Now that the U.S. is among the world leaders in oil production, does it make sense to retain the ban on U.S. oil exports? These bans were imposed in the mid-1970s in response to the oil embargo from the Organization of Petroleum Exporting Countries (OPEC). At the time, the U.S. was highly dependent on oil imports, and exporting was considered damaging to economic and national security interests (not to mention political fallout).
Given the change in fortunes over the last forty years, there has been a new push by oil producers and affiliated companies to lift the ban and take advantage of the oil boom. The ban was recently lifted in one narrow fashion — to allow some exports of “oil condensate,” an ultra-light form of oil that has had minimal processing — but some are pushing for a complete lifting of the ban. Environmentalists and fuel refineries disagree and oppose lifting the ban.
At this point, pros and cons of lifting the ban are mostly opinions based on assumptions. Let’s drill (pun intended) into the specific categories.
Jobs
- Pro: According to IHS (Information Handling Services) analysts back in March, removing the export ban could result in hundreds of thousands of new jobs and billions in new income to the economy. The oil industry and its suppliers have taken a beating with the oil price plunge and could use the boost that exports will provide.
- Con: Others point out that more oil on the market is only going to lower the price further, and counting on the global economy to recover and spur eventual higher demand is a risky proposition.
Environmental Impact
- Con: Environmentalists staunchly oppose lifting the ban, saying that it will increase the risk of environmental disasters, accelerate unwanted climate change, and delay the growth of alternative energy.
Reduced Buffer Capacity
- Con: A large oil reserve serves a strategic purpose and acts as a buffer against volatility in oil prices. Opening U.S. oil to the world has the potential to drive up domestic prices through volatility and localized supply issues, even as it lowers oil prices globally.
Gas Prices
- Con: Even though we are awash in oil now, it is possible to see exports affecting domestic gas prices. Fuel exporters do not have the same limits that oil exporters do, and refineries are using the oil glut to their advantage. Bloomberg has reported record levels of U.S. gasoline exports. Dropping the supply via exports will hurt the refineries, but whether the resulting gas price would rise or fall is subject to debate.
- Pro: Both the Energy Information Administration (EIA) and Resources For the Future (RFF) produced studies that suggest lifting the ban will drop gas prices slightly.
Types of Oil
- Pro: The shale oil and fracking process has brought an abundance of light, sweet crude oil onto the market. Unfortunately, most U.S. refineries are built to process the heavier crude oils from overseas suppliers like Venezuela and Saudi Arabia. Unless there is an effort to invest in retrofitting refineries or building new ones, the infrastructure mismatch makes exporting the newer oil more cost effective.
Shipping Costs
- Pro: An obscure piece of old legislation puts a twist in the economic arguments. The Jones Act from 1920 mandates that only U.S.-built, owned, and operated ships can transport oil between U.S. ports. Wall Street Journal reporter Holman Jenkins, Jr. suggested that shipping costs would favor sending oil overseas for refining compared to keeping it in the U.S. — unless Congress wishes to change the Jones Act. As a result of this legislation, it would cost around $2 to send a barrel of oil to Asia, but approximately $7 to send it to the West Coast.
Government Policy
- The Department of Commerce holds the control of exporters through licensing. It could choose the path of being slow and deliberate on licenses, thereby lifting the ban yet effectively keeping it in place through procrastination. It is also likely that the Administration will gauge the effect on our allies and enemies in the Middle East before proceeding — although it is anyone’s guess how that will turn out.
We cannot say for sure whether the lifting of the export ban is a net plus or a minus but one thing is certain — if the ban is lifted, it will be important for the U.S. government to do it correctly. What is your confidence level in that?
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