How U.S. Crude Oil Exports Are Hastening the Demise of the Oil Industry

Analysis
How U.S. Crude Oil Exports Are Hastening the Demise of the Oil Industry
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When Congress lifted the export ban on U.S. crude oil in December of 2015 to allow for exports beginning in 2016, the oil industry celebrated. However, looking back at the impact of lifting the 40-year-old ban, it appears the move has helped hasten the financial demise of the U.S. oil industry — while also increasing the industry’s huge contribution to climate change.

In many ways, the U.S. oil and gas industry’s demise is self-inflicted. When historians look back upon its declines, lifting the export ban will likely mark a turning point where the industry made a huge bet on the profitability of fracking for oil in the U.S. — and subsequently began to dig its own grave.

Opening the shale revolution to the world through the export ban lifting helped shift the global oil market psychology from supply scarcity to abundance,” Karim Fawaz, director of research and analysis for energy at IHS Markit, told Bloomberg in early 2021. “It unshackled the U.S. industry to keep growing past its domestic refining limitations.”

Graph: U.S. crude oil exports  Credit: Energy Information Administration

Now, not only is the U.S. shale oil industry failing financially and facing debts it likely can’t repay, but calls are growing for the new Biden administration to reinstate the crude oil export ban — which President Biden could do immediately under a national emergency declaration.

This would effectively put a limit on the U.S. fracking industry — and be a big step in reducing the industry’s contributions to climate change. It would also restrain the industry from simply producing as much oil as fast as possible, something investors have been lobbying for the last several years. That’s because this approach has led to the loss of over $340 billion since 2010. Investors hope imposing fiscal restraint on the U.S. fracking industry will result in companies producing less oil overall but finally producing some profits.

Lifting the crude oil export ban to allow exports beginning in 2016 unleashed the U.S. fracking industry to produce as much oil as possible because it opened access to global markets with a long list of willing buyers of cheap U.S. crude oil.

It was a seismic change for the U.S. oil industry and built on the excitement of what was being called the fracking miracle; investors continued to lend large sums to the industry to produce record amounts of oil, betting on the promise of future profits to pay back the debt.

The profits never materialized despite the record amounts of oil being produced and now it appears that most of the best U.S. shale oil deposits were drained in that effort. The U.S. exported approximately 3.6 billion barrels of crude oil from January 2016 to October 2020. To put that in perspective, that is slightly less than the 4.1 billion barrels that the U.S. is expected to produce in 2021 (estimate based on EIA forecast of 11.1 million barrels per day in 2021).

Lifting the ban increased oil production

In response to the OPEC oil embargo and subsequent gasoline shortage in the U.S. in the early 1970s, the U.S. banned almost all oil exports. Unable to sell U.S. crude oil on world markets before 2016, the U.S. oil industry was limited by how much crude oil could be purchased by U.S. oil refineries. These refineries were running at full capacity and could not process another few million barrels of oil per day that frackers wanted to produce and sell. This very real limit was about to cause producers to have to restrain U.S. oil production rather than simply trying to get as many barrels of oil out of the ground as fast as possible.

To fix that, the oil industry and commodities brokers that trade oil on global markets successfully lobbied the U.S. Congress to lift the ban.

A big part of the argument lobbyists made was that there was such an abundance of oil to be fracked in the U.S. that it made sense to sell it to the rest of the world. In 2015, for example, Harold Hamm, billionaire founder of Continental Resources, presented a slide at the annual Energy Information Administration (EIA) conference projecting that the U.S. could be producing 20 million barrels per day (mmbpd) of crude oil by 2025 due to the energy abundance fracking had opened up. At the time, U.S. crude oil production was less than half that — just under 10 million barrels per day.

Image: Harold Hamm’s U.S. oil production predictions  Credit: DeSmog

By 2016, with the ban lifted and no domestic refining limitations shackling production, U.S. oil volumes exploded in the years that followed. The industry was producing huge amounts of oil as fast as it could — and losing huge sums of money in the process, likely hastening the industry’s currently unfolding financial collapse.

The misinformation behind the export ban’s reversal

The successful lifting of the ban was largely the result of a well-coordinated effort by the U.S. oil and gas industry — along with its partners in academia and various industry-funded think tanks — to mislead the public and government about the industry’s true motivations for lifting the crude oil export ban.

The industry’s campaign was on full display in 2014 at a conference hosted by a new academic energy strategy group, the Center on Global Energy Policy (CGEP), which was launched in April 2013 at Columbia University. New York City’s Mayor Michael Bloomberg spoke at the launch of CGEP where he advocated for fracking and natural gas.

In November 2014, CGEP hosted a Columbia University Energy Symposium. It featured a fireside chat with Marianne Kah, chief economist for ConocoPhillips, who supported lifting the ban.

Kah repeatedly referred to a study done by energy consulting group IHS — which was instrumental in the public relations efforts to reverse the crude export ban. The IHS study touted the benefits of lifting the ban, focusing on potential economic benefits and downplaying any environmental risks. In 2014 Reuters reported that Daniel Yergin of IHS said that lifting the ban would not hurt the global environment because it would not add to total global oil production — a claim that was quickly proven wrong after the ban was lifted. 

As DeSmog reported at the time, the study by IHS was “funded by Chevron, ConocoPhillips, ExxonMobil, and other industry players.”

Over the course of 2015, Columbia’s Center on Global Energy Policy played a leading role in pushing to lift the ban. At the time, CGEP didn’t reveal its funding. But, recently the group published a list of some of its “partners,” including Saudi Aramco, Exxon, and Kah’s former employer, ConocoPhillips. (Kah now works at CGEP.)

CGEP’s work helped to support the industry’s misleading arguments that lifting the crude oil export ban would be good for Americans. At the time, CGEP and oil industry leaders like Hamm were making claims that the move would benefit U.S. foreign policy and help meet climate goals while expanding oil production. In addition, in July 2015 Hamm testified before Congress that lifting the ban would not result in U.S. oil being sold to the biggest growth market in the world, China, a concern for national security reasons. Reassurances like his that U.S. oil would only be sold to strategic allies was a big part of the argument for lifting the crude oil export ban.

Another of the main arguments industry consultants were making at the time for lifting the ban was that its removal was unlikely to have much of an impact on U.S. oil production. This claim was meant to deflect arguments from environmental groups such as the Sierra Club that lifting the ban would be bad for the climate (something that has proven to be true, especially when accounting for the U.S. fracking industry’s methane pollution).

In January 2015, Jason Bordoff, head of CGEP, co-authored a report, which stated that lifting the ban would likely only increase U.S. oil production from 0 to 1.2 million barrels per day by 2025.

This projection turned out to be a gross underestimate. Crude exports peaked in 2020 at approximately 4 million barrels per day.

The result, however, highlights the economic consequences of short-term thinking. As DeSmog previously reported, these coordinated misinformation campaigns led to a massive expansion of U.S. fracking. But, despite the much-hyped U.S. “fracking miracle,” the U.S. oil and gas industry is now coming to terms with years of losses and falling asset values, which have dealt the industry a serious financial blow.

Unlimited demand for cheap oil

Lifting the U.S. crude oil export ban effectively gave U.S. oil producers access to unlimited demand for its products. Any oil produced would be purchased by foreign buyers who especially liked the cheap oil prices, prices that were below what it cost the U.S. oil companies to produce the oil — resulting in large losses for oil producers.

In November 2020, the Government Accountability Office (GAO) released an analysis of the impact of lifting the crude oil export ban, noting the big increase in U.S. fracked oil production — 3.5 million barrels per day — since the ban was removed.

According to EIA data,” the GAO wrote, “total production of U.S. crude oil rose by roughly one-third, from approximately 9.3 million barrels per day just before the repeal of the ban in December 2015 to about 12.8 million barrels per day in December 2019.”

And nearly all of that additional oil is exported — the increase in production cited by the GAO translated into the export of an average of three million barrels per day of crude oil in 2019.

This rush to produce, however, helped hastened the demise of the U.S. oil industry, a fall which was brought on by the fracking boom. Lifting the ban encouraged shale drillers to produce more and more oil, even when they were losing money on every barrel drilled. This blistering pace of drilling through the best acreage in shale fields quickly revealed that industry promises of abundance were, in fact, hollow — heady projections made to investors were likely based on estimates of oil reserves that simply are not there.

The result is that the industry has now lost $342 billion since 2010, the best oil reserves have been fracked, and even industry insiders are saying the U.S. fracking boom has peaked.

In April 2020, Scott Sheffield, CEO of shale oil producer Pioneer Natural Resources, summed up what the fracking revolution — driven in part by the export ban’s reversal — has done to the U.S. oil and gas industry. “It has been an economic disaster, especially the last 10 years,” Sheffield said in testimony before Texas’s oil regulators. “Nobody wants to give us capital because we have all destroyed capital and created economic waste.”

Perhaps no two groups have gained from the export of America’s shale boom more than producers of U.S. oil and the giant commodities merchants who trade it,” Bloomberg reported in January.

While it is true that commodity merchants have been one of the main beneficiaries of the ban’s lifting, it isn’t quite accurate to say that producers of U.S. oil have gained as well; the executives of those companies reaped the benefits while the companies themselves actually lost money. In October 2020, the Wall Street Journal highlighted this reality with an article headlined, “Shale Companies Had Lousy Returns. Their CEOs Got Paid Anyway.”

And contrary to industry promises, China was the biggest buyer of U.S. oil for much of 2020, and the group that now manages the most exports of U.S. oil is Trafigura — a Singapore-based company currently accused of bribery aimed at influencing the global oil trading market. Trafigura has a partnership to export U.S. oil with Kah’s old employer ConocoPhillips.

The time is right to reinstate the export ban

In recent years, investors have been begging the shale industry to curb oil production itself, now that U.S. crude oil can be exported to the world. Investors hope that by limiting production, U.S. oil producers will focus instead on profitability instead of simply producing the most oil possible.

However, it took a global pandemic and U.S. oil prices going negative in 2020 to slow industry production. Meanwhile, despite all of that, exports have remained strong throughout the pandemic, only dropping in early 2021. One reason is that analysts at JP Morgan have recently downgraded forecasts for Chinese oil consumption with expectations that the pandemic will depress oil demand in China for longer than initially expected.

Reinstating the crude oil export ban would be bad for China and other countries that want access to as much cheap U.S. crude as possible. But it would be very good for the climate — a top priority of the Biden administration. While campaigning for president in 2020, Biden even made a qualified statement about banning fossil fuel exports.

The Biden administration also has directed the government to pause new drilling leases on federal lands, which, unsurprisingly, has provoked strong reactions, along with inflated job loss numbers, from the U.S. oil and gas industry. Similarly, should the administration propose reinstating the crude oil export ban, industry groups undoubtedly would make even more predictions of catastrophe.

While such a move would likely mean the U.S. would never again see the record levels of crude oil production that led to exporting 4 million barrels of oil a day, it also would likely force the U.S. fracking industry to learn how to produce oil at a profit — something it has not done in the past decade.

The energy world has changed dramatically since 2014 when the U.S. oil industry began lobbying to lift the crude oil export ban. The arguments made back then no longer apply — and most didn’t make sense even at the time.

While there are many reasons that the U.S. should be discussing banning exports of U.S. crude oil, the most immediate positive impact would be to address greenhouse gas emissions and tackle the climate emergency. As UN scientists have pointed out, the world doesn’t have any extra time to spare.

Main Image: VLCC Kyrakatingo seen alongside Tranmere North Oil Jetty having just been made fully fast after arrival from Houston, Texas with a part cargo of light crude oil.  Credit: Darren Hillman, CC BYND 2.0

How U.S. Crude Oil Exports Are Hastening the Demise of the Oil Industry
Justin Mikulka is a freelance writer and audio and video producer living in New York. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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