It’s election year again and the stakes are higher than ever for one booming industry in the United States: oil and gas.
All the leading Democratic candidates have vowed to reduce the country’s emissions to net zero by 2050, which is a pledge general enough to overlook, but some have also promised to ban oil exports as part of push to net zero emissions. Now this is a promise that the industry cannot overlook.
Bernie Sanders, Elizabeth Warren, and Tom Steyer have all spoken in favor of reinstating the oil export ban that was in effect for four decades before Obama repealed it. Environmentalist organizations are adding fuel to the anti-oil enthusiasm, as well.
A report by Greenpeace and Oil Change International released earlier this month said that banning U.S. oil exports would remove between 80 and 181 million tons of carbon dioxide emissions annually. But the return of the ban would serve a dual purpose, according to analysts. It would, on the one hand, cut emissions, and, on the other, discourage investors from putting their money in oil and gas when the oil and gas have nowhere to go.
But there are problems with Greenpeace and Oil Change International’s ambitions. If the United States were to stop exporting oil, it wouldn’t affect demand. The oil would simply come from elsewhere. Instead, a US oil export ban would simply be a boon for other producers such as Saudi Arabia and Russia, with no effect on emissions globally.
As Shell’s chief executive, Ben van Beurden, summed up the industry in a Reuters interview last year, as long as there is demand for oil, there will be production. An export ban would do nothing about the demand, it will simply shrink the supply alternatives.
In truth, the authors of the report acknowledge that the impact of an oil export ban could be smaller than desired.
With the first point invalid, that leaves the green groups’ second point as the primary motive for a ban. We are already seeing this result play out in Canada. Investors are pulling out of Canadian oil because of the many problems the industry is having—chief among them, not finding an outlet for its growing production.
A U.S. oil export ban would have a similar effect: the booming production in the Permian and the Bakken shale plays would be stifled if the oil had nowhere to go. Prices would then fall, and investors would pull out seeking greener pastures.
"The two most basic ways to 'keep it in the ground' are to disrupt throughput and capital," the managing director of energy research firm ClearView Energy Partners, Kevin Book, told S&P Global Platts this week. "In this case, an export ban does both. Not only does it block physical transfer, but the glut resulting from impaired exports can diminish the commercial incentive to invest in future production."
The United States exported an average of around 3 million bpd of crude last year, according to Energy Information Administration data. At WTI prices of around $53 at the moment, these exports are worth some $159 million daily. A month’s worth of exports at this daily rate is worth $4.77 billion. If the export ban is reinstated, it would deal a pretty severe blow to the industry.
Yet the actual blow will be a lot more severe because the end of exports would not just eliminate the daily 3 million bpd at current prices. The reinstatement of the export ban would inevitably pressure oil prices, so the actual losses the industry will incur would be higher than the above calculations.
In fact, a U.S. oil export ban could have an impact on the industry that is comparable with the effect the 2014 price crash had. That price crash was caused by growing U.S. shale oil production and OPEC’s decision to fight fire with fire and open the taps to maximum. Many shale companies did not survive that crash. Many more are bound to go under if the export ban returns. And this time investors will dump their oil stocks even faster.
The climate change narrative has prompted several institutional shareholders to pull out or limit their exposure to the oil industry. The most notable of these was the Norwegian sovereign wealth fund, which decided to exit all pure-play oil producers. In truth, the grounds for that decision were not climate change but rather exposure to the volatile oil price environment, yet there are pension funds that are moving their money away from oil and gas precisely because of climate change concerns.
Investment banks have got a whiff of the changing times, too. Goldman recently announced it would no longer fund oil and gas drilling projects in the Arctic. This may be just the start in a shift that will make the life of the U.S. oil industry much harder, even if exports continue and President Trump wins a second term in office. But if Trump is replaced by any one of the candidates promising a reinstatement of the ban, then the future of U.S. oil becomes a lot bleaker.
By Irina Slav for Oilprice.com
