Lifting of U.S. oil export ban no big deal for Canada
Oil export shipments from the United States to offshore customers are now legal. In fact, the first freely traded cargo of U.S. oil was shipped from Texas to Germany this past New Year’s Eve. Recent congressional legislation lifted a ban on U.S. crude oil exports that had been in place for four decades, although U.S. refineries were legally able to export refined crude oil products.
There has been some debate about the overall impact of the new U.S. legislation on Canada with some observers seeing a positive impact on Canadian oil companies while others see a possible negative impact. In fact, unless current conditions surrounding the global oil market change fairly dramatically over the foreseeable future, the overall impact on Canada from the lifting of the oil export ban is likely to be very modest.
A point to note in this regard is that oil exports to Canada were exempt from the ban, so the new legislation has no direct effect on the potential supply of U.S. crude oil exports to Canada. There might be an indirect effect to the extent that some U.S. exports that would otherwise go to Canada are “diverted” to Europe or other offshore markets. In this case, prices for crude oil in Canada might increase, thereby benefiting Canadian oil producers while disadvantaging Canadian consumers; however, the incentive for U.S. oil companies to export offshore depends upon the gap between the price of crude oil in Europe (the so-called Brent price) and the price in North America (the West Texas Intermediate price). While the Brent price has been as much as US$10/barrel higher than the North American price in recent years, the gap has currently narrowed to around US$1/barrel. This relatively small difference in price severely limits offshore export opportunities for U.S. oil companies given the costs of shipping.
It is certainly possible that a recovery in the demand for crude oil in world markets could lift offshore prices, thereby making offshore exports of crude oil more profitable for U.S. producers. At the same time, Gulf Coast infrastructure (existing and planned) that’s used to process oil exports from U.S. ports can also be used by Canadian oil companies to export offshore. Hence, a substantial rebound in offshore oil prices could result in an increase in Canadian exports of crude oil, as well as U.S. exports.
Whether oil prices enjoy a substantial recovery from current levels is anyone’s guess, although prospective demand and supply conditions provide no obvious grounds for optimism from the producer perspective. Certainly, if the Brent oil price rebounds, the legal ability of U.S. oil companies to export offshore will ensure that North American oil prices will increase as well; however, the benefit of those higher prices to Canadian producers drilling in the oilsands will be limited by the fact that Western Canada heavy crude oil is largely captive to demand by U.S. refineries that are configured to process heavy crude oil. As such, higher prices would likely benefit some Canadian oil producers more than others.
While opponents of lifting the export ban highlighted the potential for North American oil prices to increase significantly, neither Americans nor Canadians should worry that the removal of the ban will have much of an impact on prices of gasoline and heating oil given current circumstances surrounding the global oil market.
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