Changing the Modes of Crude Delivery to Refineries
In part, the regional disparity in crude price was caused by the lack of pipeline connections from the center of the country to the West Coast and East Coast. Pipelines are the least expensive mode of transport, and the center of the US has an extensive web of pipelines. But the cost of building pipelines to refineries along the coasts has always been steep. In the case of PADD 5, the Rocky Mountains form a natural barrier. PADD 5 also includes Alaska and Hawaii, which are non-contiguous states unreachable by pipeline in any case. East Coast refineries also are far distant from crude producing areas, and many of them are smaller and less sophisticated than their US Gulf Coast counterparts.
With restrictions on exporting US crude, and with refineries in the center of the country running at high utilization, the new crudes needed a place to go. Buyers and sellers began to look to alternative transport modes to handle influx, as shown in Figure 3. Rail deliveries of crude to refineries rose from 17 kbpd in 2004 to in 209 kbpd in 2013. Barge deliveries rose from 135 kbpd in 2004 to 586 kbpd in 2013. Deliveries by truck, typically the most expensive mode (though also highly flexible) rose from 134 kbpd in 2004 to 398 kbpd in 2013. In all, deliveries of crude to refiners using these three modes grew at a rate averaging over 17% per year from 2004 to 2013.
This price disparity likely would have been moderated more quickly and thoroughly, however, if trade in domestic crude had been left entirely to the market—which it is not.
US Crude Exports: Not Really a Ban, but a Bother
It is common to see discussions about lifting the “US crude export ban.” There are any number of such discussions and debates, but a reader should be cautious about fully accepting accounts that use the expression “export ban” without qualifications or clarification. It is not a ban—the US has in fact been a crude exporter for the past hundred years or so, and the current pattern of exports will be discussed in a section following. Realistically, however, it is a set of restrictions that, for most would-be exporters, are enough of a disincentive that exports are unlikely. The key laws governing US crude exports are the Mineral Leasing Act of 1920, the Energy Policy and Conservation Act of 1975 (EPCA) and the Export Administration Act of 1979. The 1970s brought a new era in oil, with the rise of OAPEC and OPEC. The public had to contend with the first serious oil price shocks brought on by the Arab Oil Embargo and the Iranian Revolution. At the time, the public believed that restricting the export of US domestic crude would enhance supply security. It is now arguable whether the laws did anything to enhance supply security, but the US energy market has worked within the constraints of this policy ever since.
The “Short Supply Controls”—Petroleum, and Horses Exported by Sea?
The regulations are complex, so this article provides only an overview of key features drawn from the statutes. Crude exports are regulated under the provisions of the Export Administration Regulations (EAR), administered by the Bureau of Industry and Security (BIS) within the US Department of Commerce. The regulations are delineated in the “Short Supply Controls” section 754.2 The main focus of the BIS is national security, including homeland security, cyber security, economic security, and export controls to prevent the spread of weapons of mass destruction—in short, very high-level topics. The short supply controls cover an odd combination, including crude petroleum, petroleum products, unprocessed red cedar, and horses exported by sea. Despite the strategic importance of petroleum, controlling its export may not seem to fit with the rest of the Bureau’s work in the current market. Today’s market has an increasing level of domestic production, a decline in demand, numerous logistical difficulties delivering light tight oils across the country, and an international regime of low prices without the OPEC unity needed to defend prices by cutting production. Thus, there are many who believe that the restrictions should be eliminated.
The license requirements concerning crude oil describe several types of permissible exports, including:
- Exports from Alaska’s Cook Inlet (state waters),
- Exports to Canada for consumption therein,
- Exports in connection with refining or exchange of Strategic Petroleum Reserve (SPR) oil,
- Exports of California heavy crude (less than 20 degrees API*), not to exceed an average volume of 25 kbpd,
- Exports consistent with international agreements,
- Exports found by the President of the United States to be consistent with other statutory controls,
- Exports of foreign crude that have not been commingled with domestic crude, with some specific rules pertaining to SPR crudes, and
- Other exports heard on a case-by-case basis that are consistent with the national interest and the purposes of the Energy Policy and Conservation Act.
* American Petroleum Institute’s measure is inversely related to specific gravity, so a low API crude is heavy and a high API crude is light.
People have a variety of ideas about what actually serves the national interest. But it is fairly easy to imagine specific cases where crude exports would receive expedited licensing, such as hurricanes or other natural disasters that leave domestic crude cargoes with no place to go except overseas. But at such a time, requiring permitting or presidential action may cause unnecessary delay.
