The global oil market is nothing if not liquid. More than most any other commodity, crude has the remarkable distinction of fetching a similar price in virtually any region of the globe, the product of decades of work to build the most efficient system for suppliers to meet demand, regardless of geography. Prior to 2011, that held true here in the United States. The regional benchmark for America—the West Texas Intermediate (WTI)—tracked closely with Europe’s Brent benchmark, the most frequently used indicator for global prices. But four years ago, those two benchmarks diverged as burgeoning American production outstripped our pipeline capacity to bring shale-wrought oil to Gulf refineries. That bottleneck meant more oil in storage, and the resultant glut depressed the WTI significantly as compared to the Brent benchmark.
The U.S. doesn’t export unrefined crude thanks to a ban enacted during the days of the 1970s oil embargo, but the gap between the WTI and Brent was commonly cited as evidence that it’s high time to reconsider that ban. Such a market distortion was, critics of the ban argued, a blemish on America’s reputation as a leading proponent of free trade. Moreover, cheaper domestic prices hacked away at the margins of U.S. shale producers, a concern that’s only grown over the past year as the global market has taken a nose dive.
But lately the WTI and Brent crude benchmarks are more in sync as the gap has shrunk from double digits three months ago to less than $6 per barrel today. As the FT reports, this shrinking gap between Brent and WTI means that crude is trading at less of a discount stateside as compared to the rest of the world, and that’s knock against the argument for ending the export ban. A source quoted in the FT put it this way: “The lack of a domestic crude oil discount has the natural effect of defusing the political urgency of lawmakers or the administration having to do something to help producers.”This is far from a cut and dry issue, and it’s certainly a politically contentious one. Readers interested in a nuanced and creative approach to the subject would do well to read Arthur Herman’s excellent recent essay in which he advocates for the U.S. to roll back the ban strategically through bilateral supply agreements with our allies in order to “husband and exploit” the extraordinary strategic advantage shale production has provided us.