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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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What Oil Export Ban Means for Investors

One of the hottest issues in both politics and the energy industry over the last year has been the fight surrounding the ban on exports of U.S. oil.

The export ban is a decades old relic from another era, originally intended to help the U.S. avoid oil shortages by keeping production within the country. That’s no longer a serious concern as the U.S. is now producing more fossil fuels than any other country in the world thanks to technological innovations that build on the country’s available natural resources. What’s unclear though, is whether the export ban is still helpful to the country as a whole in light of recent developments.

Research studies suggest that removing the oil export ban and promoting safe and efficient fracking across the country would lead to billions of dollars in additional GDP and tens-of-thousands of jobs. This is on top of the hundreds of thousands of jobs already supported by fracking and the hundreds of billions the industry adds to the U.S. economy. Related: Russia’s Rosneft To Help Venezuela’s Oil Sector

There is a real chance that the ban could be lifted in the next few years, especially if it is tied to some larger piece of legislation pushed through Congress in the months before or after the next election. President Obama seems ready to at least consider lifting the ban, and various U.S. Senators are talking about putting a bill forward to remove the ban.

The issue of the export ban is bringing together strange bedfellows on both sides of the table though. In favor of lifting the ban are many of the U.S. oil companies, including integrated majors and shale players. But the effect of lifting the ban is likely to lead to even more supply flowing into the global market. Currently, the export ban essentially creates two markets for oil; the U.S. and the rest of the world.
A surplus of supply trapped within U.S. borders has pushed down domestic prices. Bringing down the export ban would allow that oil to reach the international market, likely leading to a decline in international oil prices while raising prices for domestically produced crude. Related: Why The Oil Rally May Well Be Over

Domestic oil companies love this idea – the ability to sell U.S. crude at a higher price. Even just a few dollars per barrel would mean significant profits. In contrast, firms with a lot of international production are likely to think twice before supporting the removal of the ban.

Similarly, refineries, chemical companies that use oil and gas as feedstocks, and environmentalists who hate oil altogether would all want to see prices in the U.S. remain low. There are certainly points in both sides’ favor, but it is ironic that, even as the U.S. struggles to negotiate a free trade pact that would let the country sell more goods abroad without tariffs, one of the biggest potential exports remains deliberately excluded from trade discussions. Related: Fossil Fuel Divestment Could Be A Red Herring

Like the companies themselves that are lining up on both sides of the export ban issue, investors will find themselves pitted against one another over the ban. In some cases, those with a diversified portfolio, holding say, big chemical company stocks and shale producer stocks, may even find themselves conflicted about the ban.

Regardless, going forward, investors should keep an eye on legislation regarding the ban; if progress towards removing it continues to be made, U.S. domestic shale producers will likely rally 5-10% or more as the probability of legislation passing increases.

By Michael McDonald of Oilprice.com

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  • onlymho on June 25 2015 said:
    oil imports have declined from about 10 million barrels per day in 2007 to the current level of about 6 million barrels as a result of the slowing economy, more stringent energy use and domestic oil production growth, but the bottom line is the US still imports most of the oil used so what is so different from the environment when the ban was instituted? the days of energy hoarding are just around the corner and domestic reserves will only grow in value

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