Compelling Economics Support Oil Exports
Posted August 4, 2015
Something we hear frequently (and too often from people who should know better), is that as long as the United States is an oil importer it shouldn’t export domestic crude. It sounds logical and certainly makes for a good headline. But the idea ignores reality and sound economic analysis.
A quick skim of government data on U.S. trade shows that goods imported into the United States are often goods that also are exported from the United States. The fact is that oil is traded globally, and the ebbs and flows of global supply affect us here in the U.S. Bruce Everett, who teaches oil market economics at Tufts University, explained in a recent article for Politico:
… it’s certainly true that the US will still require imported oil for the foreseeable future to meet our needs. But the implication here is that exporting US crude oil would increase our import needs and therefore undermine national security. And that’s not how the oil market works. The US has an open economy, and American consumers pay world prices for oil – just as they do for wheat, corn, copper, gold and other internationally traded commodities. Crude oil is sold in a single, integrated global market. If the world oil price spikes, the US will suffer, along with everyone else, to the extent we rely on the global market for imports. But exporting some domestically produced oil would not affect this equation.
Energy isolationism isn’t in the United States’ best interest – economically or from a security standpoint. While some argue that shutting in U.S. crude oil is better for America, that kind of faulty thinking ignores the way free markets work – and can work to America’s benefit if we lift the ban on exporting domestic crude.
Earlier this year ConocoPhillips Chairman and CEO Ryan Lance noted that America’s energy renaissance has seen a rapid ramp-up in domestic production – to 11.6 million barrels per day that led the world in 2014, according to BP’s Statistical Review of World Energy 2015. The U.S. has only “scratched the surface” of its shale energy potential, Lance said, but domestic production will struggle to grow without access to the global marketplace. Lance:
Crude oil exports can help domestic energy production. The best way to maximize the benefits of the energy renaissance to the country and consumers is to ensure that producers can access healthy markets for their production. Crude oil exports would expand markets for domestic producers and thus encourage greater investment in new resource development.
It’s Economics 101: When market access is restricted, the impetus for new production and economic growth – more investment, job creation, equipment acquisition, materials and support services – is restricted as well. Conversely, when a U.S. commodity is allowed to trade freely and find markets, additional domestic production is stimulated.
The export ban specifically affects domestic production of light crude oil – oil that’s coming from the Bakken and other shale formations in volumes that are mismatched for the U.S. refining sector. Lance:
[T]his mismatch could reach 1.5 to 2 million barrels per day in the foreseeable future. To offset the cost of processing light oil in facilities not designed for it, U.S. refiners purchase light oil at a $5 to $10 per barrel discount from world oil prices. The discount incentivizes refiners to process more light crude oil, but negatively impacts producers and the U.S. economy, while putting domestic producers at a competitive disadvantage to peers in other countries. At today’s low oil prices, differences of a few dollars have substantial impact on upstream investments. For example, a $3 change in a $50-per-barrel price environment has the same effect as a $10 change in a $100 price environment, according to IHS.
The export ban works against American competitiveness. As a global energy superpower, the United States should be competing with other suppliers in the global marketplace, not effectively sanctioning itself while the benefits of exports accrue to others.
Studies (ICF International and NERA Economic Consulting) have estimated billions in additional investment and up to $1.8 trillion added to the U.S. economy would follow lifting the export ban. Studies also have projected that U.S. consumers will gain because gasoline costs will be lower – up to 12 cents per gallon in one study – by allowing crude exports.
Something else we hear on this issue is that the effort to end the U.S. export ban is an industry scheme. Here’s Lawrence Summers, Harvard University president emeritus and President Obama’s former National Economic Council director:
There’s also the claim that studies supporting crude oil exports have been produced by pro-industry organizations … like the Columbia University Center on Global Energy:
The original rationale for crude export restrictions no longer applies. Today’s oil market looks very different than in the 1970s when current crude oil export restrictions were first put in place. … If recent production growth rates continue, a shortage of US light crude refining capacity will likely reduce domestic crude prices relative to international levels, slowing the pace of upstream investment and future crude output. Modifying or removing crude export restrictions would prevent this from occurring by allowing domestic producers to compete in global markets. Permitting companies to export crude oil in greater quantities … will likely decrease the price Americans pay for gasoline, diesel and other petroleum products and benefit the US economy as a whole.
Lifting the ban on crude oil exports from the United States will boost U.S. economic growth, wages, employment, trade, and overall welfare. For example, the present discounted value of GDP in the high resource case increases through 2039 is between $600 billion and $1.8 trillion, depending on how soon and how completely the ban is lifted. Benefits are greatest if the U.S. lifts the ban in 2015 for all types of crude. … The welfare benefits to U.S. households derive from higher real incomes (from higher wages) and lower gasoline prices. In the reference case, the decrease in gasoline price is estimated to be $0.09/gallon, but only for about five years. If oil supplies are more abundant than currently expected, the decline in gasoline prices will be larger ($0.07 to $0.12 per gallon) and more enduring.
Exports would open new markets, encourage greater domestic production, and yield economic stimulation that would benefit consumers and the nation. Crude oil is the only energy commodity subject to an export ban, which was imposed by the Energy Policy and Conservation Act of 1975. Given the vastly improved energy landscape, exports should be allowed to enable the United States to realize the full potential of its unconventional energy resources. … There is no sound economic reason to prohibit crude oil exports, while allowing exports of the products made from crude oil.
About The Author
Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Previously, Mark was a reporter, copy editor and sports editor at an assortment of newspapers. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela have two grown children and six grandchildren.
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