U.S. Loosens Longtime Ban on Oil Exports

Companies will be freed to swap light, sweet crude for heavy Mexican crude.

Energy companies eager to export American crude oil scored a victory Friday when Washington agreed to allow them to trade oil with Mexico, in a further erosion of the four-decade ban on selling U.S. crude overseas.

The U.S. Commerce Department told members of Congress it intends to approve an application by the national oil company of Mexico to exchange heavy oil pumped there for light crude pumped in the U.S., according to people familiar with the matter.

The deal, which will give American drillers a new market for their product, is a significant step toward lifting the export ban that dates to the Arab oil embargo of the 1970s, when the U.S. suffered though gasoline shortages. Since then, the U.S. has allowed few overseas shipments of oil, with a current exemption for Canadian refineries, which send a lot of gas and diesel back to the U.S.

The laws barring overseas sales have come under pressure in the past year as American drillers pumped surging amounts of crude from shale formations, helping to create a global glut that has brought down oil prices by half in the last 14 months. Congress is slated to take up the matter later this year, and several top lawmakers back unfettered domestic oil exports.

The swap deal with Mexico doesn’t need congressional approval. Such oil trades—which aren’t considered true exports because the U.S. is getting oil in return—were contemplated under the original ban legislation, but haven’t taken place before.

The deal illustrates how Washington is trying to catch up to a dramatic new energy abundance in the U.S., said Daniel Yergin, vice chairman of IHS Inc., an energy consultancy. “It’s pretty clear, directionally, where things are headed,” he said. “This ban becomes more and more awkward and ill-fitting. It doesn’t fit reality.”

Petróleos Mexicanos SA, known as Pemex, has asked Washington for permission to start by bringing in as much as 100,000 barrels of U.S. oil a day. Though that is a fraction of the 9.5 million barrels the U.S. is pumping daily, it amounts to more than 36 million barrels a year.

Mexico first asked for oil swaps with the U.S. eight months ago.

The Commerce Department is rejecting applications from other countries that sought permission for similar swaps, according to a person briefed on the matter, adding that American oil sent to Mexico must be refined within that country and not re-exported to any other nation.

More From The Wall Street Journal (subscription required):