Lifting the Crude Oil Export Ban – Welcome and Long Overdue

Last week, President Obama signed into law an omnibus spending bill that included a repeal of America’s crude oil export ban. Part of the Energy Policy and Conservation Act of 1973, the ban was enacted as a response to the Arab oil embargoes of the 1970s. While refined petroleum products such as gasoline and diesel are exported without restrictions, the United States has not exported unrefined crude oil, except in limited circumstances, in more than 40 years. Despite dramatic increases in American energy production, the policy remained unchanged.

With the discovery of new reserves and the technological advances to extract the oil, the U.S. has become a leading energy producer. The anti-free market oil ban that seemed a sensible response when enacted clearly outlived its usefulness, as ALEC underscored in its model Resolution in Support of Lifting Federal Restrictions on Crude Oil Exports and Resolution for Reform of Counterproductive Export Control Policies.

While the short-term effects will be minimal, lifting the ban is likely to have a far-reaching, long-term impact on the U.S. economy. Energy production was one of the few sectors experiencing job growth following the 2008 financial crisis. However, with plunging oil prices, American producers have cut thousands of jobs. Lifting the export ban might stop the hemorrhaging of upstream production jobs and ultimately herald increased hiring when oil prices rise.

Lifting the crude oil export ban will remove market distortions. Currently, American refiners purchase oversupplied crude oil at below market prices yet sell refined products, such as gasoline, at world market prices. This is why increases in domestic oil production have little impact on what hardworking Americans pay at the pump.

Efficiency in the oil refining sector will also improve, removing a significant bottleneck for U.S. producers. Unable to export their light crude to refineries more suited to refine it, domestic oil producers send their oil to domestic refineries designed to process heavy crude, resulting in insufficient capacity and increased refining costs. With the increased capacity to refine domestically produced oil in overseas locations, the U.S. can realize potential growth in crude oil production and the job creation that accompanies that growth.

Domestic refineries will no longer have a captive oil market dependent on them because of the export prohibition but can make up the market share with imports from countries like Mexico, Canada and Venezuela that produce heavy oil. Additionally, in an effort to retain more of the domestic market share, U.S. refineries might apply just enough political pressure to repeal the Jones Act, a protectionist, legislative relic whose demise is also long overdue. Because of its requirement to use more expensive U.S. ships and U.S. crews when shipping goods between American ports, the Jones Act makes it less expensive to ship crude oil overseas to be refined than to ship it to a domestic refinery.

According to an Aspen Institute report, Lifting the Crude Oil Export Ban: The Impact on U.S. Manufacturing, U.S. manufacturers will benefit from the ban’s repeal. Constraints on domestic refining caused by the inability of U.S. producers to export to refineries abroad have inhibited crude oil production growth. This has the potential to drive up energy costs with grave implications for an industry that consumes up to one-third of the energy used in the U.S. Domestic companies manufacture much of the equipment used to develop America’s energy reserves providing additional indirect benefits from the energy boon.

American consumers will likely notice little change with the lifting of the ban. The world market determines gasoline prices, although a significant increase in domestic oil production could lead long-term to lower fuel prices.

Lifting the moratorium on crude oil exports will align U.S. policy with America’s stated free market principles. The ban is inconsistent with our obligations under the General Agreement on Tariffs and Trade (GATT), which only permits export bans that are temporary and resulting from extraordinary circumstances. The Energy Policy and Conservation Act of 1973 is neither. American crude oil exports will reduce global reliance on exports from more volatile oil-producing regions and enable Central and Eastern Europe to diversify their oil imports, a positive geostrategic goal.

Almost equal numbers of members of the U.S. House of Representatives from both sides of the aisle supported  the omnibus bill, of which lifting the crude oil exports ban was just a part. The process was marked by compromise and an absence of Washington dysfunction that has typified Congressional lawmaking of late. As 2016 approaches, perhaps this is a harbinger of more responsible federal governance in the coming year.

In Depth: Energy

It is difficult – and perhaps even impossible – to overstate the relationship between readily available access to safe, affordable and reliable energy and individual prosperity and economic wellbeing. This is because energy is an input to virtually everything we produce, consume and enjoy in society. Think for a minute…

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