On oil exports, Obama’s domino effect of negative outcomes

Most pundits are predicting a lame lame-duck, which means the new Congress will have plenty of old business to deal with. Some issues will be more urgent than others. One matter I would put at the top of the “must do” list is a review of the administration’s current policy regarding oil exports. Obstructing oil exports has put the United States at the mercy of its global competitors, allowing them to dictate our energy security and undermine our oil production while they protect their market share and engage in predatory pricing.

{mosads}By limiting sales to only domestic refineries, the administration is capping production and creating a domino effect of negative outcomes: a delay in price reductions to consumers; a loss in revenue that could be generated by industry from higher global prices and reinvested at home; and a weakening of our ability to shape global events. Unless there is a course correction, the situation will only get worse for the economy and, with it, hamstring one of our strongest economic growth engines.

A parlor game among oil analysts and policy wonks of late has been to divine why Saudi Arabia is maintaining strong production levels in the face of dropping prices. John Kemp, an energy columnist for Reuters, recently analyzed this situation in his column “The Saudi Oil Enigma.” He argued that the availability of new crude supplies gives the Saudis little choice in the matter: “Ultimately, Saudi Arabia and OPEC [if they reduced production] would end up with a combination of lower market share and lower prices, the worst of all outcomes, just as they did in 1985. The best strategy for the Saudis, indeed the only effective one, is to allow prices to fall until the market rebalances naturally, with slower growth in shale and bigger increases in demand.”

Ask any business school professor about the importance of market share, and you will get a tutorial on how market leaders go on offense to protect their share and about the pitfalls of defending a position. To that point, I would argue that by going on offense and protecting its market share, the Saudis are actually basing their current decisions on past lessons from the 1980s. Kemp’s reference to 1985 is significant. It’s when the average price of a barrel of oil fell from $26.50 to $14.64. It would be another five years before the cost of a barrel of oil broke $20. During that same period, oil production dropped 19 percent from nearly 9 million barrels per day to just over 7 million and price dropped 45 percent. It was not until last year that U.S. oil production rose to the 1990 level, after bottoming out below 6 million barrels in the interim.

In the words of Yankees’ great Yogi Berra, “It’s deja vu all over again.” The question for policymakers in Washington today is: Will they allow for a repeat of events and disruption that occurred in the late 1980s? I hope not, as we have come a long way since then in fortifying our national energy security. It would be a mistake for the U.S. to stand idly by and watch these gains slip away.

According to the U.S. General Accountability Office (GAO), allowing exports could lower the price of gasoline here at home by as much as 13 cents a gallon. Additional supply would depress global markets — markets that ultimately impact what U.S. motorists pay at the pump. Additionally, the GAO points out that the increased production accompanying a pro-export policy would create huge dividends for the economy and the U.S. Treasury.

Globally, our ability to export oil would tilt the playing field such that our allies would be less dependent on Russia, Iran and others who either leverage their own oil to achieve expansionist goals or who use profits to fund terrorist groups.

Finally, as a global producer and exporter, we would shift our current posture from one of “price taker” to that of “price maker.”

At the very least, a pro-export policy would allow domestic producers to enter global markets in response to a higher price signal and moderate excessive price spikes. The lack of what economists call market “contestability,” which refers to the ability of producers to enter the market if oil prices become excessive, has plagued industrialized nations since Winston Churchill oversaw the British navy.

For a generation, policymakers have sought to influence oil prices, only to discover the only tools in the box were to jawbone OPEC or try and conserve our way out of price spikes, neither of which proved effective. No longer is this the case. Because of advances in technology, as well as the geology of the Bakken and Eagle Ford shale plays, we have new and better tools to help advance our energy security goals. Congress must be forward-leaning on this one and put a stop to the kind of ill-conceived policies of the last century that led us down the path of price controls and a weakened energy position internationally.

Maddox is a former senior official at the U.S. Department of Energy, a fellow at the American Action Forum and is associated with the Livingston Group.