexico

For the 20 sampled companies, total free cash flow was -$10.5 billion in 2014, -$4.9 billion more negative cash flow than in 2013. On average, these companies only made 75 cents for every dollar that they spent. 2014 debt was $90.3 billion, an increase of almost $7 billion from 2013. Average debt-to-equity was 92%.

WTI prices averaged $93 per barrel in 2014. So, if oil-weighted companies were losing money at more than $90, how are they going to benefit by selling oil at international prices of $53 per barrel at the time of this post?

There is a strategic reason not to allow crude oil export: to keep enough of our own oil in reserve in case there are supply disruptions or our relationships with foreign suppliers sour.

The U.S. does not have significant oil reserves in spite of what we read and hear in the mainstream media. It is true that we are producing a lot of oil today, more liquids than Saudi Arabia. That does not mean that we will have enough for ourselves in a few years. In fact, the U.S. is only 11th in world for proven reserves with 33 billion barrels compared with Saudi Arabia’s 268 billion barrels.

WorldProvenReserves

World proven crude oil reserves. Source: EIA

(Click image to enlarge)

And while tight oil has added new reserves that we didn’t think we had a few years ago, it only amounts to about 2 years of supply if we had to rely solely on tight oil proven reserves to meet our annual consumption. There is another year-and-a-half if we add proven undeveloped reserves that have been identified but not yet drilled.

Related: Is US Oil Production Finally About To Fall?

USTightOilYears

Years of U.S. supply of tight oil. Source: EIA.

(Click image to enlarge)

The real issue is that U.S. tight oil producers have over-supplied both the domestic and world markets and that has led to depressed world oil prices. Low oil prices are introducing discipline into U.S. tight oil production that companies are apparently unable to provide on their own. Companies that couldn’t make money at $93 oil prices will not make money at $53 international prices.

Lifting the oil export ban would only perpetuate the problem of over-production. That is no solution to low oil prices, lost jobs or lower oil-related spending.

Over-production is the problem, not the oil export ban.

By Art Berman for Oilprice.com

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  • Bob on March 18 2015 said:
    A very solid analysis. Even when I don't always agree with him, Berman is always worth reading.
  • Bruce on March 25 2015 said:
    Anyone in the oil business knows that any conclusions drawn using "proven" reserves are basically useless.
  • abraham on March 25 2015 said:
    it does not matter. the Saudis are fracking. why would they frack when they have 50 years of conventional oil supplies. it is obvious. they intend to steal hydraulic fracking market share, particularly the US's. a new type of oil energy system is about to manifest itself. a hybrid oil economy. the economy will have conventional and unconventional aspects to it. in short the Saudis intend to frack. this could be the main reason they are overproducing. every time a well closes here they will open one there, not fracking from it yet but wait until their infrastructure is complete. and once completed and our wells would have been shut down they will start to cut supplies. you see the saudis are in a unique position to control oil supplies hence control prices. they will shut down their conventional wells and when the price reaches 100 a barrel their fracking will be profitable and they will start fracking. there are new technologies where you can recycle the water and even water less fracking. this is why i think oil will not be going up for a while. not until the Saudis have built all their wells and enough US wells have shut down. when this happens there is no way to get our market share back. every time we reopen those well the saudis will just over produce the conventional wells and shut down the fracking wells until we are force to shut down our wells again. what are we going to do keep laying off people and rehiring them again. i don't think so. there is no way around this. and if the saudis are doing this so are the Russians. the big prize is in Russia’s Bazhenov shale in Western Siberia. these two countries could shut down fracking well all over the planet. there goes our other half of fracking wells. the only way i think this could change is if some kind of unstable political situation happens, but it would have to be in both countries at the same time. it is possible that the oil producing countries are trying to prolong peak oil. if there is 50 years of reserves, then along with fracking peak oil might go as far as 100 years or longer. i don't know how long it will take but i think oil will stay low for a long time. well that's free enterprise for you.
  • Ralph on March 26 2015 said:
    Serfs, don't buy this obvious propaganda from the Oil
    Export/Import Monopoly of Saudi Aramco of Houston,
    Texas who are compelled to destroy their competition
    Russia, Iran, and USA Horizontal Frackers!
    Exxon, Chevron, Shell, BP et al are their partners who
    take their marching orders from the CFR, FRB, and
    Bildeburgs. After 50 years in the oil patch, I found the
    USA sits on 10 Trillion bbls of oil and Saudi has 950
    Billion bbls, this reveals an astonishing truth of how
    big this oil scam has become in violations of our
    trade laws, No Investigations!
  • Stuart on March 26 2015 said:
    The simple answer is, increase refinery capacity and export the oil as distillate since there is no restriction there and it increases jobs here instead of exporting them.

    Quit spending money trying to lobby yourselves into making a quick profit and put it into an actual investment that may benefit everyone for years to come.

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