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The recent decline in the price of oil has stolen the limelight from a massive shift in U.S. energy policy.
Everybody is talking about the $80 oil story. Or rumors that the Saudis are trying to squash the U.S. energy boom by flooding the market. Or theories about how global powers are conspiring to drive down oil so Vladimir Putin will have no choice but to sell gas to Ukraine.
There is a lot of speculation as to how oil fell to $80 so quickly, and where it will go from here.
But perhaps the most important development in U.S. energy policy is not a rumor. Up until June it had been four decades since U.S. oil left U.S. ports. But in the last four months, two ships have sailed with nearly 800,000 barrels of oil, destined for ports in Asia and Europe.
That’s groundbreaking news. These ships weren’t carrying illegal cargo. In fact, the oil shipments had the blessing of the U.S. Commerce Department. That’s because a new loophole in a 40-year-old law now allows just a handful of U.S. energy companies to export oil.
Forty-one years ago a surprise attack by Syria and Egypt against an essentially undefended Israel marked the official end of low oil prices around the globe. The world was enjoying $3 per barrel oil, less than the cost of a gallon of milk today.
But within a year that price would catapult 400% to $12 as the Organization of Arab Petroleum Exporting Countries (OAPEC) slapped an oil embargo on the U.S. and its allies – a swift and painful retaliatory response for supplying arms to Israel.
As President Nixon and Secretary of State Henry Kissinger tried to put the U.S. on the path toward energy independence, it was written into law that every drop of domestic oil production would stay in country.
Of course, energy independence didn’t come to the U.S. by 1980, as Nixon and Kissinger had hoped. But it wasn’t because we exported all of our oil – we never had it to begin with. Four decades later, that’s changed.
In mid-June the U.S. Commerce Department approved two U.S. companies to export oil condensate, a lighter version of oil that condenses to liquid from gas when it reaches the surface.
While total U.S condensate production is only rising moderately, it is rising rapidly in specific shale oil plays, particularly the Eagle Ford and the Utica shale.
Condensate is loosely defined as oil with an API gravity greater than 45. API is a measure of how heavy petroleum is relative to water – the higher the API the more similar the product is to gasoline, and the more valuable it is. In other words, condensate is a very valuable product.
Part of the fascination in the oil condensate story is that there is no standard level of API at the moment to define it – a wrinkle that makes analysis of condensate production equal parts art and science.
The Commerce Department has ruled that to qualify oil condensate for export it needs to go through a distillation tower – a very simple refining process that oil producers can do in the field.
One of these areas is the Eagle Ford Shale. Stretching from the Mexican border to East Texas, the Eagle Ford produces around 1.5 million barrels of oil per day. While estimates vary, energy consulting company Platts suggests that around 700,000 barrels per day come from condensate now, and that the figure could rise to 1.1 million barrels per day by 2020.
While $80 oil has cast a shadow over the U.S. oil boom for now, expect the U.S. export story to make headlines again in 2015. Greater demand for oil condensate exists overseas than in the U.S. And growing the country’s export volumes is just another way the industry, and U.S. producers, can continue to grow.
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