Oil Exports and America’s New Era of Energy Opportunity

Mark Green
Posted November 2, 2015

When the Energy Policy and Conservation Act was signed into law by President Gerald Ford in 1975, Ford said it would put the United States “solidly on the road to energy independence.” The legislation included a ban on most exports of domestically produced crude oil. For many, shutting in domestic oil production – effectively self-sanctioning a vital U.S. industrial sector from the global marketplace – seemed like a good idea. At the time.

The country had been roiled by an oil embargo imposed by exporting states in response to U.S. support for Israel during the 1973 Yom Kippur War. Americans learned the meaning of oil shock – long lines for gasoline, odd/even day rationing schedules, shortages and rising prices. The Federal Reserve’s Michael Corbett writes that the embargo nearly quadrupled the price of a barrel of oil to $11.65 – quaintly low in 2015 dollars, but economically crippling four decades ago. Corbett:

As Arthur Burns, the chairman of the Federal Reserve at the time, explained in 1974, the “manipulation of oil prices and supplies by the oil-exporting countries came at a most inopportune time for the United States. In the middle of 1973, wholesale prices of industrial commodities were already rising at an annual rate of more than 10 per cent; our industrial plant was operating at virtually full capacity; and many major industrial materials were in extremely short supply” (Burns 1974). In addition to these cost pressures, the US oil industry had a lack of excess production capacity, which meant it was difficult for the industry to bring more oil to market if needed (Alhajji  2005). Thus, when OAPEC [the Organization of Arab Petroleum Exporting Countries] cut oil production, prices had to rise because the American oil industry could not respond by increasing supply.

Then, the conventional wisdom was to sequester U.S. oil production, to marshal domestic energy in hopes of limiting America’s vulnerability to future oil shocks. The oil exports ban was one of the most visible indications that the United States had entered an era of energy scarcity, one that would see Ford and every one of his successors challenge the country to strive for energy independence.

Despite the pledges, goal-setting and bully pulpit prodding, energy independence was as elusive as a distant oasis, shimmering and tantalizing, but always evaporating before the U.S. could arrive. U.S. oil imports kept rising – and with them, the leverage of the world’s petro-states. As the Jeff MacNelly editorial cartoon from the mid-1970s depicts, it was widely believed that the United States was being overmatched by its need for imported oil, volumes of which surged during the 1990s and 2000s. A charting of U.S. Energy Information Administration data showing the increase in imports:

It was hard to see how the story could possibly end well. But that indeed is happening. As you can see in the following chart, things dramatically changed with growing domestic oil production over the past five years. Energy independence or, more accurately, energy self-sufficiency no longer was a mirage. An American energy revolution was upon us.

The revolution is a shale energy/fracking revolution, carried along by the combination of modern hydraulic fracturing and advanced horizontal drilling that unlocked vast reserves of oil and natural gas in shale and other tight-rock formations.

Last year, U.S. net energy imports as a share of energy use fell to their lowest level in 29 years. A new era of energy abundance dawned, and with it new scenarios were possible on a number of policy fronts – including resuming the export of domestic crude oil.

Though the U.S. remains an oil importer – we also import cars, aircraft and a number of other items – the energy revolution created a generational opportunity for America, the world’s No. 1 producer of oil and natural gas. If the U.S. ends its self-imposed, four-decades-old ban on oil exports, broad expert analysis says it will:

• Create market access for large volumes of light oil that are mismatched for U.S. refineries, the accumulation of which discounts that oil compared to global crude prices, discouraging domestic production.
• Stimulate domestic energy production and along with it, job creation and economic growth. ICF projects that lifting the ban could help domestic output increase up to 500,000 barrels per day by 2020, increase U.S. GDP by $38.1 billion and created up to 300,000 jobs.
• Benefit U.S. consumers with lower gasoline costs – between a penny per gallon up to 12 cents per gallon, according to major studies.
• Compete with other energy-supplying countries in the global marketplace, balancing and diversifying that marketplace and helping allies overseas.

America would be stronger, and the world would be safer. “Allowing the free export of oil will enhance U.S. energy security in multiple ways,” write Charles Ebinger and Heather L. Greenley, authors of the Brookings Energy Security Initiative’s study on the effects of lifting the U.S. crude oil export ban. “[B]y allowing exports of U.S. crude oil the U.S. will create a more competitive oil market.” Michele Flournoy, CEO of the Center for New American Security and President Obama’s former undersecretary of defense for policy, in congressional testimony:

“When more supply originates from producers who are not vulnerable to political instability, conflict or threats to their energy infrastructure, the overall market becomes more stable. … [A]llowing U.S. oil exports would enhance the energy security of key U.S. partners, from Poland to India to Japan. Indeed, our closest allies in Europe and Northeast Asia would welcome – and have asked for – the unrestricted export of U.S. crude oil. … Enabling U.S. oil exports would strengthen our geopolitical influence, leadership and leverage with allies and adversaries alike.”

Unfortunately, some retain the mindset of those energy-scarce 1970s, perhaps not understanding the basic economics that strongly argue for lifting the exports ban and allowing U.S. oil to reach the global marketplace. Maybe they simply were unprepared for such an historic paradigm shift – that the United States could drill its way out of energy dependence.

More concerning are those who know the economics and know better. Yet they want to keep the exports ban as part of an off-oil agenda, a narrow ideological view that denies the strategic economic, energy and security reasons for robust domestic oil and natural gas development – which would be helped by exporting U.S. oil.

They have no plan that offers broad opportunity for American prosperity and security now and in the decades to come. Theirs is an America of limited energy and limited opportunity and, ultimately, an America whose standard of living must decline for wont of reliable, abundant, scalable energy. In other words, an America much like the one four decades ago that reacted in fear to the realities of a post-oil embargo world.

That doesn’t have to be our world, our future. The United States has the energy reserves and the technologies, as well as the industry to safely and responsibly harness them and secure a better future. Lifting the oil exports ban is one piece of the policy puzzle that, if it comes together, can sustain and grow our energy revolution and benefit all Americans.