Will the Ban on Oil Exports Stop the Fracking Boom?

The fracking revolution marches on as more and more oil and natural gas is extracted from the continental U.S. and delivered to market.  In a development almost no one predicted even several years ago aggregate production of oil and gas within the United States is tops in the world, outpacing both Russia and Saudi Arabia.  Long-lead time construction of midstream and processing facilities are now struggling to keep up with the surge in production, but pipeline, rail and processing capacity provided by the private sector continues to come online.  Given time and capital midstream capacity is expected to catch up in the next few years and provide support to a sustained drilling boom in America.

However, the current ban on oil exports from the United States presents a long-term threat to this expansion.  The crude oil export ban was passed by Congress in 1975 in response to the Arab Oil Embargo of 1973 and essentially bans exports of crude oil to all countries besides Canada in order to provide some level of energy security.  The expectation back then was the United States would have to import more and more of its energy needs from other countries, and so for the past several decades, refiners located in the United States invested in expensive equipment that could process the heavy and sour types of crude oil that are found in other parts of the world.  However, the current American energy boom is producing light, sweet crude that is not optimal for the existing refineries, many of which are located on the American Gulf Coast.  As a result of this large investment, most refiners would, to some extent, prefer to or must process imported heavy crudes over domestic light crudes. This preference reduces domestic demand, limiting the market for domestic crude producers and, in turn, depressing U.S. domestic oil prices relative to global prices.

A widening gap among the types of oil produced by American upstream producers and the types of crude oil that refiners want for their facilities is hampering the long term outlook for domestic oil producers.  If refiners do not want the light, sweet crudes that are produced in the United States, then producers will be less inclined to drill for more oil because, without the ability to export those volumes, the price of that oil will be substantially lower than the price it could fetch on the world market.  Allowing the export of crude oil produced in America as the market dictates would help solve this mismatch.

Preventing crude exports threatens the long term growth of Untied States energy production and transportation companies, companies that have been one of the few bright spots in the American economy over the last few years.  Upstream and midstream companies in America have been extremely effective in exploiting hydrocarbons reserves and transporting them to where they are needed, but if they cannot find an ultimate market for the light, sweet crude they produce, further development, expansion and hiring by American energy companies will not materialize.  Lawmakers in the United States do not appear to be ready to embrace the elimination of the outdated oil export ban anytime soon, but the longer the ban remains in the place the shorter the American fracking boom will be.