US Opens Market to Limited Crude Oil Exports to Mexico

The Department of Commerce announced this week that U.S. companies can now export some crude oil to Mexico. There is a vigorous debate in Washington over crude oil export policy. Exxon and other industry groups lobbied to remove the prohibition on exporting crude oil.

President Dwight Eisenhower issued an executive order to prohibit crude-oil exports. The theory was to use cheap foreign oil and preserve our domestic crude oil reserves. U.S. government estimates of the size of our domestic reserves vary greatly over time. In the 1930s, estimates held that the U.S. would run out of crude oil in a few years.

Several years ago, before shale-oil discoveries, the U.S. imported over 50% of our crude oil. With the increased US production our imports have plummeted and our production has increased. For example, in 1994 we produced about seven million bbs day and imported six million bbs. In 1997, we imported 10.7 million bbs. In 2014, we produced nine million bbs and imported six million bbs. If trends continue, the U.S. in two decades could be self-sufficient in crude-oil production, some estimates contend.

Mexico produces three grades of crude oil: heavy, light and super-light. (Extra-heavy oil is in the government’s plan for auctioning petroleum blocks. Mexico’s refineries were built for light crude oil, which, as a percentage of Pemex’s total production, has been shrinking since the 1980s.

“Today, with U.S. light shale oil in abundance, it makes sense to swap Mexican oil for oil produced in the United States,” observes George Baker, publisher of an industry newsletter focused on Mexico.

According to Dr. Tony Payan of the Rice University Baker institute Mexico Center, this permit to export U.S. crude to Mexico really is important. There are several reasons this is important for both Mexico and the United States.

First, for Mexico, this means that it will be able to export most of its oil, which is heavy crude that requires heavy investment to refine, and import lighter crude from the United States, which requires less investment to process. This will enable Mexico to increase its profit margins in refining.

Second, for the United States and North America, this marks another step in the further integration of the energy markets, with a freer flow and even swaps, such as the one I just indicated, so that everyone gains from this.

Third, this specifically means for the U.S. that as the country comes closer to becoming an energy exporter, its markets abroad expand as well preparing the ground for a future that may include U.S. exports in a way that we have not seen since the 1970s.

Mexico exports of crude oil to the US over the past few years have fallen as the Mexican oil production has fallen substantially.  The Mexican national oil company eight months ago applied to import 100,000 bbs a day, which the Department of Commerce now grants. This Mexican concession is not a major reversal of our export prohibition policy. This can be viewed as a swap of quality light U.S. crude for Mexican Maya crude for blending. The Department of Commerce does allow US crude oil to be exported to Canada and some to Japan.