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By Robert Rapier on Jan 9, 2012 with 23 responses

What’s So Bad About Exporting Gasoline?

One of my Top 10 Energy Stories of 2011 was the fact that the U.S. had become a net exporter of finished petroleum products such as diesel and gasoline. In fact, because gasoline and diesel prices were so high, U.S. fuel exports were valued at $88 billion, which made them the top value export in 2011 for the first time ever:

Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990. It will also be the first year in more than 60 that America has been a net exporter of these fuels.

Just how big of a shift is this? A decade ago, fuel wasn’t even among the top 25 exports. And for the last five years, America’s top export was aircraft.

This news did not sit well with some people, who argued that those exports could have been better used in the U.S. I read numerous comments from people angry that we are exporting fuel. In fact, one of the arguments against the Keystone Pipeline is that the fuel could end up being exported after it is refined.

I don’t think the people who are making these arguments have thought this through very well.

Consider the situation. Gasoline demand in the U.S. has fallen for several years via a combination of high prices killing off demand and the escalating ethanol mandate. Refiners can respond by shutting down more refineries and laying off workers, or they can seek other markets for their product.

Look at what is happening with gasoline exports. 60% of the gasoline that is being exported is going to Mexico (a lower portion of distillates goes to Mexico as shown in the graph, but the bulk still goes to Central and South America), and most of the rest is going to Canada, Ecuador, and Brazil — countries that we import oil from. So we are importing oil from Mexico — the source of over 10% of our oil imports — and turning around and exporting back to them the higher value finished products. It creates jobs and tax revenue here in the U.S. That sounds like a bad deal for Mexico and a good deal for the U.S. So I don’t understand why people are upset. We could choose to stop selling gasoline to Mexico, in which case we could import less oil from them. But since gasoline is worth more than oil, that doesn’t seem like a very good business proposition.

However, I do want to make clear that I don’t believe that any domestically produced fuel that is benefiting from any sort of production incentives (i.e., tax benefits) should be allowed to be exported. This was my objection to reports of ethanol exports last year, because some were reportedly receiving the U.S. tax credit and exporting that ethanol. Since the ethanol tax credit has expired, I have no problem with the ethanol industry exporting ethanol that they can’t sell in the U.S. But tax credits that are designed for domestic production — petroleum or ethanol — should remain in the country for the benefit of those who paid those taxes.

Link to Original Article: What’s So Bad About Exporting Gasoline?

By Robert Rapier

  1. By armchair261 on January 9, 2012 at 2:26 am

    Agreed, usually successful exports would be approved by everyone, no matter what their politics. It’s hard to see the downside in this. But no doubt many will find reasons.

    The tinfoil hat crowd will probably respond in two ways.

    First, they’ll say that refiners should sell more in the US rather than export, in order to force domestic prices down (even though this crowd generally doesn’t believe that supply and demand drive petroleum prices). I suppose this is true, and I guess they could have demanded that US automakers keep their plants open to force auto prices down too. But consider recent profit margin figures for Valero and Tesoro, two large pure refiners:

    Valero

    2010: 1.1%

    2009: -2.9%

    2008: -1.0%

    2007: 4.9%

    Tesoro

    2010: 0.1%

    2009: -0.8%

    2008: 1.0%

    2007: 2.6%

    It’s a pretty weak industry right now. If refiners are pressured to dump into the US market, then assuming oil doesn’t fall, their margins would be sorely squeezed. At least some refiners would be operating at a loss and shutting down facilities. The excess product (or shuttered refineries) in the US will translate into supply constraints overseas, hurting foreign economies. All so that US drivers could continue to drive their SUV’s at bargain prices, at least until after the next election and some US refiners go under. In this case domestic supply could eventually fall to about the same as it is now, but the exports would disappear as throughput capacity drops. 

    Secondly, we’ll hear that refiners are intentionally shutting down refineries in a plot to drive up prices. But operable capacity has grown by about 6% (1 million barrels per day) in the last decade, and capacity upgrades aren’t free. It would be an unusual strategy indeed to invest billions on capacity only to cut production. Wouldn’t it be better to save those billions and not invest in capacity in the first place? Both would have the same supply effect, only, one comes free of charge. It’s a tough choice. What would the tinfoil hat crowd do?

     

     

     

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  2. By Muchos huevos on January 9, 2012 at 10:34 am

    I only hope for us to be using at least half of it so that same # of gallons could be decreased/deducted from what we have to import from America haters.

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  3. By robert on January 9, 2012 at 11:15 am

    Thank You Netherlands for buying our unwanted gasoline.

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  4. By JavelinaTex on January 9, 2012 at 12:09 pm

    I agree with you entirely. This is the nuttiest dust-up spin doctoring I have heard in a while. One has to remember we have often exported gasoline from some regions and imported it from others. Now we are importing less for the reasons you cited, plus expanded refinery capacity.

    There is another important spin check that has been missed. We are actually importing more gasoline blending components than the total of finished gasoline we are exporting. And we are also importing a slight amount of finished gasoline. Since virtually all US gasoline is now blended with ethanol, and that is done near the final consumer, virtually all imports are of blending components. Here is EIA link.

    http://www.eia.gov/dnav/pet/pe…..blpd_w.htm

    It will be interesting with the end of the blenders credit whether we will be exporting blending components or finished gasoline in 2012.

    Further, a lot of what we are exporting are of things we have in surplus, like residual fuel which has been priced out by Natural Gas and is far dirtier to burn than Natural Gas. Also propane exports have picked up due to growth in gas shale production and the shift of pet chems to ethane feedstock. This has also led to Naphtha exports (Other Oils?).

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  5. By rrapier on January 9, 2012 at 1:27 pm

    armchair261 said:

    But consider recent profit margin figures for Valero and Tesoro, two large pure refiners:

     


     

    When I started to write this, I meant to mention that. I thought about it this morning when I woke up and realized I had left it out. As you say, more gasoline could be sold here at a somewhat lower price, and this would drive more refiners out of business.

    RR

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  6. By Craig on January 9, 2012 at 5:00 pm

    That sounds like a bad deal for Mexico and a good deal for the U.S.

    Minor quibble: one of the basic economic ideas of trade is that both parties tend to gain from trade. You have to ask, ‘If this is such a bad deal for Mexico why are they doing it’? If you dug into it I wouldn’t be surprised to find out that it wasn’t a bad deal for them. If there is excess refining capacity in the U.S due to lower demand it is probably cheaper for them to buy our excess product than investing in increased Mexican refining capacity.

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  7. By rrapier on January 9, 2012 at 5:14 pm

    Craig said:

    That sounds like a bad deal for Mexico and a good deal for the U.S.

    Minor quibble: one of the basic economic ideas of trade is that both parties tend to gain from trade. You have to ask, ‘If this is such a bad deal for Mexico why are they doing it’? If you dug into it I wouldn’t be surprised to find out that it wasn’t a bad deal for them. If there is excess refining capacity in the U.S due to lower demand it is probably cheaper for them to buy our excess product than investing in increased Mexican refining capacity.


     

    No question that this is why Mexico does it. It is cheaper for them in the short term, but over time it would serve their interests more to build their more refinery capacity if 1). They continue to have enough oil to operate them; and 2). Demand is forecast to justify it.

    This is why countries like Saudi Arabia and India are investing in refineries. It creates the value added products in their country, creating jobs and wealth instead of out-sourcing it.

    RR

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  8. By Joseph on January 9, 2012 at 7:11 pm

    This is why countries like Saudi Arabia and India are investing in refineries. It creates the value added products in their country, creating jobs and wealth instead of out-sourcing it.

    One has to wonder why Canada isn’t doing the same? The Northern Gateway project is a double pipe project… a smaller pipe to send the imported condensate eastbound so they can use it to dilute the viscosity of the heavy crude from the tar sands in order to be able to pump it westbound in the larger pipe.

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  9. By rrapier on January 9, 2012 at 7:26 pm

    Joseph said:

    This is why countries like Saudi Arabia and India are investing in refineries. It creates the value added products in their country, creating jobs and wealth instead of out-sourcing it.

    One has to wonder why Canada isn’t doing the same? The Northern Gateway project is a double pipe project… a smaller pipe to send the imported condensate eastbound so they can use it to dilute the viscosity of the heavy crude from the tar sands in order to be able to pump it westbound in the larger pipe.


     

    This was actually the reason some Canadians protested the pipeline, because it would outsource jobs. And in fact, if I was in the Canadian government I would strongly push to build refineries there and export the finished product.

    RR

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  10. By paul-n on January 10, 2012 at 2:25 am

    The Cdn oil companies themselves are the ones pushing for the export of the bitumen, rather than refining it, not even just the first stage to synthetic crude.  The profit margins on producing bitumen/crude oil are good to very good, depending on the oil price.

    The profit margins on refining – the crack spread – are far less appealling – look at the low margins of pure refiners like Tesoro and Valero.  Plus there is a huge capital investment, and the lengthy environmental permitting processes for new refineries – though Alberta has kept this as short as possible.  Presently, many oft he US midwest and Gulf coast refineries can handle heavy oil and bitumen, until this last year, would pay almost as much for heavy oil as for light stuff.

    Quite simply, producing crude is the better business to be in – no one wants to build refineries.

     

    The Cdn government could mandate refining by banning the export of crude oil – which would lead to the closure of quite a few US refineries that would be starved for product (as is already happening on the east coast).  That alone makes it, in my opinion, a good reason for the Cdn government to impose just such a mandate, but I doubt they will.

    It would be very interesting to see how the US gov (and oil industry) would react to such a move.  Going on the hissy fits the US gov and lumber industry periodically have over imports of Cdn softwood lumber (but not raw logs) I’d suggest there would be quite some heated words said.

    Would be just the thing to stir the pot in an election year….

     

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  11. By Joseph on January 10, 2012 at 5:47 am

     

    The profit margins on producing bitumen/crude oil are good to very good, depending on the oil price.

    I guess margins must be when they plan to import condensate, pump it hundreds of miles, mix it with bitumen and then send it all back hundreds of miles to export it.

     

    The Cdn government could mandate refining by banning the export of crude oil

    What can the Alberta provincial government do about it? I dunno… but one would think that “jobs” and “tax revenues” would be a pretty powerful incentive for governments to push of refineries.

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  12. By paul-n on January 10, 2012 at 12:25 pm

    I guess margins must be when they plan to import condensate, pump it hundreds of miles, mix it with bitumen and then send it all back hundreds of miles to export it

    Well, actually, profit margins means selling price less cost of production.  Using condensate to dilute bitumen/heavy oil for pipeline flow is very common practice – there are already several reverse flow pipelines for diluent, and the Keystone XL pipeline will have one too.

     

    What can the Alberta provincial government do about it? I dunno… but one would think that “jobs” and “tax revenues” would be a pretty powerful incentive for governments to push of refineries.

    The AB gov doesn’t really need to “do” anything, they are OK with the oil co’s sending out the crude, and leaving the the air polluting refining part to someone else.  Ask anyone who does or did live in the east Edmontion city of Sherwood Park (downwind from a massive refinery complex) and they will tell you they would be very happy to see less refining, not more.

    That said, the AB gov is involved with a new refinery being built, which uses the “government’s share” of oil from some of the projects.

     

    As for tax revenue, from conventional oil, the AB gov gets 10 to 40% of the oil revenues, and for oilsands from 6 to 25%.  Note that even the lowest rate is more than the total profit margin on refining, so how much extra tax revenue do you think there is from refining?  And it takes more capital to build a refinery, to capture that 10% value increase, than it does to build a new oilsands project to produce the oil for said refinery – so where do you think the most tax per investment dollar will come from?

    You can educate yourself on the whole process here; http://www.energy.gov.ab.ca/Or…..mics.pdf 

    They probably could have given this some flashy marketing name, like, say, “Reinventing Oil”, but the Ab gov is fairly pragmatic, and prefers to just get on with actually doing stuff

    And with the oil and gas sector, and the AB economy in general, running flat out, they really don’t need to worry too much about jobs.  But other provinces, and the US certainly do.

    The constraint for Alberta is not jobs or tax revenue, it is the ability to move the oil it produces.  That is why the AB gov is – quite rightly – pushing for new pipelines.  They will leave it to the -very successful – Ab oil industry to decide whether there is a value proposition in refining.

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  13. By Joseph on January 10, 2012 at 3:19 pm

     

    Well, actually, profit margins means selling price less cost of
    production.  Using condensate to dilute bitumen/heavy oil for pipeline
    flow is very common practice – there are already several reverse flow
    pipelines for diluent, and the Keystone XL pipeline will have one too.

    Yes… but it is still amazing that the margins are so “healthy” that they are going to bring in the condensate by ship, pump it hundreds of miles in a new pipe… only to ship it back out again in the diluted bitumen. Given the projected growth of tar sands production I would have thought that the control and production of condensate locally made more economic and logistal sense.

    Note that even the lowest rate is more than the total profit margin on
    refining, so how much extra tax revenue do you think there is from
    refining?

    I was refering more to jobs and the resultant direct and indirect tax revenues in addition to the refining. According to the link you provided, each  job in the oil and gas industry results in another 5.4 jobs.

    And it takes more capital to build a refinery, to capture that 10% value
    increase, than it does to build a new oilsands project to produce the
    oil for said refinery – so where do you think the most tax per
    investment dollar will come from?

    I don’t think that it is an either or proposition. The refinery and the pipeline could both be built.

    You can educate yourself on the whole process here; http://www.energy.gov.ab.ca/Or…..mics.pdf 

    Thanks for the link but unfortunately it doesn’t say anything about refining economics… it is mainly just about how Alberta applies and collects royalites.

    They will leave it to the -very successful – Ab oil industry to decide whether there is a value proposition in refining.

    What the industry decides (with a lot of foreign compainies involved) are not going to to do what is best for Alberta or Canada.

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  14. By paul-n on January 10, 2012 at 3:57 pm

    Given the projected growth of tar sands production I would have thought that the control and production of condensate locally made more economic and logistal sense.

    I would have thought so too, but I don;t know much about this – they wouldn;t be considering this (imported diluent) unless there was some economic advantage to it.  A return pipeline for the diluent is not that big a deal and is often done.  If things change, the flow could be reversed for delivering refined products.

     

    I was refering more to jobs and the resultant direct and indirect tax revenues in addition to the refining. According to the link you provided, each  job in the oil and gas industry results in another 5.4 jobs.

    The problem in Alberta is that you have near full employment now, and the oil industry is having trouble getting skilled workers as it is, and towns are having trouble housing them.  Not everyone wants their town to turn into Fort McMurray – it may be great for real estate speculators, but not for the fabric of the town.  The gov and oil co’s are trying to get the most value per capita dollar and per worker – refining loses on both counts.  It will still be done at some scale, but it is clearly not the priority.  

    I don’t think that it is an either or proposition. The refinery and the pipeline could both be built.

    Agreed. If no one wants to build it in Alberta then the refinery should be built at the BC end of the pipeline.   Put up a refinery at Prince Rupert (not Kitimat) to refine all the crude right there, create the diluent to send back, and export the refined products.

    Thanks for the link but unfortunately it doesn’t say anything about refining economics…

    No, thankfully the  government mostly stays out of that.    For an interesting look at refining margins, check out this chart for a Euro refiner;

    http://www.nesteoil.com/defaul…..,2035,5187

    This is the difference between crude price, and price of all the products made – at $1-5/bbl on $100 crude, that is pretty thin!

     

    What the industry decides (with a lot of foreign compainies involved) are not going to to do what is best for Alberta or Canada.

    Well, there’s the real question.  What is “best” is quite debatable, and the oil co’s think what they are doing is “good enough”.  If the prov and federal governments really think that refining is the best way to go then they should simply mandate it.  If that’s the price the oil co’s have to pay, then they will, though it will slow down development a lot as capital, resources and manpower go to refineries and not production.  Right now, the Ab and fed gov are clearly focused on production, so that’s probably what they think is best.  I think that BC and the Eastern provinces should get onto the case of refining, but Ab and the Fed are not going to wait for them to get their act together – and neither would I.

     

     

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    • By David on March 12, 2012 at 6:00 pm

      “Put up a refinery at Prince Rupert (not Kitimat)”

      Why you prefer Prince Rupert rather than Kitimat?

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  15. By Benny BND Cole on January 10, 2012 at 7:13 pm

    Seems okay to me. We get crude, refine it, and send it back out—seems like the USA is doing the added-value work. Good work to keep in the USA.

    I just hope we can make gasoline from coal or natural gas and do the same thing.

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  16. By Joseph on January 11, 2012 at 1:08 pm

    they wouldn;t be considering this (imported diluent) unless there was some economic advantage to it.

    Yes, there must be an economic advantage individually to tar sand players but not to Alberta as a whole (keeping in mind that it is not an either or situation).

    The problem in Alberta is that you have near full employment now, and the oil industry is having trouble getting skilled workers as it is, and towns are having trouble housing them.

    From what I have read, the pipeline would not start construction for several years (and the majority of it is not even in Alberta). One would think that in this very mobile age that getting workers to move to where the jobs are would not be a problem.

    If no one wants to build it in Alberta then the refinery should be built at the BC end of the pipeline.

    Interesting thought. However, it would seem that that would defeat Alberta’s goals to create a petroleum based chemical cluster/industry (I read through the web link you provided).

    Well, there’s the real question. What is “best” is quite debatable, and the oil co’s think what they are doing is “good enough”.

    Yes, there is “best” for Canada and there is “best” for the oil companies… and I don’t think that the two agree on this point. While a government could mandate I don’t think that it would for a number of reasons.

    Seems okay to me. We get crude, refine it, and send it back out—seems like the USA is doing the added-value work. Good work to keep in the USA.

    That is why there is a push for the XL. The industry needs to keep the Gulf refineries running at capacity.

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  17. By paul-n on January 11, 2012 at 2:07 pm

    Yes, there must be an economic advantage individually to tar sand players but not to Alberta as a whole (keeping in mind that it is not an either or situation).

    Well, if the oilsands companies are doing well, then so is Alberta, and if they are not, then neither is Ab, so the government doesn;t want to rock that boat too much.  The gov does not want to do anything that really hurts the oilsands industry, and if that means they give up on refining all the oil, then that is what the gov will let happen.  While Ab may miss out ion some benefits, they are getting plenty, and doing better than almost any othjer province/state, so the government can reasonably say that things are good enough.

     

    One would think that in this very mobile age that getting workers to move to where the jobs are would not be a problem.

    Well, it’s not quite that simple – you need lots of skilled and diligent workers.  Unskilled workers in energy industry jobs quickly become safety hazards.  So too with a unionised factory worker from Ontario that tries it out in the oilpatch – its a different world.

    For all the oilsands projects that have been built, they have all gone over budget because of manpower issues.  Building a refinery is about as complex as it gets, and the risk in construction costs is high.  The oil co’s are happier to just make oil.  If a refining co, like Valero or Tesoro wants to build a refinery, no one is stopping them, they will be welcomed.  But none of them are willing to venture to do that.

    However, it would seem that that would defeat Alberta’s goals to create a petroleum based chemical cluster/industry

    Well, they already have a good petroleum based cluster, and it will get larger, but the interest in refineries, at large scale, just doesn;t seem to be there.  

    I think it comes down to the ability/willingness of the gov’s to force industry to do something – refine the stuff in AB – that they don;t really want to do.  I think we can all agree on which way the AB  and Cdn gov’s wil go – build the pipelines and get the crude to market – even if we don;t all agree that is the way they should go.

    However, I don’t think this is the worst mistake the gov’s could/will make. 

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  18. By Joseph on January 11, 2012 at 5:12 pm

    If a refining co, like Valero or Tesoro wants to build a refinery, no one is stopping them, they will be welcomed. But none of them are willing to venture to do that.

    They are not willing because it would be cannibalizing their existing refineries down south. So, without government mandate, as you suggested, they will obviously prefer the XL option. Between domestic crude supply, imported crude supply from Canada, and reducing domestic demand, Valero and Tesoro will have to increasingly rely on export markets to keep their refineries at capacity and they obviously wouldn’t want any competition from north of the border.

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  19. By paul-n on January 11, 2012 at 9:59 pm

    They are not willing because it would be cannibalizing their existing refineries down south.

    Precisely.

    So why then would we want the Ab/Cdn governments to mandate that the Ab based oil cos’, or someone else, go into competition with the Gulf refineries?  What is the point of building new N. American refining capacity when there is already an oversupply, and it is only going to get worse?

    if new refineries were built in Ab, and Valero etc have lots of spare capacity, (that they aren;t willing to close) then Valero will buy whatever they have to to keep them going – hence the high price of La sweet compared to WTI. That same high price makes for low crack spreads.  So when Ab has someone willing to pay so much for crude that the Ab oil industry would lose money refining it itself, what should they do?  The answer is build a pipeline to supply those hungry southern refineries, let them do ther refining at break even or worse, and just pocket the money.  

    Now, for exports to China its a different story.  They’ll take the oil in whatever form it is offered, and the crack spreads are likely larger.  Refining the China bound oil certainly makes sense in my view, as it can then also be sold to any number of Asian countries that are desperate for fuel.

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  20. By Joseph on January 12, 2012 at 11:16 am

    So why then would we want the Ab/Cdn governments to mandate that the Ab based oil cos’, or someone else, go into competition with the Gulf refineries? What is the point of building new N. American refining capacity when there is already an oversupply, and it is only going to get worse?

    If I’m not mistaken, I believe that Canada imports some refined products. However, in the scheme of things I imagine it is a relatively small amount. Obviously, a new refinery would compete with existing refineries for global customers (such as China and Asia as you pointed out but also Mexico and S. America).

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  21. By paul-n on January 13, 2012 at 12:12 am

    I think Canada does import some refined stuff (east coast) but small in the scheme of things.  

     

    The real problem for the east coast (Can and US) is that their refineries are set up for light sweet crude, which they get from North Sea, middle east, Africa etc.  Retrofitting to handle heavy sour oil will cost so much that in many cases they are better off to close them.    So the east coast will become importers of refined products, from the midwest and Gulf coast, where all these refineries can already handle heavy stuff.  

    Quite a seismic shift in the oil(refining) game in N. America, and not a good one for the east coast folks.  Time for them to burn less oil for heating and start using it in diesel vehicles instead.

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  22. By Stew Plock on February 29, 2012 at 5:12 pm

    Here’s a question for Newt Gingrich and other “drill baby, drill” enthusiasts.  When is it better for the U.S. to utilize more of our petroleum resources..1) now when other nations have good but past peak production inventories of crude, or 2) in 20-25 years when those countries’ inventories of oil are reduced, making oil more of a scarce commodity with the result of global prices rising?   My answer is the latter…save our reserves for when the global price of oil skyrockets due to low reserves, and also save our oil for production of needed non-fuel products.

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