Once again, US oil exports explained... poorly

After Platts posed some questions to CAP, the group did revise its statement and pointed out that the exports were in the form of products and not in the form of crude. In its original statement, it referred only to "oil" exports, but the implied message was clear: if the US did not export the amount of oil that it does, it could reduce its offshore production by a like amount. As it said: "Does it make sense for the United States to bear the health, economic, and environmental costs of this offshore production for oil that is shipped elsewhere? If our oil needs are so great that we must open sensitive, formerly protected areas to drilling, this oil should remain in the United States for domestic consumption. But not all of it is."

The US does export petroleum molecules. But it almost rarely does it in the form of crude. But the US exports a fair amount of other things. For example, the EIA, in its most recent weekly report, reported 154,000 b/d of NGL exports, a figure likely to rise as more shale gas comes on line; 458,000 b/d of residual fuel, as resid's share of the electric generating market continues to dwindle and even as supply is squeezed out of the market by coking capacity; and 441,000 b/d of petroleum coke, which also makes sense, because the US has a large amount of deep conversion capacity through coking, and one of the end products of coking is petroleum coke.

In the latest report, the US also was reported to be shipping out 252,000 b/d of gasoline, more than half of it going to Mexico with a good chunk to several impoverished Latin American and Central American nations; and 389,000 b/d of distillate, again, most of it to Latin America but with a significant amount to the Netherlands, whose terminals in places like Rotterdam serve as the basis for further shipment into a distillate-short European continent.

All of this is easily discernible, but instead CAP makes a simplistic equation. If the US didn't ship out the oil it is exporting then it wouldn't need to produce an offsetting amount of crude.

This theory is saying that if the US slices downstream exports of apples, it can cut upstream production of oranges. But then you've cut off a feedstock supply for the refineries' production of what the US still very much needs, like gasoline? And what does the US do with petroleum coke it doesn't need, or LPGs, or distillates? Presumably the prices for those products would drop to bargain-basement levels, possibly killing refining margins in the process and forcing refiners to cut back output of things the US most definitely does need - like gasoline.

Also inherent in the CAP analysis is that US refiners can fine-tune their plants to produce precisely the balance of products that would eliminate exports and at the same time cut the amount of crude that needs to be produced in the US.

But refining isn't like having 10 potatoes and deciding to bake six of them and mash the other four. The decision-making available to refining managers is not that precise. You put crude through a refinery, and a refining manager can tweak and twist and squeeze to the yields that are most desirable, based on prices and transportation costs. But even after that, you're going to get gasoline, and you're going to get distillates, and you're going to get a lot of other things, sometimes in quantities more than can be sold in the domestic market. If they can't be exported, listing the unintended consequences on markets and supply lines would probably take a few hours.

For example, if the US stopped shipping distillates to Europe, European refiners would have to squeeze out even more distillate, and probably would do that squeezing by cutting down on their gasoline yields. That means less gasoline to export to the US, driving gasoline prices in the US higher. Is that a CAP goal?

The relatively small portion of the US supply/demand balance that is exported has long been a ripe target for political gain, but it also serves as a platform in which an utter lack of understanding of how markets work can be put on display.  (Rep. Ed Markey, a long-time oil industry critic, has called for a ban on US oil exports).

This could all be easily dismissed, but this report comes from CAP, whose relationship to the Obama administration last year was described by Time magazine this way: "It is difficult to overstate the influence in Obamaland of CAP."  This report from CAP is irresponsible in not explaining how oil markets work, and in showing no sign that its authors even have any understanding of why the US is an oil exporter in certain areas. Given CAP's significance in Washington, these misguided views are not insignificant.