For the first time since the oil embargo that arose in the wake of the energy crisis of the 1970s, US companies are now legally free to export crude oil. That new permission is an outgrowth of the Protecting Americans from Tax Hikes Act of 2015 (PATH), a $1.15 trillion spending measure that President Barack Obama signed into law in December 2015.
In addition to its package of tax breaks − among them the extension of renewable energy tax credits − the law lifts the 40-year-long ban on exports of crude oil from the United States, which had only previously been waived for Canada.
In practice, this means that any company that wants to export crude oil will no longer need a Department of Commerce license to do so. Crude oil is now officially classified by Commerce as falling within EAR99, a class of products that do not require such a license. The classification does not permit the export of crude oil to Cuba, Iran, North Korea, Syria, Sudan and the Crimean Region, which are embargoed by the US. This still leaves the entire rest of the world open for the export of crude oil from the US without a license.
The origins of the prohibition on the export of crude oil grew out of an era very different from ours. Back in 1973, several Arab nations had imposed an oil embargo on the US. World oil prices were soaring, and Congress was trying to limit US exposure to the global crude markets. Congress enacted these restrictions on exports with the goal of keeping crude oil at home, limiting the nation's reliance on imports, and sidestepping the volatile global markets.
Today, the US and world energy situation has changed. Domestic production of crude oil is now on the upswing, thanks to the development of fracking technology and other improved drilling techniques in places like North Dakota's Bakken Formation or Texas's Eagle Ford Formation. US producers see export markets as desirable, even necessary – and the new law permits them to sell into those markets.
Some observers have speculated that crude oil prices will fall in the near term as a result of the new authorization for US companies to sell in the export market. Perhaps overproduction in the US will not be matched by decreases in production worldwide, thus leading to an oversupply in world markets and a consequent price decline. But nothing along these lines is certain, and we will be watching to see how market forces unfold.
What is known is that US oil producers will want to take advantage of a new opportunity, one that they have not had for 40 years. As one would expect, there will always be a few bumps along the road when companies try to go into a new market where they haven’t found themselves in many decades. We at DLA Piper are following developments in this area in our Energy and Government Affairs groups. If any unexpected issues or questions arise, we are well prepared to respond to your questions about this new market opportunity.
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