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By John Kemp LONDON, Jan 10 The prospect of lifting the ban on U.S. crude oil exports has drawn strong opposition from some refiners and politicians in Washington, who claim it would raise pump prices for American motorists. But there is no evidence that lifting the ban would have an adverse effect on drivers, and it could actually lower pump prices and make them more stable. According to Senator Lisa Murkowski, the highest-ranking Republican on the Senate Energy and Natural Resources Committee: "Opponents will be quick to assert, too often without citing any evidence, that exports of crude oil will raise gasoline prices for American consumers." "This claim is wrong, but it must be dealt with immediately, and it must be dealt with head-on," she added, in a thoughtful and well argued speech on Tuesday calling for an overhaul of outdated export regulations. Valero, the largest independent refiner in the United States, says, "It makes more sense to keep crude oil here in the U.S." The current system of export controls is "working well", according to Valero. "It has significantly reduced American dependence on foreign oil, kept U.S. refining utilisation high, and insulated American consumers from geopolitical shocks," it added. Refiner PBF Energy is trying to rally rivals to form a lobbying group to maintain the ban and held a conference call with some of them on Wednesday. THE BAN AND PUMP PRICES The impact on U.S. consumers of maintaining or lifting the ban is essentially an empirical question. It is worth considering each of the three arguments Valero makes for preserving the ban to see if they make sense. First, Valero claims the ban has "significantly reduced American dependence on foreign oil". But the ban has nothing to do with falling oil imports. Domestic production has soared to its highest level since the 1970s because of horizontal drilling and hydraulic fracturing. Domestic consumption of gasoline has fallen owing to a combination of biofuels and tougher mileage standards for cars and trucks. None of this has anything to do with the export ban. Second, Valero claims the ban "kept U.S. refining utilisation high". This is true. Access to domestic crude below global prices has thrown a lifeline to U.S. refineries, especially the relatively unsophisticated ones on the East Coast, averting the threat of closure and supporting jobs. But the thousands of jobs saved at East Coast refineries must be weighed against the tens of thousands that have been created in oil and gas production as a result of the shale boom and the potential for creating even more if exports are permitted. Reserving U.S.-produced crude and condensates for U.S. refiners is effectively a subsidy to refiners paid for by oil producers and people with mineral rights. It is not clear whether this means a net gain for the U.S. economy as a whole. In fact, trade theory strongly suggests it would be more efficient to allow the crude to be exported. Finally, Valero claims the ban has "insulated American consumers from geopolitical shocks". This is clearly wrong. While the crude market is segmented by the export ban, leading to different prices for domestic and foreign oil, there are no restrictions on the export of refined products such as gasoline, which therefore trade in an integrated global market. U.S. pump prices track international gasoline prices, which in turn track the price of benchmarks such as Brent, rather than domestic oil markers such as West Texas Intermediate (WTI). CORRELATIONS WITH BRENT The correlations in Tables 1 and 2 show that the change in weekly pump prices is much more closely linked with Brent than WTI. Weekly crude oil and gasoline prices, first differences Table 1: Correlations 2009-2013 On-road gasoline prices WTI Brent U.S. 0.15 0.27 PADD 1 0.10 0.20 PADD 2 0.23 0.35 PADD 3 0.14 0.26 PADD 4 (0.02) 0.06 PADD 5 0.02 0.08 Chicago 0.23 0.32 Table 2: Correlations 2011-2013 On-road gasoline prices WTI Brent U.S. 0.33 0.39 PADD 1 0.31 0.36 PADD 2 0.35 0.40 PADD 3 0.31 0.36 PADD 4 0.05 0.10 PADD 5 0.14 0.18 Chicago 0.29 0.35 Even in the Midwest - known in the industry as Petroleum Administration for Defense District (PADD) 2 - and the city of Chicago, which are far from the coast, pump prices track Brent more closely than WTI. In fact, pump prices track Brent more closely than WTI in every part of the United States from the East Coast (PADD 1), Gulf Coast (PADD 3) and West Coast (PADD 5) to geographically remote markets in the Rockies (PADD 4). Pump prices continued to track Brent more closely than WTI even when the two started to diverge in 2011. There is no evidence the fall in WTI prices relative to Brent has been reflected in lower prices for U.S. motorists. Pump prices, in both absolute terms and weekly changes, continued to track Brent, as the correlations in Tables 3 and 4 confirm. Weekly crude oil and gasoline prices, outright levels Table 3: Correlations 2009-2013 On-road gasoline prices WTI Brent U.S. 0.90 0.96 PADD 1 0.90 0.97 PADD 2 0.89 0.95 PADD 3 0.90 0.96 PADD 4 0.85 0.90 PADD 5 0.88 0.94 Chicago 0.87 0.92 Table 4: Correlations 2011-2013 On-road gasoline prices WTI Brent U.S. 0.34 0.58 PADD 1 0.36 0.68 PADD 2 0.32 0.49 PADD 3 0.39 0.64 PADD 4 0.09 0.16 PADD 5 0.26 0.45 Chicago 0.31 0.40 Lower prices for domestically produced crude have represented a financial transfer from domestic oil producers to refiners rather than to motorists. Nor has the export ban insulated U.S. consumers from turmoil abroad. Pump prices have been hit by instability in the Middle East through the link between domestic and foreign gasoline markets. EXPORT FOR GREATER STABILITY U.S. crude oil exports might actually bring more stability and possibly even lower gasoline prices to both American and foreign motorists. International crude prices are currently set by markers such as Brent that have limited underlying physical liquidity. Permitting the export of U.S. shale oil, much of which is light and sweet, would substantially deepen the pool of oil that is deliverable into these markets, contributing to greater liquidity and stability. By lessening dependence on producers in unstable areas such as the Middle East and Africa, increased U.S. oil production and exports would reduce fears about supply interruptions and reduce risk premiums. Cheaper shale production would edge out high-cost deep offshore projects and expensive oil production in the Middle East, Africa and Central Asia. For all these reasons, allowing exports could actually reduce gasoline prices and make them more stable. It was this point that was first made by researchers at Citigroup last year and that was taken up by Senator Murkowski on Tuesday. "Lifting the prohibition on crude oil exports will serve to increase domestic oil production, and the entry of this oil onto global markets will put downward pressure on international prices," Murkowski noted. "All things equal, this combination will help the American consumer." The export ban clearly favours independent refiners that don't have their own oil production, especially the smaller and older refineries on the East Coast. But there is no evidence whatsoever that it lowers prices for U.S. motorists.
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