Why American crude oil is selling for less than it’s worth

It seems simple. Our country produces crude oil that cannot be economically refined into products. Other countries have the capability to process this oil. So, what is stopping the U.S. from selling our crude oil to these markets? An outdated policy dating back to the 1970s.

Outdated ban

A 40-year-old ban is keeping the U.S. from selling crude oil it cannot process to global markets. The result? U.S. crude oil is worth less than global oil. For nearly five years, global oil (Brent) has sold at a premium, with U.S. crude (West Texas Intermediate) selling as much as 20 percent below global prices. While the ban may have been appropriate during the 1970s when U.S. oil production was declining, it does not make economic sense now that the country is able to produce an abundance of oil.

U.S. refineries cannot economically process all U.S. oil

Not all oil is the same. The bulk of the oil produced in the United States is low-density “light oil,” but many Gulf Coast and Midwest refineries were designed to process denser “heavy oil” from Venezuela, Mexico and Canada. This is why experts agree the United States should export light oil, even though it will still need to import heavy oil.

“There’s a mismatch between the new production we’re developing as an industry and our country’s existing refining capacity,” said Ryan Lance, chairman and CEO of ConocoPhillips. “To process this new, lighter oil, refineries must operate inefficiently or at a reduced rate. They need to buy oil at a discount in order to make it economic to refine it, which hurts domestic producers and ultimately, consumers.”

Fortunately, there is a solution, because refineries in many parts of the world are set up to process light oil.

Exports would decrease consumer gasoline prices

U.S. gasoline prices are set by the global price for crude oil, not the lower domestic price. Thus, a higher global crude oil price means a higher price at U.S. gas pumps.

Experts agree that one of the simplest ways to decrease the discrepancy between global and U.S. crude prices, thereby lowering gasoline prices in the United States, is to export oil the country cannot economically process. If the United States is allowed to sell its light oil in the global marketplace, the new supply entering the market would decrease the global price of oil.

To learn more, visit www.powerincooperation.com.

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