Late last week the White House announced it would temporarily allow oil firms to swap crude with Mexico, a move that was hailed by the American Petroleum Institute’s executive vice president as “a long overdue step that will benefit our economy and North American energy security.” The head of the commercial arm of Mexico’s state-owned oil company Pemex praised the U.S. decision to allow crude exports to its southern neighbor as “great news” that would “allow refining in both countries to be more efficient.”
The fracking boom has unleashed a flood of production of light, sweet crude, but America’s Gulf coast refineries were built with a heavier variety of oil in mind. Many of Pemex’s refineries are configured for those lighter grades and the oil it produces is generally of a heavier variety, so a swap makes sense for both countries. In the previous issue of our magazine, Arthur Herman explains why exporting that light, tight oil (fracked from shale) could help firms better turn a profit:
Because domestic refiners don’t relish their product, [light tight oil (LTO)] producers have had to sell at a discount, sometimes as much as $28 below world prices. Ending the ban means ending the discount—which is in effect a non-market subsidy provided by the 1975 law—that allows refiners to buy LTO cheaply and sell it as gasoline on the world market.
While this is more an exception rather than a new rule, it does look like an erosion of the 1970s-era U.S. ban on crude oil exports, a policy that looks increasingly archaic as our oil production outlook continues to brighten. “It’s pretty clear, directionally, where things are headed. This ban becomes more and more awkward and ill-fitting. It doesn’t fit reality,” said oil guru Daniel Yergin.
With this latest swap agreement, it looks like we’re moving towards a more rational crude export policy, though it may not be as easy a fix as simply opening up fracked crude to the global market all at once. For a nuanced look at our policy options—and the strategic potential selectively selling our oil could produce—take the time to read Herman’s piece in full.