Not all crude oil is the same, and one oil isn’t necessarily better than the other, although lighter American oil tends to be more expensive because heavy oil is harder and more expensive to refine : in fact, to function at its most optimal level crude oil should be a good blend of both light and heavy oils. Most of the crude oil produced in the US is light oil, whilst the majority of the oil found in Mexico is much heavier. This, in the briefest possible way, is why the federal commerce department agreed to approve the deal. American companies will now have the authorisation to sell their light crude oil to Mexico for the ultimate benefit of their refineries, whilst Mexican refineries (who need this light crude oil) will in exchange be able to sell their heavier grades for use here. The licenses, good for one year, that should enable these trades to legitimately take place, will be formally issued by the end of August. It seems like a very simple and logical business transaction.
What Does This Mean For The Future?
What is interesting though is what this may mean for future potential crude oil trading transactions from within the United States. Realistically, the Commerce Department have suggested that not only will this new deal have little to no impact on the overall pricing or on the volume of production of U.S. crude, it also doesn’t indicate that America is close considering a total lift on its current export ban: in fact, that decision is considered to be highly unlikely. Some observers, however, have seen the decision to even begin lifting the long-held trading restrictions as a possible “first step” in the eventual overturn of the ban. Certainly, it could be a positive move for many American refineries, which are struggling because many oil companies are reporting that they are producing more light oil than U.S. refineries can currently handle.
Finding a new market to purchase that light oil could help these struggling oil companies to continue pumping at the same high levels, meaning that their employees aren’t at risk of losing their jobs, or having their hours cut. Whilst a good level of business insurance can protect from certain unexpected business issues that often arise, at this point only the United States Commerce Department can provide an insurance policy that will widen the markets for these companies and ensure that they have a purchaser for the huge volumes of light oil that they are currently producing.
For oil producers, a decision to open up the export market would be good news as it would bring U.S. crude prices up to a position where they were more in line with Brent crude, the global benchmark for oil, and something which which usually trades at a premium compared to WTI. On the flip side, there are concerns that opening up the export market further will drive up gasoline prices for domestic customers, which can equally impact big business in a negative way.
The White House and Congress have both agreed that later this year the current export ban that is in place will be analysed fuller and discussed, potentially with a view to some degree of review. What is clear is that what this new trade agreement with Mexico means for the future of the American crude oil industry really can’t be determined at this early stage. But this first breach of the ban in oil exports for over 30 years simply can’t be ignored.