Net exports of refined products from the US Gulf are booming. Diesel exports are up over 300 percent since 2009 and gasoline is up five fold over the same period. The growth is driven by strong diesel margins and US refinery feedstock and fuel cost advantages. Some of those advantages derive from regulations banning most US crude exports. If, as rumored in Washington lately, regulators end the crude export ban the refined product export boom could screech to a halt. Today we look at the consequences for US refiners of an end to the crude export ban.
Crude oil exports from the United States are heavily restricted by Department of Commerce regulations introduced in the 1970’s that are administered by the Bureau of Industry and Security (BIS). These regulations prevent the export of US crude oil except to Canada or in specific circumstances from Alaska and California (see I Fought the Law). In Episode 1 of this series we discussed the consequences of a partial end to the ban on crude exports that might occur as a result of a change to the BIS definition of lease condensate – a very light hydrocarbon that is nevertheless defined as crude that cannot be exported. Production of lease condensate is booming in shale plays like the Eagle Ford in South Texas. Our analysis imagined that if the condensate export ban were lifted tomorrow, much of this material could be profitably exported to markets such as Asia where it is highly valued as a petrochemical feedstock. In Episode 2 we widened the debate to wonder what would happen if there were a complete removal of the ban on crude exports. In this case we would expect an increase in domestic crude production due to US crude prices rising to higher world levels. There should also be a reduction in the current backwardation in futures prices. We would expect an export infrastructure boom building out pipeline, rail and dock facilities to export domestic and Canadian crudes from the US. Light sweet crudes from surging domestic production in the Permian and Eagle Ford basins would compete internationally against similar crudes in Northwest Europe. In this final episode in the series we imagine the likely impact on the refining industry of lifting the crude export ban.
The recent history of US refining has been dominated by a surge in refined product exports. We have covered this in previous blogs – most recently in April when we looked at the drivers behind the export boom (see Baby You Can Drive My Exports). The increase in exports has been most pronounced in the Gulf Coast region, where net exports of diesel are up over 300 percent from an average of 230 Mb/d in 2009 to 750 Mb/d in 2013. Over the same period net gasoline exports from the Gulf Coast increased five-fold from an average of 90 Mb/d in 2009 to 440 Mb/d in 2013. Our analysis back in April showed that the boom in Gulf Coast refined product exports has been driven primarily by high diesel margins that have in turn pushed up gasoline production and exports. Figures 1a and 1b below show how this happened using monthly data from the Energy Information Administration (EIA) for Gulf Coast net exports over the past two years. Figure 1b shows the diesel “crack” or margin – the spread between diesel prices at the Gulf Coast and Light Louisiana Sweet (LLS, the Gulf Coast benchmark) crude (red line, left axis) - as well as net diesel exports (exports minus imports – purple shaded area, right axis). The chart shows exports increasing in line with diesel margins – indicating that as margins improve refiners cranked up diesel exports. Figure 1a shows the same analysis for gasoline with the crack spread (blue line, left axis) and net gasoline exports (green shaded area, right axis). Unlike diesel, the gasoline chart shows exports increasing when margins are low (the red line represents “zero” margin) and exports falling when margins for refining gasoline are higher. This seems counter intuitive except that when diesel production increases, more gasoline is produced as well – and has to be sold even if margins are not great. So higher diesel margins have incentivized Gulf Coast refiners to process more crude to produce diesel for export but along the way more gasoline has been produced and exported – even as margins for the latter have not been as attractive.
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