Is it time to end the curb on U.S. crude oil exports? As storage capacity reaches its limit, industry participants and their lobby groups in Washington think so. They're calling for this action to support an industry that is struggling in the new era of low oil prices. For example, groups like the Producers for American Crude Oil Exports (PACE) claim that if U.S. crude oil storage capacity indeed reaches its limit, then “producers will undoubtedly be forced to curtail production and idle additional rigs.” This is a big concern in an industry that is already experiencing idle rigs and job losses resulting from the 50% decline in oil prices that began in Q4 of 2014. Crude oil exports are seen as a way to increase demand for U.S. crude, boost economic activity and reduce the trade deficit. (To learn more, read: What Determines Oil Prices?)

Additionally, countries like Saudi Arabia, Mexico and Venezuela would also like to see an increase in the export of U.S. light, sweet crude oil. This is because exports would help ensure that U.S. refiners delay or curtail the investments on reconfiguring their operations to deal with new domestic U.S. production. It would also ensure stable demand for the heavy, sour crude these countries produce and give them a continued presence in the U.S. oil markets. (Read more in: Understanding Benchmark Oils).

U.S. Crude Oil In Storage Reaches Record Levels

U.S. crude oil production and storage continues at a healthy pace despite the rapid decline in the Baker Hughes (BHI) onshore drilling rig count. Data from the Energy Information Administration (EIA) shows that for the week ending March 27, crude oil stocks reached a record 471.4 million barrels, up 91.4 million barrels compared to a year ago, continuing a trend that began accelerating in January 2015 (see chart below). (For more analysis on U.S. oil storage concerns see: When Will Oil Finally Hit Bottom?).

Source: US EIA

Such a large increase in the number of barrels in storage is now well outside the previous 5 year range. At current levels, U.S. storage capacity is more than 90% full, since total working storage capacity in the country is 521 million barrels according to PACE. The summer driving season may help to draw down some of these inventories for a few months, but demand probably won’t be sufficiently large enough to reverse this trend permanently. Therefore calls to open the taps and let some of this excess crude onto world markets are getting louder again.

United States Produces The Wrong Kind Of Crude

Part of the problem seems to be that the U.S. produces too much of the light, sweet crude oil that many local refiners simply can’t use and don’t need because they are designed to refine heavy, sour crude. For example, according to the Congressional Research Service (CRS) and the EIA, 68% of total U.S. refining capacity is located on the West and Gulf Coast (or Petroleum Administration for Defense Districts – PADD 3 and 5) and more than half of the refineries in those districts handle heavy, sour crude. The chart below shows how the heavy, sour quality of crude processed by these two districts (PADD 3 and 5) compares to the type of crude used by other districts and the U.S. average.

Source: US EIA

The Motley Fool reported that according to the EIA, approximately 96% of the 1.8 million barrels per day (bbl/d) growth in output from 2011 to 2013 consisted of light, sweet crude with API gravity of 40 or above, and more than 60% of forecast production growth through 2015 will consist of the same type of light, sweet crude. The chart above shows even the lightest U.S. refiners tend to use crude with an API gravity around 33, mostly by mixing light crude with the heavy, sour type. They go on to report that in order to process lighter crudes on their own, refiners would need to invest heavily in distillation towers, downstream conversion units, furnaces and other equipment that would require hundreds of millions of dollars in new investment and take several years to complete. (For more, see: The Cost Of Extracting Oil).

The other problem is that these same Gulf and West Coast refineries have already invested heavily in coking units to process heavy, sour crude. For example, CRS said in a report published in December 2014 that “adding a coking unit to a refinery is an expensive endeavor, with estimated costs in the US$ 1 billion plus range.” Refiners usually do this because they expect that they will be able to purchase heavier crude oils that generally sell at a discount.

The U.S.A Imports Heavy, Sour Crude

Because the United States is producing the wrong kind of crude oil, it is increasingly dependent on heavy, sour crude from abroad. While it is true that overall U.S. crude oil imports are declining, data from the EIA shows that out of the more than 7 million bbl/d of crude oil that the U.S. is still importing, the percentage of heavy crude oil (broadly defined as having an API gravity of less than 25%) accounted for more than 50% of total crude oil imports in 2014 (see chart below).

This is a huge advantage to heavy, sour crude oil producing countries like Saudi Arabia, Venezuela and Mexico. As the chart from the EIA below shows, Saudi and Mexico produce the type of oil that West and Gulf Coast refiners are best designed to process.

Source: US EIA

It also ensures that these countries maintain a presence in U.S. oil markets. In fact, CRS reports that both Saudi Arabia (via Motiva Enterprises) and Venezuela (via Citgo Petroleum Corporation) own extensive refining assets in the U.S. that are configured to process their type of heavy oil.

One may even go so far to argue that part of the Saudi position to keep oil prices lower for longer could be due in part to ensuring U.S. refiners that are currently configured to process heavy, sour crude remain that way. If these refiners scrap any investment plans to reconfigure operations to process lighter, sweeter domestic crudes, then this can only help Saudi market share in the United States. (See: Refiners Getting Ready For Heavier Crude).

At the same time, this is a disadvantage to domestic producers and to other OPEC members like Nigeria who produce light, sweet crude. The decline in import demand for lighter, sweet crude resulted in a collapse of U.S. imports of crude oil from Nigeria, as shown in the chart below. From a high of 40 million barrels per month in 2007, the U.S. actually stopped importing oil from Nigeria altogether for a time in late 2014. (For more, see: Forecast Of Oil Production By Country In 2015).

The Bottom Line

U.S. oil production remains high despite the recent decline in prices and fall off in the onshore drilling rig count, but the crude oil being produced isn’t the type or quality U.S. refiners need most. This is leading to an excess inventory build up that is putting pressure on existing storage infrastructure. The U.S. is quickly facing two choices: either reduce production to prevent too much excess crude from flooding the domestic market, or begin to export what isn’t needed. With the industry already hurting from the drop in oil price, the case is growing for abolition of the crude export ban. This could provide the stimulus needed to prevent a more permanent slowdown in U.S. crude oil production.