Congress Lifts Ban On Crude Oil Exports After 40 Years

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

December 29, 2015

IN THIS ISSUE:

1. Congress Reverses 40-Year Ban on Crude Oil Exports

2. Gasoline Prices Are Low, But Don’t Get Used To It

3. Texas Company to be First to Export US Crude Abroad

4. Oil Bears Bet on $25 Crude Oil Price, Some Even $15

Overview

I am old enough to remember when OPEC decided to embargo all oil exports to the United States in the fall of 1973. The US was very much dependent on foreign oil at that time, and the embargo had a very detrimental effect on our economy.  Gasoline prices jumped to record highs, rationing was instituted and long lines at the pump became commonplace.

As part of these events in 1973 and 1974, the US banned exports of domestically produced crude oil.  It seemed to be a logical and prudent step to take given the continued decline in US energy production, and until recently, the export ban was rarely mentioned.

Until about a decade ago, the idea of the US supplying all of its own energy needs was considered a futuristic dream, and many said it could never happen.  Then along came hydraulic fracturing (“fracking”) as a means to extract oil from underground formations that were previously far too expensive to access.

US energy production ended its decades-long decline and began to climb again around 2005. Last year, the US became the world’s largest producer of petroleum products, a status deemed unthinkable just five to 10 years ago. Now we have a glut of oil and prices have plunged accordingly.

Earlier this month, Congress voted to lift the ban on exports of US oil as a part of the dreadful $1.1 trillion omnibus budget deal that President Obama signed into law. While all of the details are not yet clear, US oil producers will be allowed to export crude going forward for the first time in 40 years.

As usual, there are pluses and minuses surrounding this latest decision to allow exports of US oil. The most likely minus is that US oil and gasoline prices will likely move higher over time. Yet with gas prices at the lowest level since 2008, that doesn’t seem to be much of a concern today.

While the export ban has officially been lifted, there are doubts about whether or not US oil producers will actually commence large scale sales of US oil abroad. Since I’m getting a lot of questions on the likely effect of the lifting of the oil export ban, that’s what we’ll focus on today.

Congress Reverses 40-Year Ban on Crude Oil Exports

In a move considered unthinkable even a few years ago, congressional leaders voted on December 16 to lift the nation’s 40-year-old ban on oil exports, a historic action that reflects political and economic shifts driven by the boom in US oil drilling.

The measure allowing oil exports is at the center of a secretive budget deal that congressional leaders announced earlier this month, which President Obama immediately signed into law.  The latest $1.1 trillion budget deal is highly controversial among most conservatives, and even some liberals.

The deal would lift the oil export ban, a priority for Republicans and the oil industry, and at the same time adopt new environmental and renewable energy measures that Mr. Obama and Democrats wanted. These include extending federal wind and solar energy tax credits, reauthorizing for three years a conservation fund and excluding any measures that block major Obama administration environmental regulations.

Sirius Star

Congressional leaders on both sides of the aisle claimed victory with the passage of the latest budget deal. I don’t know about you, but anytime I hear both sides in Congress declaring victory, I know it was a bad deal. The latest huge omnibus budget is loaded with pork! What else is new? But I digress.

By design or not, the latest agreement hands the oil industry a long-sought victory within days of a major international climate deal that is aimed at sharply reducing emissions from oil and other fossil fuels – a deal opposed by the energy industry and one that will arguably require its cooperation.

More than a dozen independent oil companies, including ConocoPhillips, Exxon, Continental Resources and others, have been lobbying Congress to lift the ban on oil exports for several years, arguing that unfettered oil exports would eliminate market distortions, stimulate the US economy and boost national security.

A handful of Washington lawmakers representing oil-producing states, including Senators Heidi Heitkamp (D-ND) and Lisa Murkowski (R-AK), have been working to persuade once-wary politicians to back oil exports and allay worries that they will be blamed if gasoline prices go higher as a result – which is very likely to happen eventually.

Some US refineries actually oppose oil exports, saying their business would be hurt if crude oil is shipped overseas to be refined and warn that the higher costs of fuel will be passed along to consumers. FYI, the US government doesn’t limit exports of refined petroleum products, and those exports have more than doubled since 2007.

To address the refiners’ concerns, expressed most vocally by Democrats from the Northeast where several refineries are located, the new budget spending bill changed an existing tax deduction for domestic manufacturing so independent refineries can deduct most of the transportation costs associated with their products.

The bill also included a provision aimed at addressing politicians’ concerns about high gasoline prices that are almost certain to happen in the future. The bill also enables the president to restrict oil exports in certain scenarios for up to one year, including in the case of a supply shortage or if domestic oil prices climb significantly higher than global levels.

President Obama had threatened to veto separate legislation lifting the oil export ban, and it was clear that he opposed it. Yet in the end, the president got several spending and environmental goodies he wanted, so he elected to sign the budget deal and declared victory.

Gasoline Prices Are Low, But Don’t Get Used To It

With the increased use of fracking and other new drilling technologies in recent years, US oil production has shot up nearly 90% since late 2008, helping lower gasoline prices to levels not seen since 2009. Gas prices are less than $2 a gallon in many regions of the country, and the US Energy Information Administration forecasts the national price will average $2.04 this month and $2.36 next year.

It took this dramatic drop in oil prices, hovering below $40 a barrel, to catapult the policy change to the top of the Republican agenda. It helped prompt lawmakers of both parties to consider pairing renewable-energy support with oil exports, a type of grand Washington deal-making that hasn’t been seen for years on the highly divisive issues of energy and the environment.

The same low gasoline prices that generated momentum for lifting the export ban could also reduce its short-term economic impact since the global market is saturated with oil. While global oil production has increased since mid-2014, despite the plunge in prices, this trend is beginning to change. If it continues, this can only lead to higher gas prices down the road. So, enjoy it while it lasts.

US Retail Gas Prices

The US is already exporting nearly 400,000 barrels of crude a day to Canada, which has been possible for some time due to an exemption under the previous export ban. That is more than nine times as much as in 2008 but still just 3.8% of the US oil produced every day.

A certain type of light crude has also already started to flow overseas thanks to permission granted in 2014 by the Commerce Department, which allows producers to reclassify a certain type of oil as a “refined fuel,” similar to gasoline, which is legal to ship abroad.

The bottom line is that while crude oil and gasoline prices are at multi-year lows today, the decision by Congress earlier this month to allow exports of crude for the first time in 40 years likely means higher gas prices in the not-too-distant future.

I’m not saying that is necessarily a bad thing going forward, especially with gasoline prices at $2.00 a gallon nationally and well below that level in many parts of the country (I bought gas at $1.77 last week in Central Texas).

The point is that US oil companies have wanted the right to export crude, especially since oil production has skyrocketed in recent years. They got their way as a result of a provision in the latest convoluted $1.1 trillion budget deal passed by Congress and signed into law by Obama earlier this month.

We’ll see how this turns out in the months and years ahead.

Texas Company to be First to Export US Crude Abroad

FYI, a Texas energy company will load the first cargo of US crude oil to be shipped overseas since the Gerald Ford administration. Texas-based Enterprise Products Partners, LP announced last week that during the first week of January it will load 600,000 barrels of light, sweet crude pumped in South Texas into a tanker at its oil terminal on the Houston Ship Channel.

The announcement came less than a week after Congress passed legislation that lifted the 40-year-old ban on exporting US oil. Vitol Group, a Dutch oil-trading titan, is buying the crude according to Enterprise. The oil will head to a Vitol subsidiary’s refinery in Cressier, Switzerland, which supplies diesel and other fuels to Northern Europe.

Infrastructure companies like Enterprise have been laying the groundwork for oil exports over the past couple of years by investing in dock space at US ports and storage terminals that can hold crude destined for overseas markets.

As US crude flows abroad, it will compete against oil pumped in Saudi Arabia, Russia and eventually Iran. Sounds good, right? But European refiners may be the first to benefit from lifting the US oil export ban.

Yet it remains to be seen where US exports of crude oil will ultimately be headed. While initial reports suggest that most US exports of crude will be headed to Europe, other reports disagree. Some sources believe that US crude will more likely be directed to Mexico and Latin America, much closer destinations, which makes more sense logistically.

Obviously, the unexpected lifting of the 40-year ban on crude oil exports could have several different outcomes. Some may be benign; and some may be detrimental to the US economy, especially if energy prices rise. I’ll keep you posted.

Oil Bears Bet on $25 Crude Oil Price, Some Even $15

Crude oil prices have collapsed from near $85 a barrel this time last year to below $35 earlier this month. Crude oil futures closed at $36.81 yesterday. Oil speculators are buying “put” option contracts that will only pay out if crude drops as low as $25 a barrel or lower next year –  the latest sign that many investors expect an even deeper slump in oil prices.

These bearish wagers come as a result of OPEC’s effective scrapping of production cutbacks, Iran’s anticipated return to the oil market and the resilience of production from countries such as the US and Russia – and  raise the prospect of a prolonged global oil glut.

This has prompted investors to buy put options on crude – which give them the right to sell at a predetermined price and time – at strike prices of $30, $25, $20 and even $15 a barrel – according to data from the New York Mercantile Exchange where such options are traded.

Betting on Lower Crude Prices

The volume of trading in these “put” options has spiked recently, suggesting that the consensus view that oil prices can only go down may be getting overdone. Keep in mind also that historically about 90% of futures options contracts expire worthless, and the investors lose the money they paid for them.

There is an old saying in the commodities business: The solution to low prices is low prices. What this means is that if prices stay low for a prolonged period, producers will cut back and the supply will decrease – thus pushing prices back up eventually. As mentioned above, global oil production has increased since mid-2014, but that trend appears to be changing.

Nevertheless, the world is still awash in crude oil. That is not, however, an endorsement to go out and buy put options on crude at this point.

I will close today with two uplifting thoughts about Christmas. Rasmussen reported earlier this month that 71% of adult Americans believe that Christmas should be more about Jesus Christ than about Santa Claus. That’s up from just 60% last year.

Rasmussen reported last week that 56% of adult Americans will attend a religious service this holiday season.  That’s up from just 50% a year ago. Both surveys are very encouraging!

As we close out 2015, let me thank you for your loyalty over the years. Remember, I always appreciate your comments and suggestions, so please keep them coming.

HAPPY NEW YEAR EVERYONE!!

Warmest holiday wishes,

Gary D. Halbert

 

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Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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