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January 6, 2016
The United States has lifted its decades-long ban on oil exports, but local economists and business leaders are unsure of its effects on the Bayou Region.
Congress repealed the ban on American crude oil exports in its 2016 spending bill, and President Obama signed the bill into law on Dec. 18. The ban had been in place since the 1975 Energy Policy and Conservation Act.
While the lifting of the ban opens up companies to sell their crude on the global markets, it has not presented any clear, short-term benefits for Lafourche and Terrebonne parishes. The tumbling oil price has hamstrung the local economy, a large part of which is based on offshore oil exploration. Those involved in the industry say that they do not see much relief for bayou oil business.
Louisiana economist Loren Scott said Congress’s repeal of the restrictions would primarily help oil producers in Texas and North Dakota. Those areas are producing sweet, light crude oil that fetches a higher price on the global market. Deepwater operations in the Gulf of Mexico focus on heavy crude. The U.S. sweet, light crude market that is benchmarked in price by West Texas Intermediate will be the biggest winner, according to Scott.
“This is not that big an issue for the Houma area, because most of the West Texas Intermediate product is produced out in West Texas, in Eagle Ford, and up in the Bakken play in North Dakota,” the economist said. “The oil that we produce is not in the same context. So, it’s mainly going to benefit those producers of oil.”
Scott said the boon to WTI oil producers will be a reduction in the spread they encounter between their product’s sale price and the global price. According to him, WTI oil was selling for as much as $20 less per barrel than North Sea Brent, the international benchmark for light crude. With their products opened up to the global market, WTI companies will start to see that discount dissipate.
“Now, if you are a producer of West Texas Intermediate and you see the world price of oil $100, and you’re getting paid $80, you don’t like that. Under normal circumstances, the price of oil everywhere is the same; I don’t care what kind of oil it is,” he said.
A U.S. Energy Information Administration report from September examined what removing the ban would mean for U.S. oil production. In both the reference case and the scenario with low gas prices, the report predicted that unrestricted exports would have no noticeable effect on the WTI-Brent spread in 2025. In the two scenarios that predicted the most U.S. production, the report said that lifting the bans would reduce the spread by about $6-$7.
Kerry Chauvin, the retired CEO of Gulf Island Fabrications Inc. and a member of the South Central Industrial Association, said he is taking a wait-and-see approach regarding the export ban’s effects. He said that there are many variables, such as national and global politics, that will determine its efficacy. Chauvin also said that U.S. companies, who could never previously export their goods, will need time to work their way into the global market.
“You haven’t developed markets for exports yet. So until we see what the market is for U.S. oil and gas, this is kind of a thing that we were hoping was coming. But nobody knows what the real effects are, or what the contracts will be set at this point in time. It’s really premature to determine what effect it might have in this area,” Chauvin said.
Don Briggs, president of the Louisiana Oil and Gas Association, spoke favorably of the U.S. putting oil exports back on the table, saying it frees up the country’s oil market. He said that the 40-year ban restricted companies from truly being involved in the petroleum business.
“The way things are today, every country in the world can export oil except for the United States. While we participate in a global oil market, we can’t really play the game,” he said.
Briggs also expressed some optimism about the ban’s removal impacting south Louisiana, citing Republican Congressman Steve Scalise’s mention of a study that predicted new jobs would come to the state if exports were allowed.
“According to studies that have been done, it’s said to be that it’ll create possibly 5,000 new jobs in Louisiana. I would anticipate some of those jobs definitely being in [the southern] part of the state,” the LOGA president said.
Briggs noted that these new jobs would not provide a much-needed jolt for the current lulling economy, saying that those 5,000 jobs would take time to establish. According to Scott, allowing exports will boost the oil storage business. However, oil storage is mainly operated on the Mississippi River. Chett Chaisson, executive director of Port Fourchon, said that his port does not see many effects by the ban’s lifting right now.
“It doesn’t, at this point, have any impact on us directly because we don’t deal in storage of oil or anything like that,” Chaisson said.
Scott said he has not made any changes to his projections to the Houma-Thibodaux MSA employment from his October 2015 Louisiana Economic Outlook report, which predict the area will lose 2,000 jobs in 2016 before gaining 1,000 next year.
The removal of those restrictions could mean an increase in production, according to the EIA report. In the report’s second-highest production scenario, the removal of the ban would result in about 400,000 more barrels per day in 2025 U.S. production.
The most optimistic scenario predicted that allowing exports would provide a boost of almost 500,000 per day by 2025, something Chaisson would be eager to see happen.
“If drilling would pick up again, and things like that, and more oil would be exported, it very well could have a positive impact on us, and in the long term it probably will. We’ll have to see and let that ramp up,” he said.
With this increase in production and sales to other countries come geopolitical concerns. Briggs said that the export ban helps America wean allies off of oil suppliers they are at odds with.
“I think it’s also important that we’re able to sell crude to our allies, the countries that are friendly to us, so they don’t have to be so reliant on Russia and countries that aren’t favorable to them,” Briggs said.
According to Scott, the current oil price collapse is based largely on Saudi Arabian reaction to American entrance into the oil market last year, when oil producers found a loophole in which they could slightly distill their crude and export it as petroleum products. In response, the Saudis flooded the market with oil to drop its price and slow U.S. production. Scott said that he could see the export ban steeling Saudi resolve even more.
“Well, lifting the oil ban is basically going to make that even easier for U.S. suppliers to cut into the Saudis’ international market. So, I think if anything it’s going to encourage the Saudis to try to keep the price lower longer, to try to stop this oil production from these shale plays in the United States,” he said.
However, Scott said the Saudis will have to eventually turn the faucet off, as their current actions are burning through their cash reserves.
According to Scott, Saudi Arabia had $700 billion in cash reserves when they started flooding the market in 2014. He said that he had last heard that they are down to $400 billion, as the low prices mean they cannot fund their social programs and war efforts solely through oil sales. Scott said that the diminishing Saudi cash reserves are what prompt his team to expect higher oil prices in the coming year.
“If you look back at our forecast, and we’ve been hanging in there. We think it’s going back to $55 next year. The primary reason we think that is because we think the Saudis are just going to start getting so low on cash reserves that they’ve got almost no choice except to let the price go back up again,” Scott said. •
Last month Congress agreed to lift the 40-year ban on United States oil exports, which could provide a boost in longterm domestic production.
