It is a violation of federal law in the United States to export crude oil. Even though the U.S. claims to be a haven for free trade and open markets, this protectionist stance has been in place since the oil shocks of the 1970s which saw cars line up around entire city blocks in order to fill up their gas tanks. In the intervening years, domestic oil production languished until the past decade when fracking began to be employed on a large scale.

Now there is an ever increasing call to lift the ban on oil exports in order for the U.S. to remove itself of the glut and send its oil surpluses overseas where demand is higher, such as in Asia and India. While the ban on oil exports remains in place, the U.S. government is getting close to a deal to allow U.S. producers to swap the light, sweet crude that is in too much supply with Mexico, in return for heavy crude. While this transaction may not seem very noteworthy, it marks the first time that domestic oil producers have been able to legally export oil, and may signal a relaxing of existing regulations going forward.

Fracking and the U.S. Light Crude Surplus

The price of crude oil keeps on falling, approaching $40 a barrel, which constitutes price levels not seen in years. Part of the reason for this precipitous drop from prices well above $100 a barrel is due to a drop in global demand for oil. Equally important, there has been an increased supply of crude resulting from U.S. oil production. The United States has been a long-time oil importer which has led to a lack of energy independence, reverberating through the economy since the oil shocks of the 1970s. The advent of hydro-fracturing, or fracking for short, has made the United States awash in light crude oil as drillers from Montana to Texas to Pennsylvania have been taking advantage of this technology. (For related reading, see: A Complex Story: Global Impact of Low Oil Prices.)

Fracking involves drilling into oil-rich rocks and then pumping high pressure fluid into the ground, breaking up, or fracturing, those rocks. The free oil is then extracted and refined. When the price of oil was above $80, it was a no-brainer to employ this relatively more expensive alternative method to oil extraction. Meanwhile, as the price of a barrel has fallen drastically, so-called shale oil drillers are beginning to go bankrupt one by one. (For more, see: How Fracking Affects Natural Gas Prices.)

Light and Sweet in Exchange for Heavy

The type of oil that domestic drillers are extracting is light, sweet crude, which is more easily refined than heavy crude oil. "Light" refers to petroleum that has a low density and flows freely at room temperature while "sweet" refers to a low sulfur content. This type of crude oil commands a higher price in the market per barrel as it yields a higher percentage of useful gasoline and diesel fuel when processed by an oil refiner.

Heavy crude, which the U.S. is receiving back from Mexico is characterized as any type of petroleum which does not flow easily. It is referred to as “heavy” because its density or specific gravity is higher than that of light crude oil. Not only is this kind of oil priced at a discount to light, but it produces many more unwanted byproducts as it is processed. It is more expensive to turn into usable products since its refinement requires the use of more advanced techniques and the need to get rid of contaminants.

According to Fortune, the agreement would allow Mexico's state-run oil company Pemex to swap its heavier and cheaper crude for lighter and more expensive U.S. crude. Mexico benefits from increased efficiency of its refineries which can handle the light crude much more easily, while U.S. facilities can convert the heavy crude into useful derivatives such as jet fuel.

It is less clear as to what the U.S. gains from the deal. Aside from altruism in helping the Mexican oil economy deal with outdated and inefficient refineries, it could be a measure of goodwill aimed at encouraging the Mexican government to award oil services contracts to U.S. companies. Mexico only recently opened its oil industry to foreign investment for the first time in decades. (For more, see: Mexican Reforms Please Foreign Investors.)

Oil Exchange Limited to Mexico

The net amount of oil being exchanged is likely to be only around 100,000 barrels per day, which represents just 0.6% of the total amount of oil that U.S. refineries process on a daily basis. This small amount will barely put a dent in the oil economy or the spread between heavy and light crude oil in commodities markets.

Furthermore, Mexico falls under the NAFTA free trade agreement, and therefore is considered a much more acceptable deal partner than sending oil farther afield. In fact, there has been a free two-way flow of oil between Canada and the U.S. for years. According to experts, this decision will have no bearing on the U.S. government continuing to reject pretty much every other request by U.S. oil producers to export their product abroad.

The Bottom Line

Ever since the oil shocks of the 1970s, there has a been a federal restriction banning the export of U.S.-produced crude oil. The domestic oil economy has changed, however, since 40 years ago with the U.S. becoming less and less reliant on foreign oil imports. This is largely due to the increase in shale-oil extraction using fracking. An increase in supply coupled with a steady decline in demand has led to a glut of light, sweet crude in the U.S.

Furthermore, a deal with Mexico seems to be close, allowing Mexico to swap nearly 100,000 barrels a day of their heavier and cheaper oil for American light, sweet crude. While Mexico seems to gain economically from the deal, allowing its antiquated refineries the ability to run more efficiently, the U.S. may also reap benefits from Mexico's recently opened oil industry with U.S. companies being awarded lucrative contracts there. Regardless, this particular deal does not signal that the federal government is going to freely allow exports of oil any time soon, even though many experts agree that the ban should be lifted.

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