Crude Oil Export Restrictions: Studies Suggest Allowing Exports Could Reduce Consumer Fuel Prices
Published: 2015-07-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: After decades of generally falling U.S. crude oil production, technological advances in the extraction of crude oil from shale formations have contributed to increases in U.S. production. In response to these and other market developments, some have proposed removing the 4 decade old restrictions on crude oil exports, underscoring the need to understand how allowing crude oil exports could affect crude oil prices, and the prices of consumer fuels refined from crude oil, such as gasoline and diesel.
This testimony discusses what is known about the pricing and other key potential implications of removing crude oil export restrictions. It is based on GAO's September 2014 report ( GAO-14-807 ), and information on crude oil production and prices updated in June 2015. For that report, GAO reviewed four studies issued in 2014 on crude oil exports; including two sponsored by industry and conducted by consultants, one sponsored by a research organization and conducted by consultants, and one conducted at a research organization. Market conditions have changed since these studies were conducted, underscoring some uncertainties surrounding estimates of potential implications of removing crude oil export restrictions. For its 2014 report, GAO also summarized the views of a nongeneralizable sample of 17 stakeholders including representatives of companies and interest groups with a stake in the outcome of decisions regarding crude oil export restrictions, as well as academic, industry, and other experts.
section_title: What GAO Found
paragraphs: In September 2014, GAO reported that according to studies it reviewed and stakeholders it interviewed, removing crude oil export restrictions would likely increase domestic crude oil prices, but could decrease consumer fuel prices, although the extent of price changes are uncertain and may vary by region. The studies identified the following implications for U.S. crude oil and consumer fuel prices:
Crude oil prices . The four studies GAO reviewed estimated that if crude oil export restrictions were removed, U.S. crude oil prices would increase by about $2 to $8 per barrel—bringing them closer to international prices. Prices for some U.S. crude oils have been lower than international prices—for example, one benchmark U.S. crude oil averaged $52 per barrel from January through May 2015, while a comparable international crude oil averaged $57. In addition, one study found that, when assuming low future crude oil prices overall, removing export restrictions would have no measurable effect on U.S. crude oil prices.
Consumer fuel prices. The four studies suggested that U.S. prices for gasoline, diesel, and other consumer fuels follow international prices. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well. Estimates of the consumer fuel price implications in the four studies GAO reviewed ranged from a decrease of 1.5 to 13 cents per gallon. In addition, one study found that, when assuming low future crude oil prices, removing export restrictions would have no measurable effect on consumer fuel prices.
Some stakeholders cautioned that estimates of the price implications of removing export restrictions are subject to several uncertainties, such as the extent of U.S. crude oil production increases, and how readily U.S. refiners are able to absorb such increases. Some stakeholders further told GAO that there could be important regional differences in the price implications of removing export restrictions.
The studies GAO reviewed and the stakeholders it interviewed generally suggested that removing crude oil export restrictions may also have the following implications:
Crude oil production . Removing export restrictions may increase domestic production—over 8 million barrels per day in April 2014—because of increasing domestic crude oil prices. Estimates ranged from an additional 130,000 to 3.3 million barrels per day on average from 2015 through 2035.
Environment . Additional crude oil production may pose risks to the quality and quantity of surface groundwater sources; increase greenhouse gas and other emissions; and increase the risk of spills from crude oil transportation.
The economy . Three of the studies projected that removing export restrictions would lead to additional investment in crude oil production and increases in employment. This growth in the oil sector would—in turn—have additional positive effects in the rest of the economy, including for employment and government revenues.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss our work on the implications of  removing crude oil export restrictions. After decades of generally falling  U.S. crude oil production, technological advances in the extraction of  crude oil from shale formations have contributed to increases in U.S.  production. Crude oil production increased by about 74 percent from 2008  through 2014 to reach over 8 million barrels per day in 2014, and  production increases in 2012, 2013, and 2014 were the largest annual  increases since the beginning of U.S. commercial crude oil production in  1859, according to the Energy Information Administration (EIA). More  recently, however, crude oil prices have declined by 40 percent, from  about $100 per barrel in the summer of 2014, to about $60 in May 2015.  In response to these and other market developments, some have  proposed removing the 4 decade old restrictions on crude oil exports,  underscoring the need to understand how allowing crude oil to be  exported could affect crude oil prices, and the prices of consumer fuels  refined from crude oil, such as gasoline and diesel.
My testimony discusses what is known about the pricing and other key  implications of removing crude oil export restrictions. It is based on our  September 2014 report that examined these and other issues,information on crude oil prices and production updated in June 2015. For  the 2014 report, we reviewed four studies issued in 2014 on crude oil  exports; including two sponsored by industry and conducted by  consultants, one sponsored by a research organization and conducted by   and  consultants, and one conducted at a research organization.conditions have changed since these studies were conducted,  underscoring some uncertainties surrounding estimates of potential  implications of removing crude oil export restrictions. For our 2014 report,  we also summarized the views of a nongeneralizable sample of 17  stakeholders including representatives of companies and interest groups  with a stake in the outcome of decisions regarding crude oil export  restrictions, as well as academic, industry, and other experts. Although  not generalizable to all potential stakeholders, these views provide  illustrative examples. More details on our scope and methodology for that  work can be found in the issued report. We conducted the work on which  this statement is based in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The export of domestically produced crude oil has generally been  restricted since the 1970s. In particular, the Energy Policy and  Conservation Act of 1975 (EPCA) led the Department of Commerce’s  Bureau of Industry and Security (BIS) to promulgate regulations that  require crude oil exporters to obtain a license.that BIS will issue licenses for the following crude oil exports: exports from Alaska’s Cook Inlet, exports to Canada for consumption or use therein, exports in connection with refining or exchange of SPR crude oil, exports of certain California crude oil up to twenty-five thousand  barrels per day, exports consistent with certain international energy supply exports consistent with findings made by the President under certain exports of foreign origin crude oil that has not been commingled with  crude oil of U.S. origin.
Other than for these exceptions, BIS considers export license applications  for exchanges involving crude oil on a case-by-case basis, and BIS can  approve them if it determines that the proposed export is consistent with  the national interest and purposes of EPCA. In addition to BIS’s export  controls, other statutes control the export of domestically produced crude  oil, depending on where it was produced and how it is transported. In  these cases, BIS can approve exports only if the President makes the  necessary findings under applicable laws. Some of the authorized  exceptions, outlined above, are the result of such presidential findings.
As we previously found, recent increases in U.S. crude oil production  have lowered the cost of some domestic crude oils. For example, prices  for West Texas Intermediate (WTI) crude oil—a domestic crude oil used  as a benchmark for pricing—were historically about the same price as  Brent, an international benchmark crude oil from the North Sea between   However, from 2011 through  Great Britain and the European continent.2014, the price of WTI averaged $12 per barrel lower than Brent (see fig.  1). In 2014, prices for these benchmark crude oils narrowed as global oil  prices declined, and WTI averaged $52 from January through May 2015,  while Brent averaged $57. The development of U.S. crude oil production  has created some challenges for crude oil transportation infrastructure  because some production has been in areas with limited linkages to  refining centers. According to EIA, these infrastructure constraints have  contributed to discounted prices for some domestic crude oils.
Much of the crude oil currently produced in the United States has  characteristics that differ from historic domestic production. Crude oil is  generally classified according to two parameters: density and sulfur  content. Less dense crude oils are known as “light,” and denser crude oils  are known as “heavy.” Crude oils with relatively low sulfur content are  known as “sweet,” and crude oils with higher sulfur content are known as  “sour.” As shown in figure 2, according to EIA, most domestic crude oil  produced over the last 5 years has tended to be light oil. Specifically,  according to EIA estimates, about all of the 1.8 million barrels per day  increase in production from 2011 to 2013 consisted of lighter sweet crude  oils.
Light crude oil differs from the crude oil that many U.S. refineries are  designed to process. Refineries are configured to produce transportation  fuels and other products (e.g., gasoline, diesel, jet fuel, and kerosene)  from specific types of crude oil. Refineries use a distillation process that  separates crude oil into different fractions, or interim products, based on  their boiling points, which can then be further processed into final  products. Many refineries in the United States are configured to refine  heavier crude oils and have therefore been able to take advantage of  historically lower prices of heavier crude oils. For example, in 2013, the  average density of crude oil used at domestic refineries was 30.8, while  nearly all of the increase in production in recent years has been lighter  crude oil with a density of 35 or above.
According to EIA, additional production of light crude oil over the past  several years has been absorbed into the market through several  mechanisms, but the capacity of these mechanisms to absorb further  increases in light crude oil production may be limited in the future for the  following reasons:
Reduced imports of similar grade crude oils: According to EIA,  additional production of light oil in the past several years has primarily  been absorbed by reducing imports of similar grade crude oils. Light  crude oil imports fell from 1.7 million barrels per day in 2011 to 1  million barrels per day in 2013. As a result, there may be dwindling  amounts of light crude oil imports that can be reduced in the future,  according to EIA.  Increased crude oil exports: Crude oil exports have increased  recently, from less than thirty thousand barrels per day in 2008 to 396  thousand barrels per day in June 2014. Continued increases in crude  oil exports will depend, in part, on the extent of any relaxation of  current export restrictions, according to EIA.  Increased use of light crude oils at domestic refineries: Domestic  refineries have increased the average gravity of crude oils that they  refine. The average American Petroleum Institute (API) gravity of  crude oil used in U.S. refineries increased from 30.2 degrees in 2008  to 30.8 degrees in 2013, according to EIA. Continued shifts to use  additional lighter crude oils at domestic refineries can be enabled by  investments to relieve constraints associated with refining lighter  crude oils at refineries that were optimized to refine heavier crude oils,  according to EIA.  Increased use of domestic refineries: In recent years, domestic  refineries have been run more intensively, allowing the use of more  domestic crude oils. Utilization—a measure of how intensively  refineries are used that is calculated by dividing total crude oil and  other inputs used at refineries by the amount refineries can process  under usual operating conditions—increased from 86 percent in 2011  to 88 percent in 2013. There may be limits to further increases in  utilization of refineries that are already running at high rates,  according to EIA.
section_title: Removing Crude Oil Export Restrictions Is Expected to Increase Domestic Crude Oil Prices and Could Decrease Consumer Fuel Prices
paragraphs: In our September 2014 report, we reported that according to the studies  we reviewed and the stakeholders we interviewed, removing crude oil  export restrictions would likely increase some domestic crude oil prices,  but could decrease consumer fuel prices, although the extent of  consumer fuel price changes are uncertain and may vary by region. As  discussed earlier, increasing domestic crude oil production has resulted in  lower prices of some domestic crude oils compared with international  benchmark crude oils. Three of the studies we reviewed also concluded  that, absent changes in crude oil export restrictions, the expected growth  in crude oil production may not be fully absorbed by domestic refineries or  through exports (where allowed), contributing to even wider differences in  prices between some domestic and international crude oils. According to  these studies, by removing the export restrictions, these domestic crude  oils could be sold at prices closer to international prices, reducing the  price differential and aligning the price of domestic crude oil with  international benchmarks.
Specifically, the Department of Commerce’s definition of crude oil includes condensates,  which are light liquid hydrocarbons recovered primarily from natural gas wells. subject to export restrictions. One stakeholder stated that this may  lead to more condensate exports than expected.
Within the context of these uncertainties, estimates of potential price  effects vary in the four studies we reviewed, as shown in table 1.  Specifically, estimates in these studies of the increase in domestic crude  oil prices due to removing crude oil export restrictions ranged from about  $2 to $8 per barrel. was $103 per barrel, and these estimates represented 2 to 8 percent of  that price. In addition, NERA Economic Consulting found that removing  export restrictions would have no measurable effect in a case that  assumes a low future international oil price of $70 per barrel in 2015   According to the NERA Economic  rising to less than $75 by 2035.Consulting study, current production costs are close to these values, so  that removing export restrictions would provide little incentive to produce  more light crude oil.
Unless otherwise noted, dollar estimates in the rest of this report have been converted  to 2014 year dollars. These are average price effects over the study time frames, and  some cases in some studies projected larger price effects in the near term that declined  over time.
ICF International  West Texas Intermediate  crude oil prices increase  $2.35 to $4.19 per barrel  on average from 2015- 2035.
IHS   Prices increase $7.89  per barrel on average  from 2016-2030.
NERA Economic  Consulting  Prices increase $1.74 per  barrel in the reference case  and $5.95 per barrel in the  high case on average from  2015-2035.
Implications refer to the difference between the reference case and its baseline with export  restrictions in place, and also the difference between the high oil and gas recovery case and its  corresponding baseline. NERA Economic Consulting also found that removing crude oil export  restrictions would have no measurable effect in the low world oil price case.
Regarding consumer fuel prices, such as gasoline, diesel, and jet fuel, the  studies we reviewed and most of the stakeholders we interviewed  suggested that consumer fuel prices could decrease as a result of  removing crude oil export restrictions. A decrease in consumer fuel prices  could occur because such prices tend to follow international crude oil  prices rather than domestic crude oil prices, according to the studies  reviewed and most of the stakeholders interviewed. If domestic crude oil  exports caused international crude oil prices to decrease, consumer fuel   Table 2 shows that the estimates of the  prices could decrease as well. price effects on consumer fuels varied in the four studies we reviewed.  Price estimates ranged from a decrease of 1.5 to 13 cents per gallon.  These estimates represented 0.4 to 3.4 percent of the average U.S. retail  gasoline price at the beginning of June 2014. In addition, NERA  Economic Consulting found that removing export restrictions would have  no measurable effect on consumer fuel prices when assuming a low  future world crude oil price.
Resources for the Future also estimates a decrease in consumer fuel prices but this  decrease is as a result of increased refinery efficiency (even with an estimated slight  increase in the international crude oil price).
ICF International  Petroleum product prices  would decline by 1.5 to 2.4  cents per gallon on average  from 2015-2035.
IHS   Gasoline prices would  decline by 9 to 13  cents per gallon on  average from 2016- 2030.
NERA Economic Consulting Petroleum product prices would  decline by 3 cents per gallon on  average from 2015-2035 in the  reference case and 11 cents per  gallon in the high case. Gasoline  prices would decline by 3 cents  per gallon in the reference case  and 10 cents per gallon in the high  case. Fuel prices would not be  affected in a low world oil price  case.
Implications refer to the difference between the reference case and its baseline with export  restrictions in place, and the difference between the high oil and gas recovery case and its  corresponding baseline.
The effect of removing crude oil export restrictions on domestic consumer  fuel prices depends on several uncertainties, as we discussed in our  September 2014 report. First, it would depend on the extent to which  domestic versus international crude oil prices determine the domestic  price of consumer fuels. A 2014 research study examining the  relationship between domestic crude oil and gasoline prices concluded  that low domestic crude oil prices in the Midwest during 2011 did not  result in lower gasoline prices in that region. This research supports the  assumption made in the four studies we reviewed that to some extent  higher prices of some domestic crude oils as a result of removing crude  oil export restrictions would not be passed on to consumer fuel prices.  However, some stakeholders told us that this may not always be the case  and that more recent or detailed data could show that lower prices for  some domestic crude oils have influenced consumer fuel prices.
The Merchant Marine Act of 1920, also known as the Jones Act, in general, requires that  any vessel (including barges) operating between two U.S. ports be U.S.-built, -owned, and  -operated. closure, especially those located in the Northeast. However, according to  one stakeholder, domestic refiners still have a significant cost advantage  in the form of less expensive natural gas, which is an important energy  source for many refineries. For this and other reasons, one stakeholder  told us they did not anticipate refinery closures as a result of removing  export restrictions.
section_title: Removing Crude Oil Export Restrictions Is Expected to Increase Domestic Production and Have Other Implications
paragraphs: The studies we reviewed for our September 2014 report, generally  suggested that removing crude oil export restrictions may increase  domestic crude oil production and may affect the environment and the  economy:
Crude oil production. Removing crude oil export restrictions may  increase domestic crude oil production. Even with current crude oil  export restrictions, given various scenarios, EIA projected that  domestic production will continue to increase through 2020.  If export  restrictions were removed, according to the four studies we reviewed,  the increased prices of domestic crude oil are projected to lead to  further increases in crude oil production. Projections of this increase  varied in the studies we reviewed—from a low of an additional  130,000 barrels per day on average from 2015 through 2035,  according to the ICF International study, to a high of an additional 3.3  million barrels per day on average from 2015 through 2035 in NERA  Economic Consulting’s study.almost 40 percent of production in April 2014.
This is equivalent to 1.5 percent to
Environment. Two of the studies we reviewed stated that the  increased crude oil production that could result from removing the  restrictions on crude oil exports may affect the environment. Most  stakeholders we interviewed echoed this statement. This is consistent  with what we found in a September 2012 report.we found that crude oil development may pose certain inherent  environmental and public health risks. However, the extent of the risk  is unknown, in part, because the severity of adverse effects depends  on various location- and process-specific factors, including the  location of future shale oil and gas development and the rate at which  it occurs. It also depends on geology, climate, business practices, and  regulatory and enforcement activities. The stakeholders who raised  concerns about the effect of removing the restrictions on crude oil  exports on the environment identified risks including those related to  the quality and quantity of surface and groundwater sources;  increases in greenhouse gas and other air emissions, and increases  in the risk of spills from crude oil transportation.
The economy. The four studies we reviewed suggested that  removing crude oil export restrictions would increase the size of the  economy. Three of the studies projected that removing export  restrictions would lead to additional investment in crude oil production  and increases in employment. This growth in the oil sector would—in  turn—have additional positive effects in the rest of the economy.  For  example, NERA Economic Consulting’s study projected an average of  230,000 to 380,000 workers would be removed from unemployment  through 2020 if export restrictions were eliminated in 2015. These  employment benefits would largely disappear if export restrictions  were not removed until 2020 because by then the economy would  have returned to full employment. Two of the studies we reviewed  suggested that removing export restrictions would increase  government revenues, although the estimates of the increase vary.  One study estimated that total government revenue would increase by  a combined $1.4 trillion in additional revenue from 2016 through 2030,  and another study estimated that U.S. federal, state, and local tax  receipts combined with royalties from drilling on federal lands could  increase by an annual average of $3.9 to $5.7 billion from 2015  through 2035.
Chairman Conaway, Ranking Member Peterson, and Members of the  Committee, this completes my prepared statement. I would be pleased to  answer any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff members have any questions concerning this  testimony, please contact me at (202) 512-3841 or ruscof@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Other individuals  who made key contributions include Christine Kehr (Assistant Director),  Quindi Franco, Alison O’Neill, and Kiki Theodoropoulos.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.