U.S. STRATEGIC ERROR
As Abdalla El-Badri, secretary-general of Opec, noted with satisfaction over the weekend, the plunge in oil prices is already having a dramatic effect on the US shale industry.
Capital spending budgets are being cut back, drilling rigs idled and staff laid off. The remarkable growth of US oil production, which brought more than 1m barrels per day of additional supply on to world markets in each of the past three years, seems likely to flatten out this year.
Most of this pain is a consequence of market forces. The surge in output from the US, coming as global demand growth slowed sharply, has created excess supply. In the absence of any action from Saudi Arabia, which sees no reason to bail out its competitors, that oversupply can be corrected only through the price mechanism.
The galling fact for US oil producers is that their problems are exacerbated by regulations kept in place by their own government. The 1970s-era rules that ban exports of unrefined crude oil except in a few limited circumstances are a relic of the Opec oil embargo. They already served no useful purpose.
Studies have confirmed that they do nothing to hold down fuel costs for US consumers, instead handing undeserved rents to refiners. Their continued existence undermines the international credibility of US support for free trade. Moreover, at a time of weak prices, they are particularly pernicious because of the threat they pose to US production.
Because the US, uniquely among large oil producers, bars its industry from international sales, two crude gluts have emerged: one in world markets and another in the US.
Crude storage tanks in the US have been filling at a rate of almost 1.5m barrels per day, or about 16 per cent of all the country's production, as producers struggle to find buyers. The US is still a net importer of oil but the light and sweet (low-sulphur) crude produced from US shale is not a perfect substitute for the imported heavy and sour grades preferred by many US refineries.
As a result, the gap between the price that producers receive for their crude onshore in the US and what they would be paid if they could sell in world markets has widened sharply. US benchmark West Texas Intermediate is at a $9 discount to the internationally traded Brent crude compared with near parity in January.
For an industry that is under extreme financial pressure, the missing $9 per barrel really matters.
Some of the discount is accounted for by transport costs but most of it appears to be a result of the restricted market available for US crude.
By continuing to restrict exports, the US is therefore undermining its own production and helping competitors such as Russia and Saudi Arabia to increase their share of world markets. Regulations sometimes defended as a support for America's energy security will actually increase its net imports.
Recent moves such as allowing increased exports of the ultralight oil known as condensate have been small steps in the right direction but not comprehensive enough to make a real difference. The best solution would be the complete abandonment of all oil export controls.
US politicians are nervous of supporting export liberalisation, fearing they could be blamed when retail fuel prices rise. The severity of the crisis for US oil producers should persuade both the administration and Congress to take that risk.
In the global oil price war, the US is battling with one hand tied behind its back. It is time to abandon an outdated policy and make it a fair fight.
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