WASHINGTON, DC. (March 17, 2015) The ban on U.S. crude oil exports is exacerbating the challenges of lower oil prices for U.S. tight oil production, creating a doubly chilling effect on additional investment, jobs and oil production that would actually lower gasoline prices if the ban were lifted. Those are among the findings of a new study by IHS Inc. (NYSE: IHS), the leading global source of critical information and insight.
The study, entitled Unleashing the Supply Chain: Assessing the Economic Impact of a U.S. Crude Oil Free Trade Policy, builds on previous IHS research on the economic impacts related to the 1970s-era ban on exports of U.S. crude. According to the study, substantial economic benefits of developing the nations oil and gas resources extend beyond the oil producing regions throughout an extensive supply chain that includes every state. Every new oil production job creates three jobs in the supply chain and another six jobs in the broader economy. The export banenacted in 1973 in conjunction with now defunct oil price controlsdeters additional production, which reverberates in job losses throughout the supply chain and broader economy, the study says.
Previous IHS research found that removing export restrictions would result in significant benefits in terms of jobs, U.S gross domestic product (GDP), household disposable income and government revenues. The research also determined that lifting the ban on exports would actually lower gasoline prices since U.S. gasolineunlike crude oilis part of a global market, and the current crude export ban prevents additional supplies of crude from being produced.
The new study finds that the negative effects of the banwhich creates a supply gridlock that forces U.S. light crude to be sold at a sharp discount since production of that type of crude has outpaced domestic capacity to refine itare amplified in the current price environment.
During periods of lower oil prices (oil prices have declined by roughly half since mid-2014), crude oil production drops even more sharply with each incremental price cut such as those that result from the crude export ban. A $3 per barrel change in a $50 per barrel price environment can have the same effect as a $10 change in a $100 per barrel environment, the study finds.
The export banwhich keeps domestic crude from trading on the global marketcauses U.S. crude prices to be discounted versus international crude. The study notes that the difference in price between international (Brent) and domestic (West Texas Intermediate) crude recently widened, ranging from $7 to $12 per barrel over the past month.
The decline in global oil prices provides further need to remove the market distortions created by the ban on U.S. crude oil exports and avoid the additional disruption to investment in oil and gas production and its associated economic benefits and jobs growth, said Kurt Barrow, IHS vice president, downstream energy. U.S. crude production would be facing the doubly punitive impact of low global oil prices and additional price discounts compared to international crudes.
At current prices, the spread between Brent and WTI pricing will be the difference between the viability and non-viability of a great deal of new investment, he added.
Unleashing the Supply Chain focuses on the impact of upstream expenditures from lifting the crude oil export ban on the diverse set of industry sectors that support oil and gas producersfrom steel and nonferrous metals to engines, pumping equipment, construction, professional services and railroads.
This new study affirmed previous IHS research that ending the crude oil export ban would benefit the entire economy, generating another 394,000 jobs annually, $238 in annual household disposable income, and $86 billion more per year in GDP on average from 2016-2030. The increased economic activity would add $1.3 trillion to cumulative government revenues during that period. Additionally, the increased supply of oil on the global market would lower U.S. gasoline prices by an average of 8 cents per gallon.
Unleashing the Supply Chain finds that supply chain industries represent more than a third of the total economic benefits if the export ban were lifted.
Impacts specific to the supply chain include:
Unleashing the Supply Chain also maps the potential supply chain economic benefits of a crude oil free trade policy for each state and congressional district.
- The crude oil supply chain would add $26 billion to GDP per year (2016-2030)
- Total employment in the supply chain would increase, averaging annually 124,000 new jobs over 2016-2030 contributing to the 394,000 jobs annually that would be created economy-wide over the same period
- Labor income would rise by more than $21 billion per year, on average, (which translates to an additional $158 per household)
- Cumulative government revenues from corporate and personal taxes attributed to supply chain industries would increase by $429 billion
Key state and congressional district findings include:
" In states where the crude oil industry predominates, such as Texas, core supplier industries such as construction and well services are poised to reap the largest economic benefits in terms of jobs and value added, followed by professional services, which play a large role in supporting crude oil activity.
- In states with essentially no crude oil production, such as Florida and New York, key supplier industries that incur the largest benefit associated with the adoption of a crude oil free trade policy include the industrial equipment and machinery, professional services, financial services, and information technology sectors.
- The supply chain can account for half of the value added from lifting the export ban in states with a diverse and mature set of supplier industries. Washington states supply chain industriesled by information technology and manufacturingwould contribute 47 percent of the states total GDP benefit from higher crude oil exports over 201630. Illinois, an oil-producing state with diverse supplier industries, would derive 58 percent of the total GDP impacts from its supply chain.
- California and Texaslarge oil producers that also have substantial manufacturing activity and diverse supply chain sectorsare expected to yield the largest benefits from lifting the crude oil export ban in terms of supply chain jobs, value added, and labor income impacts. California and Texas together account for about 25 percent of the total US supply chain jobs and labor income contributions and 20 percent of the value added contributions in 201630. These two states also have the largest number of affected congressional districts.
- Non-oil producing states such as Massachusetts and Maryland would also see strong growth in supply chain-associated government revenues. They rank among the top 10 states in terms of the GDP and labor income impacts on their supply chain industries, suggesting strong ties between their supply chain activity and their government revenue from associated taxes.
- Nearly all congressional districts would experience benefits. The economic impact of a change in trade policy would be distributed across suppliers in congressional districts with crude oil activity, as well as in adjacent districts with supporting supply chain sectors. Those districts with crude oil activity and strong supply chains benefit most.