What Lifting the U.S. Oil Export Ban Means for Canada
Lifting America’s 40-year ban on crude oil exports is significant, but not monumental – particularly not for Canadian producers
Tucked away inside a broad piece of tax legislation unveiled by members of the U.S. Congress this week is a motion to lift the 40-year-old ban on U.S. crude oil exports. The motion has yet to be accepted by Senate Democrats, but at this point it appears to be a done deal.
On face value, the shift sounds monumental. But like any monument, its real value is mostly symbolic. Removing the ban would mark a reversal in legislation that dates back to the price-shock of the Arab oil embargo and subsequent worries over U.S. energy independence. But what would the lifting of the ban mean for exporters of Canadian heavy oil, and for the international oil market in the near term?
The short answer is not a whole lot. Much of the fears over U.S. light crude flooding the international market are overblown – though WTI did gain on Brent Wednesday, closing at US$1.61 below the North Sea blend, compared to an average premium of nearly US$5 more than WTI over the past year. For U.S. producers, lifting the ban will provide at least a modicum of political respite during a hell-raising downturn. But the market for oil remains saturated everywhere and the economics are far from a windfall.
As for Canada, the U.S. will continue to import about the same volumes of Canadian oil to its Gulf Coast refineries, which are calibrated to accept heavy blends that are produced either here, in Mexico or in Venezuela. According to the U.S. Energy Information Administration, Canada exported 3.2 million barrels per day to the U.S. in September 2015 of a total 7.2 million imported barrels, or about 44 per cent of the total. That isn’t going to change anytime soon, particularly considering that it will take time before any meaningful amount of U.S. light crude oil hits the market.
In the long-term, however, there is a chance Canadian heavy oil could be gradually elbowed out of the market following the ban’s lifting. An article by Yadullah Hussain of the Financial Post cited analysts who believe that Gulf Coast refiners could possibly recalibrate their facilities if the differential between heavy and light oils is shaved down far enough. If that were the case, the logic goes, refiners would no longer favor heavy blends, which previously offered relatively cheap feedstock.
Still, such a move is hard to fathom given the current oil market. “The U.S. exporting is kind of a non-event when you consider they’re the second-largest importer of crude oil in the world, right behind China,” says Tim Pickering, CEO and lead portfolio manager at Auspice Capital Partners. “On the surface it could be seen as having a knee-jerk reaction that’s slightly bearish but I don’t think it’s all that consequential as a whole. They’re still a net-importer. How much are they going to change from an export perspective when they’re one of the biggest importers in the world?”
The move, once approved, remains a political coup rather than a market-moving shift. For Canada, the real challenge remains diversifying the customer base for its energy – perhaps now more than ever.