On December 11 the Subcommittee on Energy and Power will hold a hearing on the Energy Policy and Conservation Act of 1975, which implemented the ban on U.S. crude oil exports. Especially in light of Rep. Joe Barton’s bill to end the ban and allow exports, the hearing will focus on whether circumstances have changed to render the current policy anachronistic. In this post I’ll review the reasons that a crude oil ban has no economic justification, especially in light of the new realities of the world oil market.
Historical Rationale for Export Ban No Longer Applicable
As I explained in this previous post, historically the ban on crude oil exports was tied to the price controls that the federal government put on crude oil in response to the OPEC embargo in the 1970s. Specifically, if the U.S. government back then was going to put a cap on how much U.S. producers of (certain kinds) of crude oil could charge in the domestic market, then it would be foolish to allow producers the choice to sell the oil at the controlled U.S. price or at the higher world market price. If U.S. producers retained that freedom, then they would obviously sell crude oil at the higher world price to foreign markets, meaning that the price controls would merely mean that American oil left the country.
To be sure, fans of the free market strongly opposed the federal price controls on crude oil, and this is one of the reasons. But the point is, given that the U.S. government back then was trying to keep the domestic price of crude lower than the world price, it had to accompany the price controls with a ban on exports.
Yet as Larry Summers pointed out in his speech to the Brookings Institute, whether or not we agree with the policy of price controls at the time, the price control regime ended more than 30 years ago. So there has been no real case for retaining the ban on crude exports.
The reason this has largely been a moot point for the past three decades is that the U.S. was a large net importer of crude oil, and so the ban had little real-world significance. Yet that is changing, now that the U.S. has surged to the world leader in oil production.
Free Trade Promotes Prosperity
It is ironic that we even have to explain the benefits of allowing producers to sell their product (in this case, crude oil) to as many markets as possible. Generally speaking, with government policy there is a bias towards exporters and against importers. Specifically, when exporters sell American goods and services to foreign markets, usually that is perceived as beneficial because it “creates jobs at home.” In contrast, typically people have a negative view of foreign imports because they seem to “destroy U.S. jobs” when Americans buy things made abroad.
To repeat, the situation is upside down when it comes to crude oil. One might expect it to be a no-brainer for political officials and the public alike to welcome with open arms the prospect of creating new markets for U.S. companies, so that they could boost sales and employment. By removing the ban on crude oil exports, the federal government would spur the expansion of the domestic oil industry, spurring hiring of American workers, investment in new facilities in various American cities, and so forth. In other contexts, this is what most people claim they are trying to do with trade policy.
In reality, it makes no economic sense for the government to favor exporters or importers. Basic economics shows that when governments around the world lower barriers and allow their businesses and citizens to trade with other nations, resources are allocated to their most efficient uses.
Because of the arbitrary constraint introduced by the export ban, it makes economic sense for the U.S. to devote more of its resources to crude oil production[1] and export some of the oil to foreign markets, while other countries focus on their respective strengths (such as textiles or electronic goods) to send those products to Americans. This is a win-win proposition, with all participants becoming richer from the trades than would be possible if they relied only on domestic production.
Lifting the Export Ban on Crude Oil Would Lower U.S. Gasoline Prices
The reason people are reluctant to apply the typical presumption in favor of exports to the case of U.S. crude oil is that they fear it will drive up gasoline prices for American motorists. Yet as I explained in this post, the reality is the opposite: Lifting the ban on exports of crude oil would ironically lower the price of gasoline for Americans.
The reason is that the ban on exports only applies to crude oil, but not products. Thus, U.S. refiners have been perfectly free to sell gasoline on the world market to the highest bidder. Therefore, even if the ban on crude oil exports has kept the price of American crude below the world price of crude, it hasn’t kept the price of American gasoline lower than the relevant benchmark for the world market. (In practice the price of gasoline is higher in many other countries because of taxes, but we are here referring to the market price that the American producer would fetch.)
By eliminating the ban on crude oil exports, the U.S. government would eliminate arbitrary bottlenecks in the distribution of crude oil to refineries around the world. This would make the world production and distribution of gasoline more efficient, thus lowering the baseline world price (before individual government taxes etc.). This will mean that American motorists too benefit from lower pump prices.
Although it’s counterintuitive, the case can be summarized succinctly like this: (1) Allowing for the export of U.S. crude oil will clearly make gasoline slightly cheaper for foreign motorists. (2) Because there are no restrictions currently on imports and exports of gasoline, American and foreign motorists enjoy the same (pre-tax and other regulations) price of gasoline. (3) Therefore any measure that makes gasoline cheaper for foreign motorists must also make it cheaper for American motorists.
Conclusion
One of the most well-established principles in economics is that free trade showers benefits on all participants. The ban on crude oil exports makes no economic sense, especially because the circumstances of its original introduction no longer apply. Finally, even the worry that removing the ban will lead to rising gasoline prices is erroneous: Allowing exports of crude oil would eliminate arbitrary bottlenecks and actually make gasoline cheaper for American motorists.
[1] I am speaking of longer term trends. Some analysts warn that the artificially low interest rates fueled by the “easy money” policies of the Federal Reserve have contributed to the shale boom. Without taking a stand on that particular question, it is still true that the crude export ban restricts potential markets for U.S. oil producers and thus artificially hampers the resources flowing into the industry.
