LONDON (Reuters) – In the three months ending in August, the United States and Canada swapped a record amount of crude oil with each other, one of the more bizarre consequences of outdated US export controls.
Because US oil producers cannot export crude oil to any other country, crude is sent north to refineries in Canada, even if it would make more sense to ship it to refineries in Europe, Latin America or Asia.
In some instances, crude is even shipped past US refineries on the East Coast that want to take it and on up north because of the antiquated restrictions on coastwise trade within the United States imposed by the Jones Act.
US oil producers have been permitted to export unrefined petroleum to Canada since the 1980s, when the Reagan administration exempted Canadian refiners from the general ban on crude exports.
In June 1985, President Ronald Reagan issued a formal determination that “domestic crude oil may be exported to Canada for consumption or use therein.”
As required by law, the president made formal findings that crude exports were in the national interest; would not diminish the total quantity or quality of crude available in the United States; would not increase reliance on imported oil; and were consistent with the Export Administration Act of 1979 and the Energy Policy and Conservation Act of 1975.
In December 1988, shortly before leaving office, Reagan made additional findings to permit exports of up to 50,000 barrels per day (b/d) of more severely restricted Alaskan crude for consumption or use in Canada as part of the US-Canada Free Trade Agreement.
But in an era when US oil production was declining and the country was increasingly relying on imports to supply its refineries, domestic oil producers made little use of this flexibility to market unrefined oil north of the border. Between 1985 and 2011, US exports to Canada generally averaged well under 50,000 b/d, according to the US Energy Information Administration (EIA).
Thanks to the shale revolution, however, US output has jumped by more than 3.7 million b/d (75 per cent) since 2007. Increasing amounts of US crude are now being exported north as producers and traders try to find alternatives to saturated markets at home. Between June and August 2014, a record 378,000 b/d of US crude was exported for refining in Canada.
But at the same time as more and more US crude is heading north, a record amount of Canadian is heading south. In the same three months, Canada exported a record 2.8 million b/d of crude to the United States – up from 2.5 million in the same period in 2013 and 2012, 2.2 million in 2011 and just 1.5 million b/d back in 2003.
Two-way trade in crude allows both countries to optimise their refining assets. Light US crude is being exchanged for heavier Canadian production to enable refineries on both sides of the border to use their distillation facilities more efficiently.
In effect, North America is fast becoming a single refining area with free trade in both crude and refined products between the United States and Canada. But it also makes a complete mockery of the remaining restrictions on crude oil exports to the rest of the world.
In theory, US crude can be exported to Canada for “consumption or use therein” but once the oil has left the United States there are no records and no controls on where the products refined from it end up.
Refiners in both the United States and Canada can export gasoline, diesel, home heating fuel and jet fuel almost anywhere in the world without any restrictions.