Lift the Ban

COMMENTARY Energy Economics

Lift the Ban

Sep 25th, 2014 4 min read
Nicolas Loris

Fellow in Energy and Environmental Policy

Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.
It’s a simple policy change that would create jobs, boost energy production, lower gas prices, help our reliable trading partners and ease geopolitical tensions around the world. Larry Summers, formerly President Obama’s top economic aide, recently said, “The merits are as clear as the merits with respect to any significant public-policy issue that I have ever encountered.” That policy change is lifting the ban on crude-oil exports.

Crude-oil production in the U.S. has skyrocketed in the past six years, largely due to technological advances in hydraulic fracturing (fracking) and horizontal drilling. With the aid of these advanced techniques, domestic crude-oil production has increased by 99.5 percent since 2008, the year when production reached its lowest point since 1943. Over 90 percent of all oil-production growth in the U.S. can be credited to fracking.

The soaring production now has America in a position to export crude. But antiquated laws stemming largely from the Arab oil embargo in the 1970s stand in the way. By and large, companies must refine the crude in the U.S. before shipping it overseas.

Crude oil, and energy broadly, should be traded freely like any other good or service. Free trade is a major engine of economic growth, prosperity, and human well-being. When markets are open to more producers and consumers, competition provides people with more choices and better products at lower prices.

Free trade allows Americans to buy products that companies in other countries make more efficiently — and vice versa. Additionally, being able to rely on other countries’ ability to specialize in making certain products creates new opportunities to apply American labor and capital to more productive uses. Companies in foreign countries that specialize in making a product at a lower cost create opportunities for Americans to import the product and thus pay less for it. Further, when markets are open to exports, opportunities grow, increasing the potential for more wealth, investment, and jobs.

Opening markets to both imports and exports fosters innovation. Facing more competition forces companies to change if they are to retain or expand their market share. The result is innovative ideas, higher-quality products at competitive prices, and an improving standard of living. Free trade has helped lift hundreds of millions of people out of poverty around the world. Whether by reducing hunger, improving the environment, or generally growing the global economy, free trade raises the tide for all boats, increasing prosperity and the quality of life for all.

So what’s the holdup? Perhaps the biggest concern among skeptics and opponents of lifting the crude-export ban is how increased oil exports might affect the price at the pump here at home. Yet several studies project that lifting the ban would actually decrease gas prices here, as well as abroad, by creating a more efficient distribution system for processing oil.

Crude can range from very light to very heavy (depending on its density) and from sweet to sour (depending on its sulfur content). Light, sweet crudes sell at a premium compared with heavy, sour crudes because refiners can process them more cheaply. Opening exports would allow U.S. companies to compete in the international markets, where similar crudes have higher prices. The overall increase in global supply would reduce the price of internationally benchmarked crudes and decrease the price at the pump.

To fully unleash America’s oil production and improve global market oil efficiencies, we must match refining capabilities with raw resources. For decades, industry investment has been driven by an import mindset. Despite the recent growth in light-crude production, U.S. refiners have invested — over the past 20 years — $100 billion in plants built to handle heavier crude imports. Gulf Coast refineries, for example, are set up largely to handle medium and heavy crudes from Venezuela, Mexico, Canada, and the Middle East..

U.S. refiners set up to process light crude have replaced similar grades of oil imported from West Africa with domestic light crude, and a number of companies have made investments to handle more light crude. Over the past four years, light-oil imports have decreased by two-thirds.

However, these market shifts have constraints and are unlikely to keep up with American crude production. If the refining market is saturated, domestic oil companies will have to stall or shut-in production, which would require companies to implement a production cap lower than available output. In some areas of the country, this is already occurring. The discouragement of production brought on by an artificially restricted market will decrease global supplies of oil and keep prices higher than they otherwise would be.

On the other hand, allowing crude-oil exports to flow freely to foreign markets already able to process the oil would increase supply and increase overall market efficiency. An ICF International study prepared for the American Petroleum Institute estimates that opening markets to crude exports would save American consumers $5.8 billion over 20 years, increase U.S. GDP by more than $38 billion, and add more than 300,000 jobs by 2020. A recent study by global-information firm IHS study projects even higher benefits, finding that removing the ban would lower gasoline prices by 8 cents per gallon, saving motorists $265 billion over 15 years. IHS projects that the economic activity resulting from increased crude exports would create an average of 394,000 jobs annually from 2016 to 2030, peaking at nearly 1 million jobs in 2018.

Freely trading energy has national-security benefits as well. Removing restrictions on crude-oil exports would reduce any one nation’s ability to manipulate energy supplies for political and economic influence. The recent crisis in Crimea between Ukraine and Russia demonstrates how liberalizing global energy markets could be an effective geopolitical tool. Much of Russia’s power in the region derives from its control of energy supplies, particularly natural gas, and distribution systems. Opening markets would provide a diversity of suppliers and greater energy supplies for the global market. This would likely reduce prices and certainly offer more choice to countries such as Ukraine and Poland in the near future. Ultimately, providing that choice would diminish Russian power. Establishing free-market reforms now and increasing energy supplies would help prevent future incidents and price shocks, not just in Ukraine, but around the world.

To its credit, the Obama administration has taken some steps to slightly open the door to increase allowable exports. Recently, the Commerce Department granted two Texas companies permission to export an ultra-light crude called condensate. However, Commerce has put other companies’ requests on hold.

President Obama could declare that crude-oil exports are in the national interest of the United States. Given the expansive economic gains from exports and the geopolitical gains from increasing supplies to the world market, lifting restrictions on crude-oil exports is undeniably in the national interest. However, given that the president is supposed to make a national-interest determination for Keystone XL — which it undeniably is — and has stalled that decision for years, it is unlikely that he would make that call for crude exports.

If the president does not act, Congress can. It could take up legislation to remove the ban. After all, lawmakers can heed the advice of presidential advisers just as well as the president himself can.

 - Nicolas Loris is the Herbert and Joyce Morgan Fellow at the Heritage Foundation.

Originally appeared in National Review Online