Oil price decreased by approximately 4% on Friday after the US government received a warning from the International Energy Agency concerning the storage capacities of the country. Tank farms in the United States are approaching their maximum storage limit, and the IEA estimated that this is bound to lead to price weakness. Oil production in America had been increasing, even though producers just announced some cutbacks in new drillings.
Because the American price for oil has dropped significantly lower than the international one (the American benchmark, West Texas Intermediate, set prices at around $46 an oil barrel, while the North Sea benchmark, Brent, set them at $56 a barrel), the US Department of Energy has suggested the option of storing an additional five million barrels to the Strategic Petroleum Reserve. This proposal still needs to be approved by the government, so the actual buying of the five million barrels of crude will probably take place in June and July, if the prices remain low. This wouldn’t completely solve the issue, because the United States produces as much as 9.5 million barrels of oil daily.
Given this situation, several American executives from 11 oil companies (all members of PACE) were in Washington to try to convince White House officials to suspend the export ban on US oil, a regulation that has applied for over 40 years now. The rule, imposed in the aftermath of the 1973 Arab oil embargo, forbids the selling of US-produced crude to other countries except Canada (this doesn’t apply to gasoline and other refined products, which can be exported). However, the CEOs of drilling giants warned the government officials that lowering production might provoke job cuts in the sector, as well as waste the potential of unexploited oil rigs. They pleaded for exporting crude rather than cutting back on production even more than they have.
According to the US Energy Information Administration, the United States has already outrun Russia and Saudi Arabia in oil production and natural gas production. But Russian exports have also been rising, and the king of Saudi Arabia has shown no intention of reducing production to stop the price fall. The lowering of prices has caused a higher demand for oil in developing countries like India, Brazil and Indonesia. China, in its turn, has continued to demand large quantities of oil, despite rumors of its economic slowdown. Participating in the international crude trade might temporarily solve America’s oil overproduction crisis, but the government has to consider risks before lifting the ban.
image source: New York Times