Even with these midstream adjustments, continued strong growth in U.S. production of light crude oil from tight resources raises the prospect of a quality mismatch between domestic crude supplies and refinery capabilities. Many Gulf Coast refineries, and increasingly those in the Midwest and West Coast, have invested in secondary upgrading units that are used to convert heavy sour crudes into high-margin petroleum products. Heavy sour crudes are very attractive to these refiners, both because they yield slates rich in diesel and other distillates that are in high demand and because heavy crudes typically sell at a discount to light sweet grades on world markets. For this reason, refiners with upgrading capability are very interested in increasing their runs of heavy crude, including that produced from Canadian oil sands.
At the same time, U.S. refinery closures in recent years, largely concentrated along the East Coast, have reduced the amount of capacity optimized to run light sweet crude. To date, the increase in U.S. light sweet crude production has been accommodated by displacing imports. However, with light sweet crude imports (35 degrees API or higher and sulfur under 0.5 percent) to the Gulf Coast in February 2013 (the latest data available) running at 80,000 bbl/d, and total U.S. light sweet crude imports at only 500,000 bbl/d, the opportunity for like-for-like displacement of light sweet imports is running out (Figure 3). If imports of light, higher-sulfur crude oil are also replaced by domestic light production, an additional 440,000 bbl/d of imports could be displaced.
Under current law and regulations, crude oil produced in the United States requires a license to be exported. Exports to Canada for processing or consumption in Canada, as well as certain specific U.S. crude streams (such as California heavy crudes), are presumed to automatically qualify for export licenses, subject to meeting specific restrictions such as volume limitations. Beyond these established and well-known exceptions, the common understanding has been that crude oil export licenses would be hard to come by. On the other hand, the United States generally allows exports of petroleum products without a license.1
There are market reasons that make it attractive to both import foreign-produced crude oil and export domestically produced crude oil in order to maximize the value of crude production and refining capabilities. For example, the United Kingdom is a net crude oil importer, but is also an exporter of Brent crude. While a change in export policy is one option, some combination of the following outcomes could occur in a hypothetical situation with high production growth of domestic light tight oil and no changes in current export licensing policies: