The Course Change

On Tuesday, the Department of Commerce handed down a once-unthinkable decision permitting two US oil companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, to begin exporting unrefined crude products. The decision specifically allows for the export of condensate, a crude product that’s so light that it exists as a gas until it’s brought to the surface. Found abundantly in domestic shale formations, this “ultralight” crude is being extracted so quickly that US refineries cannot process it.

The Imbalance

So is the US shale oil boom really explosive enough to clog US refineries? In short, no. The problem lies in the type of crude, not the amount of it, which US refineries have been designed to use as feedstock. Prior to the surge in domestic oil production, most refineries in the United States were built or modified to process heavy, sour imported crude from the Middle East. This left a smaller percentage of refineries intended to process light crude, leading to the current supply imbalance.

This was all good news for domestic refineries. Large refining corporations like Valero were able to purchase light crude at steeply discounted prices, at least relative to world markets. Of course, this was detrimental to oil companies inasmuch as their ultralight crude was worth more than they could sell it for.

The First Step

The Commerce Department’s policy change therefore eases the imbalance between the supply of domestically produced light crude oil and the ability of US refineries to process it. About 13% of oil extracted in the United States fits the Commerce Department’s definition of condensate, and is extracted from shale plays across the country. Though condensate has long been considered a crude product, it’s chemically more similar to gasoline than to common perceptions of crude oil. This doesn’t make Commerce’s announcement any less historic, however.

Republican lawmakers, for the most part, hailed the decision. Democrats were more reluctant, calling it the first step down a slippery slope that would make the United States less secure. It’s reflective of a typical political divide, with Republicans in favor of greater free trade and Democrats in favor of more protectionism. Time and again, however, it’s been shown that free trade really does help everyone. The ranking member of the Senate Energy and Natural Resources Committee, Lisa Murkowski, called for lifting the entire ban on unrefined crude products, while owners and operators of multiple energy companies testified on Thursday that lifting the ban would be beneficial to increasing US production and boosting job growth.

The Next Step

Lifting the ban on crude exports entirely is the logical course of action. Tearing down trade restrictions incentivizes further production by oil companies. Of course, American refiners will lose the unfair edge they’ve maintained over their foreign counterparts for decades (as was evidenced by the dramatic drop in US refineries’ shares after the Commerce Department’s announcement). But the economic benefits of the free trade of crude products are far greater than any possible harms that will come to US refineries.