Posted on 09/02/2015 9:52:19 AM PDT by thackney
On August 14 the Obama Administration announced that the Commerce Department would approve applications to export up to 100,000 barrels of light crude per day to Mexico in a swap arrangement for an equivalent volume of heavy crude from Mexico. This type of export has previously been available between The US and Canada, and perhaps indicates willingness to eventually repeal the crude export ban. Here’s a quick little recap and analysis of the situation.
WHY IS THIS A BIG DEAL?
After the 1975 oil shock, The United States banned the export of crude oil in order to stabilize the price. But with the current state of petroleum supply and demand, lawmakers and media from The Economist to the Daily Texan (The University of Texas’s student newspaper) are calling for an outright end to the ban. Additionally, today’s Wall Street Journal reports that lifting the export ban will not increase the price of gasoline in the U.S., and could in fact lower it.
Currently, West Texas Intermediate (WTI) (which flows through Cushing, OK) is discounted vs. Brent (which is priced in the North Sea) on the world market; ie, American Crude sells for around $5 per barrel less than all other oil. If this change in policy indicates a likelihood that the export ban will be lifted entirely, we will ultimately see that discount leveled out.
WHAT’S GETTING SWAPPED
Around the time of the export ban, many gulf coast refineries were geared up to rely on heavy sour crudes – primarily because of the abundance of that type of crude in the Middle East. More recently we have been importing additional heavy crudes from the New World – Venezuela, Mexico, Canada, etc. Since it is very expensive to re-configure a refinery for exclusively lighter crude, we still need a certain amount of heavy crude in order to fulfill the refining (and sale of) gasoline and other refined products (of which we are still the biggest producer and consumer). The “Mayan Crude” that comes out of the bay of Campeche is generally of the “sour heavy” variety of crude.
Since the Unconventional shale revolution has largely produced lighter, sweeter crudes and condensates, the global market for crude oil for has certainly been impacted. This EIA chart from earlier this year shows how imports of light sweet and light sour grades of crude for use by U.S. Gulf Coast refineries have been virtually eliminated.
EMEX, the national oil company for Mexico, is especially excited about the efficiency that the additional light sweet crude will bring to their refining operations.
Finally, as Dan Murtaugh at Bloomberg points out, “The U.S. exported a record 586,000 barrels of crude a day in April, mostly to Canada.” (Additionally, Alaskan crude from the North Slope – which is exempt from the export ban – has also been recently made available on the international market for the first time in a decade.)
WHY NOW?
The Obama administration probably sees the oil-swap as a win for the following reasons:
Shows Democrats as pro-Latin American and pro-Latino Bolsters Obama’s image as pro free–trade and pro-exports (something he has tried to make a legacy, as with the Pacific trade deal) Dampens some of the perception that Obama is anti-oil (although good luck with that) Lastly, the timing of the crude oil swap coincides nicely with the new rail crossing in Brownsville, TX, which will be how a lot of this oil gets shipped.
AND THE WINNERS ARE….
In addition to PEMEX and the Gulf Coast refiners, almost certainly the biggest winners will be Eagle Ford oil-focused operators like ConocoPhillips and Pioneer, who will now gain an additional avenue for delivering their light shale crudes to market.
Only if they take all Mexican citizens back.
Only if they take all Mexican citizens back. Bet Trump can get the right deal.
Is this a 1-for-1 swap???
Why would we do this? Light crude is much more easily-refined than that Mexican and Venezuelan crud.
1 light sweet barrel = 1 heavy crude barrel plus cash.
Pemex is collecting bid, private oil companies to decide what it is worth to them.
We don’t need the federal government to negotiate the business deals of industry.
It is not the US government’s oil.
Remember we want less government, not more inference at more levels. Do you want the feds to negotiate your sales and what you get paid for them?
1 light sweet barrel = 1 heavy crude barrel plus cash.Is this a 1-for-1 swap???Why would we do this? Light crude is much more easily-refined than that Mexican and Venezuelan crud.
Pemex is collecting bid, private oil companies to decide what it is worth to them.
I understand that Mexico needs light crude to help them flush their heavy crude out of its wells.And I think you said that American refinery aren’t set up for light crude but for (cheaper) heavy crude?
Sounds like a win-win.
But then, so does simply repealing the embargo of American exports altogether. It was bad Democrat policy when enacted, and makes even less than no sense now.
Our refineries are set for this heavy crude and it is cheap (now that is past tense, was cheap). It is ideal. The domestic refiners get to run on what should be cheap crude and we get cheaper wholesale gasoline prices plus domestic oil producers get to sell their higher value crude at higher prices. Plus the added world wide distribution lowers the overall price of crude which puts even more downward pressure on prices.
But for me the issue is freedom to take risk and reap rewards. As in plunk your money down, take your chances, and if you strike oil you get to sell it to whomever you please without government interference.
the mexican oil will be carried in by 1 millions illeglas
No, not out of the wells.
But it is blended in prior to the refinery to better match their refineries optimal design. Just as we do at some refineries ourselves.
And I think you said that American refinery aren’t set up for light crude but for (cheaper) heavy crude?
Not all, but many of the Gulf Coast area have maxed out their ability to use light sweet, after blending in all we efficiently can. Essential all of the last few years of oil production growth has been light sweet from shale formation.
Sounds like a win-win.
I think so. We export our expensive oil, import their cheaper oil and make some profit.
But then, so does simply repealing the embargo of American exports altogether. It was bad Democrat policy when enacted, and makes even less than no sense now.
I'll say bad federal policy. I believe this happened under the Nixon Administration's lead.
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