Crude Oil Export Ban Would Increase Gasoline Prices, Not Reduce

Update: According to reports, a crude-oil export ban is now not under consideration. That's good, because it wouldn't work. 

Certain policy measures aimed towards reducing gasoline prices had been proposed by the Biden administration, including an SPR release and a ban on WTI exports. However, a ban on crude exports would likely have the opposite intended effect.

Two ideas floated: SPR and exports

Two measures to reduce gasoline prices have been proposed by Biden’s administration including a release of barrels from the Strategic Petroleum Reserve (SPR) and a ban on crude exports.

The coordinated SPR release involves an exchange of up to 32 MMBbls, which will be returned between 2022 and 2024. The release also includes a sale of 18 MMBbls, which Congress had already required to be sold by the end of 2022. According to the President, the Department of Energy has flexibility in how it handles the release of these barrels over the next several months.

Some barrels included in the SPR release requires the participants to buy back those barrels at a later date. Therefore, while the SPR release would add supply now, it would decrease supply later.

The WTI export ban is only under consideration, rather than adopted policy. The Biden administration proposes that a ban on crude exports would lower WTI prices and thus lower gasoline prices.

How would this impact WTI, Brent, the spread between the two?

In our view, a ban of crude-oil exports would cause WTI prices to fall. In addition, U.S. regional prices such as MEH, LLS, and Mars would suffer without access to demand from overseas markets.

However, gasoline prices are unlikely to fall if a ban was instated. Yes, those who consume domestic grades would have cheaper feedstock. These domestic refiners would likely maximize their light-sweet runs, given the cheaper light-sweet barrel input cost.

But there is a limit to how much domestic refiners could alter their usage of WTI and other domestic light grades. The U.S. exports around 3 million barrels per day of crude oil, and domestic refiners would not be able to consume it all. The result would be two destructive results: (1) a backlog of light crude that must go into storage (or be shut in), and (2) decreased yields of refined products because of lower efficiency. Neither of these things help lower gasoline and diesel prices.

Internationally, the opposite price effect is likely. Global markets would be starved of light-sweet crude which would create a bid for these grades as refiners look for a substitute. The closest substitute is a Brent look-alike. But that supply is not readily available, so refinery throughputs would fall, and refined product supply would become scarcer.

As international prices for gasoline rise, due to the inability to source light sweet barrels, the U.S. would be encouraged to export more barrels abroad given the widening spread between the two product markets.

Unless U.S. refiners and marketers are restricted from exporting refined products, , domestic product prices could increase. The most likely outcome is a result entirely opposite of the desired goal of lower product prices.

Conclusion

Outlawing oil exports would send U.S. oil prices lower, and it would not help gasoline prices unless other government action were taken against gasoline sales. In our view, unless the White House wants to control prices all the way downstream, disrupting the supply chain with an oil-export ban would only transfer wealth to the refining sector.