America lifts its ban on oil exports

December 18, 2015

The Economist

For decades, the word “market” has been a misnomer for global trade in oil. Not only has the business been manipulated by an international cartel, OPEC, with varying degrees of success. Since 1975 America has also distorted it by banning the export of almost all crude oil.

On December 18th Congress voted to put an end to the problem by lifting the 40-year-old export ban as part of an omnibus budget bill. Republicans championed the proposal, which is backed by the oil industry. Reluctant Democrats supported it because in exchange they were able to negotiate an additional five years of tax credits for wind and solar power, which they are keen on. The deal showed a spirit of compromise often absent on Capitol Hill.

The move has three potentially positive outcomes. It will increase the market for the light, sweet crude pumped out of America’s shale deposits, which may eventually give the fracking industry a fillip. It will give refineries outside America access to a greater variety of oil, enabling them to operate more efficiently. And it will make West Texas Intermediate (WTI), the reference price in the United States, a global benchmark for light, high-grade crudes to rival Brent, an international benchmark that is based on a mix of heavier crudes. That would make oil trading more efficient.

Already the impact is visible in the declining price premium of Brent to WTI in recent days (see chart). Since the shale revolution led to a surge of American oil and gas output about five years ago, the price of WTI had fallen well below Brent. That is largely because American refineries are better equipped to handle heavy, sour crude than the light, sweet shale oil that was suddenly in abundance. With exports barred, the price was forced down until it was worth local refineries’ while to buy it.

Read entire article at The Economist.

 

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