Market Implications of Increased Domestic Production of Light Sweet Crude Oil in US

Rising domestic production of light sweet crude oil, especially from tight oil formations in North Dakota and Texas, is already leading to adjustments in oil markets. U.S. Gulf Coast refineries are using these high-quality domestically produced streams to replace imported oil from West Africa and other sources. Flows of light sweet crude oil via rail to both East and West Coast refiners are also increasing.
If U.S. light sweet crude oil production continues to rise strongly over the next several years, Gulf Coast refiners may be able to satisfy all of their current demand for light sweet crude oil with domestic production. Gulf Coast refiners could probably absorb additional volumes of light sweet crude oil to replace some imports of heavier crude oil streams that many of the refineries in the region are designed to use, but this could reduce the production of some high-value products and also reduce operating rates of some sophisticated refinery units used to convert low-quality, lower-priced heavy crudes into high-value products. Traditional price premiums for light crude would probably have to fall to incentivize such behavior. For this reason, increased exports may be a more attractive option for producers if an excess of light sweet crude oil in the Gulf Coast market actually develops. In the November Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) projected that U.S. crude oil production will reach 6.85 million barrels per day (bbl/d) in 2013, a 0.52-million-bbl/d increase from the 2012 level that is itself projected to be 0.78 million bbl/d above the 2011 level.
Currently, crude oil produced in the United States can be exported only when a license is granted by the Bureau of Industry and Security (BIS), which is a part of the U.S. Department of Commerce, under regulations promulgated in the Code of Federal Regulations Title 15 Part 754.2. Notwithstanding these requirements, export volumes are growing. Year-to-date (through August) exports of crude oil averaged 58,000 bbl/d, more than twice the volume exported in 2007 (Figure 1). Most exported crude oil is shipped from the Midwest to Canada.