But as you’ll see, the answer is this: the ban should be lifted.

Yes, the U.S. is producing oil at levels not seen in decades. But we still have to import roughly 40% of our needs. So it would seem, on its face, that there would be no point in ending the ban. The wrinkle comes in the reality that not all crude oil is the same. Some is heavy, some is light. Some is “sour,” with high sulfur content, other is “sweet.”

Much of the boomtime oil flowing out of the Eagle Ford shale of Texas and the Bakken formation of North Dakota is relatively light and is easy to refine in refineries that are not terribly complex.

The problem is that U.S. oil refineries were not ready for this kind of high-quality oil. Over the past decade (before the shale oil boom) refiners spent tens of billions to optimize their plants based on the assumption that their crude oil supplies would be getting heavier and more sour — like Canadian oil sands or heavy oil from Venezuela and Mexico. To process that gunk you need more complex refineries with hydrotreaters and cokers.

As it turns out, the refiners made the wrong upgrades at precisely the wrong time. After already sinking so much capital to optimize their plants for heavy crudes, they can’t easily turn around and just gulp up the light crudes that American drillers are producing. Even factoring in higher transportation costs it makes more sense for them to import heavy crudes from other parts of the world rather than to use the lighter shale oil.

Naturally, with less demand for their product at home, the U.S. shale producers want to be able to export their oil to less complex overseas refineries where they can get higher prices. One of the most vociferous proponents of lifting the ban is Harold Hamm, the billionaire founder and CEO of Continental Resources CLR +1.2%, one of the biggest producers in the Bakken. Hamm gave his testimony to the senate yesterday, explaining that contrary to popular belief U.S. oil is being exported, but as refined fuels, not crude oil.

“Unlike exports of crude oil, exports of gasoline and other refined products are not restricted. Under current law, our government is subsidizing some U.S. refiners – many of which are foreign-owned – by giving them the ability to buy American oil at artificially low prices yet sell petroleum products into higher-priced global markets,” says Hamm. “In fact, with exports approaching 4 million barrels per day, petroleum products are America’s second leading export, making up 9 percent of the U.S. total.”

Industry insiders have told me, laughingly, that some of the refined product being exported is pretty darn close to light crude. “All you have to do is spit in it and you can call it a refined product,” one executive said. What the oil drillers object to is that when it comes to exporting such lightly processed petroleum products, it’s the refiners, not them, who make the extra margin. Lifting the export ban will allow drillers to grab some of that extra margin by sidestepping the refiners and selling their crude directly to the global market, like what Hamm wants to do.

As for fears that allowing oil exports would drive up prices at the pump? How could it as long as refiners continue to export massive amounts of excess gasoline and diesel? Furthermore, explained Amy Jaffe, executive director of energy and sustainability at the University of California, Davis, exporting American crude could help lower world oil prices by  diluting OPEC’s market share and pricing power.

Says Hamm: “Major oil companies are exporting refined petroleum products like gasoline and diesel with no limitations. Why shouldn’t independent producers be allowed to do the same? Are we to be their milk cows forever? This would be equivalent to telling American farmers they can’t export their wheat, yet allowing Pillsbury to export all the processed flour they want.”

The export ban should be lifted.

Forbes will be hosting a Reinventing America Summit March 26-28, 2014, which will bring together 300 top industrial executives, entrepreneurs, academics and elected officials who are leading the country’s next Industrial Revolution.

 

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