Oil export ban 101: Why does US have it? Why is it now easing?

Since 1975, Congress has sought to keep domestic crude oil at home, for use by American consumers. Signs are afoot that the Obama administration is ready to ease the ban and let some oil be exported. Here are the basics.

The US Commerce Department is allowing two energy companies to export a lightly refined petroleum product – a move seen by some as a first step toward the possible lifting of a longstanding US ban on crude-oil exports.

The move symbolizes a new era in which the US feels rich in domestic oil reserves, some industry analysts say. But it doesn’t necessarily mean the floodgates are about to open for crude oil to flow as freely outbound as inbound.

Here’s a primer on the petroleum export ban, the Obama administration’s new step, and what the debate over the ban means for consumers.

Why does America ban the export of oil?

Think back to those images of soaring gasoline prices and long gas lines in the 1970s, when an embargo by Arab nations shook the global economy. Congress approved the Energy Policy and Conservation Act in 1975, which sought to promote domestic fuel production and efficiency and created a Strategic Petroleum Reserve for emergencies. It also codified the notion that US-produced crude oil shouldn’t be exported.

What exactly is banned?

The ban applies to crude oil, not refined petroleum products. Even then it’s not a total prohibition. “Exports of crude oil to Canada are allowed as long as the oil is used there, as are exports of Alaskan oil using the Trans-Alaskan pipeline and small amounts of specific heavy Californian crude oil,” Brookings Institution scholars Tim Boersma and Charles Ebinger wrote in a January report.

Companies can also request exemptions that are in “the national interest,” but the Brookings energy experts say the overall policy has discouraged exports of crude while allowing shipments of refined products to reach 1.7 million barrels per day in 2012.

What’s the change now?

Two companies sought permission to export a minimally processed form of ultralight oil, called condensate, and the Commerce Department approved the idea, The Wall Street Journal reported Tuesday. Condensate can be turned into gasoline or other fuels. 

For these two firms (Pioneer Natural Resources Co. and Enterprise Products Partners LP), the approval means they can export a product that has generally been subject to the ban. The Obama administration said Wednesday that its overall policy remains unchanged, but Energy Secretary Ernest Moniz has hinted that change may be coming.

“The issue of crude oil exports is under consideration,” Secretary Moniz said in May. “A driver for this consideration is that the nature of the oil we're producing may not be well matched to our current refinery capacity.”

Why is lifting the ban coming up for discussion?

The question isn’t new, but what’s changed in the past few years is the deployment of hydraulic fracturing (“fracking”) technology that unlocked oil reserves held in shale deposits, notably in North Dakota and Texas. The US still imports a lot of oil, but the fracking revolution has lessened the psychology of energy “dependence” and hoarding domestic production.

The condensate approved for export comes from Texas shale oil.

What’s the case for fully lifting the ban?

The petroleum industry generally supports the move as a step toward free trade, in which different kinds of oil products can find their way to where demand is greatest and shipping is most efficient.

In particular, US refiners are mostly adapted to process “heavy” forms of oil, while the lighter shale output might find its best home overseas. “Allowing exports would enable light-oil producers to get world market prices, and their revenues would flow back into higher investment in [domestic] production,” energy experts Daniel Yergin and Kurt Barrow wrote recently in a Wall Street Journal commentary.

Some energy analysts argue that gasoline prices would fall. “Lifting the ban would boost crude oil production and improve the efficiency of global refinery operations,” thus bringing US gasoline prices down by 2 to 5 cents per gallon, write Stephen Brown and Charles Mason of Resources for the Future. 

What’s the case against?

Sen. Ed Markey (D) of Massachusetts argues that much of the original rationale for the ban is still in place. “This reported decision by the Commerce Department puts America on a slippery slope to send more of our oil abroad, even at a time when the Middle East is in disarray and tensions are running high with Russia,” he said in a statement Wednesday. “We should keep our resources here at home for American families and businesses, not send this oil abroad even as we import oil from dangerous regions of the world.”

Some environmentalists argue that lifting the ban, by boosting oil industry profits and promoting new production, will increase greenhouse-gas emissions and contribute to harmful climate change.

The consumer could be the loser, argue those wary of the policy shift. Gasoline prices would be lower if the US continues to keep most of its own crude oil at home, and sticking with the export ban would encourage new refinery capacity.