CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Exporting U.S. Crude Oil: What Is At Issue

Exporting U.S. Crude Oil: What Is At Issue

Print
Thursday, 13 February 2014 06:05

The NYT had an article on the battle between oil producers and refiners over removing restrictions on the export of crude oil that included some misleading comments. At one point it presented the claims from a producer that a domestic glut of crude oil is lowering prices and could lead to a shutdown of less productive fields.

"'Nobody wants the collapse of the oil industry,' Mr. Sheffield [the oil producer] said in an interview. 'You would be importing crude oil from the Middle East all over again.'"

As a practical matter, the issue of imports is the exact opposite of what Mr. Sheffield claimed. If we needed oil domestically, the shutdown wells could resume production again. If we are worried about the security of our oil sources, it would make more sense to leave the oil in the ground so that we can get to it if we are cut off from imports at some future point. 

The piece later holds out the prospect of driving down the world price of oil to the domestic U.S. price as a benefit to U.S. consumers.

"The producers argue that if they could freely export, they would increase world oil supplies, forcing down the international Brent benchmark crude price, which in turn would reduce the price of gasoline at the pump. 'The American consumer is held captive by the restrained market,' said Jack Ekstrom, a vice president at the Whiting Petroleum Corporation, a major producer in the North Dakota Bakken shale field. 'When you have additional supplies coming on to market, the price naturally comes down.'"

This doesn't make any sense. The price in the United States for gas will be first and foremost dependent on the price in the United States for oil. Consumers in the United States will not be especially benefited by having the price of oil fall elsewhere.

The real issue here is simply who will profit from the difference between world prices and U.S. domestic prices. If producers can't export but refiners can, then the refiners will be the beneficiaries of the price gap. If the producers are allowed to export then they will be the primary beneficiaries. Either way, the more oil is exported, the higher the price will be for the domestic consumers.

Comments (6)Add Comment
Rules for Price Takers, Price Makers and Price Fakers of Oil
written by Last Mover, February 13, 2014 7:49

Never admit the level at which an oil producer is a price taker and therefore a competitive supplier, at the global level in this case. That would imply below that level that price making power kicks in on the domestic scene, a real no no.

Always paint yourself instead in price faker fashion, as a huge supplier with enough market power to influence global prices and bring down the global price as a price maker, not a price taker. The public will never get it behind the facade of national security combined with lowered prices.

Correspondingly, when the ability to export oil freely for any reason occurs, whine that this will result in a collapse of the very domestic oil industry that could have lowered the global price with price maker power, but now is mysteriously crippled at the domestic level for the producer in question, magically transformed into a humble price taker forced to shut down.

Conveniently, no reason is given why the same global market power wielded by said producer could not be used to lower domestic prices below the global price when it is constrained from more exports, the same way it claimed strangely it could do when more exports were allowed. (Read "more or less quantities at the global level cannot affect price, but can at the domestic level.")

Imagine that. One would think if anything, a domestic supplier of oil would be more than willing to reduce domestic price below global price just enough to survive rather than shutting down ... because suddenly everyone is buying at the global price-taker price.

But that would conflict with the usual propaganda about free market competition and all that wouldn't it. Besides, media sock puppets mop up this drivel with the eagerness of beginning stenographers, so why change the propaganda when it's working just fine?
?
written by Confused, February 13, 2014 7:53
So we should export the surplus so that we can keep open the less productive fields so that we can supply (at a higher cost) the deficit created by the market-driven over-exporting of the surplus?

We need to export so the Brent goes down so that less productive fields get closed down thus creating a security risk which could have been prevented by exporting oil produced by the way less productive fields?
"national security" and "collapse" are good buzzwords
written by Jennifer, February 13, 2014 10:12
If we are worried about the security of our oil sources, it would make more sense to leave the oil in the ground so that we can get to it if we are cut off from imports at some future point.


But of course nobody is really concerned about that. As you say, it's really all about who is going to make the money. And that is not the consumer.
The price of gas
written by Kosta, February 13, 2014 11:59
Dean wrote "This doesn't make any sense. The price in the United States for gas will be first and foremost dependent on the price in the United States for oil. Consumers in the United States will not be especially benefited by having the price of oil fall elsewhere."

My understanding (which isn't perfect) is that the price of gas is primarily determined by the East Coast refineries which import Brent oil -- that is by the price of Brent. From what I understand, the Mid West refineries, which use domestic and Canadian oil as their feedstock, price their gasoline based on what the East Coast refineries are selling (i.e., off Brent), perhaps adding a small discount, but largely reap a windfall profit from the discount they are receiving on the oil they purchase. As the price of gasoline is based on the Brent benchmark, having the price of oil (Brent) fall will benefit consumers as the price of gasoline in the East and the Mid West will fall.

However, your larger point remains. This fight is basically one between producers and refiners on who will capture the windfall profits from the high price of oil.
Question:
written by Steve Lightner, February 13, 2014 12:06
Dr. Baker, I am a little confused on the price part of the argument. If refineries set their prices based upon where they can achieve the highest margin, and that would be the world market, would not increasing crude lower the world market price and thus lower our price? Said another way why is not the price we pay at the pump (less taxes and transport) set by what the world market is paying for it?
...
written by sherparick, February 14, 2014 9:27
To the extent that midwestern and gulf coast refiners are buying cheaper domestic oil, and not oil from the world market, they are already putting downward pressure on the world market price. You are right of course that this is a political struggle between commercial interests over collecting rents. Since I am one of those who think the cost of gasoline should be much higher to reflect its social, defense, and environmental costs, I guess I hope the producers win the argument as it is likely to cause a moderate increase in gas prices in the Midwest and Texas.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives