The price of American oil has finally caught up with globally traded Brent crude, thanks to US pipeline and railway improvements. Now drillers need to be allowed to ship their product overseas. With supply surging, they'll quickly outgrow the limits of a domestic market.
For nearly three years US oil fetched less than the global market price. The gap was widest in October 2011, when America's West Texas Intermediate sold for just $87 a barrel, compared with $114 for Brent. Since the two types of crude are essentially of equal quality, the price difference inflicted a substantial penalty on American drillers while giving their customers artificially low costs. The main culprit was a pipeline network that couldn't accommodate a 40 per cent surge in US crude output since 2008. That problem has been solved, at least temporarily. Pipeline capacity has increased, while rail networks have become more efficient at delivering oil where it's needed. As a result, the price gap briefly closed on July 19.
There are, however, risks ahead. American oil output is expanding at breakneck speed, with Citigroup anticipating a million-barrel per day increase this year, a greater amount than in any other country. That could leave US refiners with more light sweet crude than they can process, prompting another drop in prices.
One solution would be to lift the US Mineral Leasing Act's almost century-long ban on American crude exports. Since the law was enacted in 1920, a special license has been required for overseas shipments of even small amounts of oil. Last year, an average of just 52,000 barrels a day was sent abroad. Daily imports, on the other hand, totaled close to 8 million barrels. Freeing up exports would make it easier to meet global demand for American crude while relieving US drillers from the burden of peddling their product for below-market prices.
The plan could provoke resistance from certain members of Congress and others who argue that America should preserve its valuable oil supplies. But that would risk suppressing US crude prices and slowing the growth of one of the nation's most important industries.
