Saudi Price War Should Fuel Drive for U.S. Crude Exports (Reuters.com)

Saudi Arabia’s move to keep crude oil production high, fueling a steep global price slump, may have an unexpected consequence: intensifying the campaign by U.S. producers to scrap Washington’s decades-old ban on exports of domestic crude.

Global oil prices plummeted nearly 5 percent on Tuesday to their lowest since 2010, as OPEC’s core members showed no sign of intervening to support the market. Amid talk of a price war, Iran, generally a price hawk, has changed course and said it can live with lower prices.

U.S. crudes have been trading at a discount to global prices since the rise of the shale revolution four years ago. That price squeeze has domestic producers eager to end the export ban enacted during the Arab oil embargo of the 1970s.

“Fully lifting the oil export ban would go a long way toward keeping U.S. oil production up even if prices continue to languish,” said Chris Faulkner, Chief Executive of Breitling Energy Inc. “Our country can’t afford to see the oil and gas boom start to bust.”

But many Americans, fearful of high gasoline prices, support the ban, as do their members of Congress. President Barack Obama has some leeway to allow more exports of some types of oil, but political experts have said he is unlikely to do so without evidence that below-market U.S. crude prices are forcing shale drillers to cut back or shut in output.

That scenario was highly unlikely during the past few years, when crude prices spent a lot of time above $100. But with oil plummeting and Saudi Arabia comfortable with crude as low as $80 a barrel, the day may arrive sooner than many had expected.

U.S. gasoline pump prices have also dropped to near $3 a gallon for the first time since 2010. If prices stay that low, Americans could grow less fearful that exporting crude will trigger a spike in retail prices, and more receptive to studies showing exports would actually boost the economy.

“I think it would be a harder argument to make at $80 than at $100,” said Guy Caruso, Senior Adviser at the Center for Strategic & International Studies.

PRICE WAR

The makings of an oil price war took shape this month, when Saudi Arabia and Kuwait said they would not cut production, signaling they would rather allow prices to drift lower to curtail production from places like the U.S. shale patch and Russia.

It remains to be seen how quickly lower prices begin to hem in U.S. production of light, sweet shale crude, which has boomed. For the moment, U.S. shale oil prices remain only a few dollars below global rivals due to strong refinery demand.

But few analysts expect that to last much longer, with a retreat to discounts of $10 a barrel or more that will amplify the price pain for drillers.

“The question is whether or not the Saudis want $80 Brent or $90 Brent. If it’s $80 our fear is we’d get a $10 to $15 discount, and at $65 crude then a lot of the U.S. plays are uneconomical,” Scott Sheffield, chief executives of Pioneer Natural Resources, said on Tuesday at the Aspen Institute, a Washington D.C.-based think tank.

Lifting the ban would allow U.S. producers to recapture the traditional price premium held by Brent, which is now about $3 a barrel, but was nearly $10 this summer, Sheffield said.

Many experts say they see little reason for Obama or Congress to push forward an issue that may be seen as caving to Big Oil interests at the expensive of the U.S. motorist.

However, if lower prices slow the drilling boom that has been a pillar of the U.S. economic recovery, politicians in Washington may have more reason to take action.

“The President would be able to stand up and say `we have to do this because we don’t want this production shut in,'” said Amy Myers Jaffe, Executive Director of Energy and Sustainability at the University of California, Davis.

AFTER WHICH ELECTION?

Some analysts expect further action after elections. Congressional mid-terms this November could tilt the Senate into the control of export-friendly Republicans, or the 2016 presidential election could result in a more oil-friendly administration.

Sheffield at Pioneer, one of two companies that has approval to export lightly-processed condensate crude, said he hopes the Commerce Department will bless more exports after November.

Even so, opponents are not backing down.

“Just because oil prices are lower does not change the fact that ending the export ban would increase prices, cut American refinery jobs, and get us no closer to energy independence,” said U.S. Senator Robert Menendez, a New Jersey Democrat.

“I understand that Big Oil wants to make more money, but last I checked they are doing pretty well for themselves.”

Article Author: Jessica Resnick-Ault & Timothy Gardner, Reuters

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