Only a few years ago, America’s oil policy was defined by scarcity and high prices. The consensus solution was characterized by President George W. Bush’s 2006 remarks that “America is addicted to oil,” when he laid out a blueprint to replace petroleum with alternatives. At the time, we were producing 5 million barrels of oil a day. But the experts and even the industry itself were blindsided by the turnaround in just a few years: Improvements in fracking technology, coupled with key exemptions from federal clean water laws and rising commodity prices, resulted in a pendulum swing to 9 million barrels a day.
{mosads}The oil gushing out of the Bakken and Eagle Ford shale formations has drillers swimming in profits and delivering jobs to producing regions, even with the recent price drop. Federal law limiting the export of U.S.-produced oil, combined with flatlining consumption, has led to a domestic glut. This surplus has driven key U.S. benchmark prices down, resulting in sub-$2.50 a gallon gasoline for most Americans.
Some analysts now claim that the resulting drop in prices, from $100 to $50 a barrel, is actually the new normal, reflecting a repeal of long-held fundamentals and justifying jettisoning the statute limiting the export of domestically produced crude oil. Oil companies (and the consulting firms they hire to produce studies affirming their position) argue that the oversupply has pushed prices down too low. Eleven oil company executives under the guise of their new lobbying group, Producers for American Crude Oil Exports, just met with the White House to urge the ban’s repeal, claiming that increased oil production can serve as the foundation of a new American economy, with unfettered oil exports creating even more jobs, lowering gasoline prices and reestablishing U.S. geopolitical supremacy by tipping the global balance of power away from OPEC and Russia. If you think this sounds too good to be true, you’re right.
Oil-exports-as-an-economic-policy sounds a lot like a Nigerian model of growth, a one-trick pony latching the U.S. to the perils of finite natural resources with volatile prices. Look to North Dakota’s and Texas’s current budget woes to see how tethering growth to fickle commodity prices produces a boom-and-bust economy. What sets America apart is not our aptitude at pulling dinosaur remnants out of the ground, but the value added by our manufacturing and high-tech innovation — competing sectors threatened by the higher petroleum product prices that will result from exporting. Oil is literally a fuel for economic activity. To increase the cost of that feedstock would benefit oil extractors at the expense of everyone else.
It is bad policy to extrapolate short-term events into long-term trends. Rising oil storage at home helps insulate the American economy from the uncertainty caused by oil supply disruptions abroad, serving as an enhanced Strategic Petroleum Reserve. The American economy remains addicted to oil, and any change in the key variables — Chinese/European growth increasing global demand, unrest in oil producing nations — can move prices to punitive levels. Oil prices have jerked repeatedly since the mid-2000s in response to a dissonance of supply constraints and demand trends. The future will be no less volatile, turning an axiom on its head: What comes down must go up.
Halliburton’s CEO explained recently that when oil exceeds $100 a barrel, oil companies are “printing money like crazy,” and falling prices simply force companies to become more efficient. Discarding the export ban would prop prices up and dull the incentive to innovate. Shale frackers will continue to return value to shareholders with the export ban in place.
But what about studies projecting that unconstrained crude oil exports will lower domestic prices rather than raise them? In general, they conclude that exporting oil will raise the key U.S. oil benchmark price (West Texas Intermediate, or WTI) but will lower an international benchmark by which some portions of the U.S. gasoline market are priced (Brent Crude). Following the money, however, one sees that nearly all of these private studies have been funded by companies that benefit from exporting oil. And a major flaw in the studies is that they dismiss the possibility that more U.S. gasoline markets could link to WTI. A recent Department of Energy study failed to draw conclusions about the impact of lifting the export ban on gasoline prices.
Indeed, Sen. John Cornyn, Republican majority whip from Texas, wants to attach the nixing of the export ban to legislation funding the next surface transportation reauthorization, claiming that “It seems to me that if our producers would get something closer to the Brent price, as opposed to the West Texas Intermediate price — it fluctuates, but it could be as much as $10 lower a barrel — that that would produce better prices for the producers.” Cornyn admits this is all about raising producers’ profits at the expense of higher gas prices for consumers. Is it a surprise that the largest contributor to his campaigns since 2009 is the oil industry, at $1.4 million?
U.S. oil exports can’t undercut geopolitical adversaries like Russia and elements of the Middle East without significant impacts to supplying the U.S. market — remember, America still imports 8 million barrels of oil every day. Booming domestic production hasn’t brought us anywhere near oil independence. We remain vulnerable to international supply shocks and punishing price swings.
As with any extractive industry, the impacts of fracking on precious resources — namely water, agriculture and harmful air emissions — will be exacerbated by the resulting increase in fracking activity should the ban be lifted. Indeed, former White House economic adviser and Treasury Secretary Lawrence Summers admitted that “the higher domestic price that will result from permitting the export of oil will lead to more drilling.”
That’s really the issue at hand. One segment of the economy — the oil industry — is waging a campaign to convince a skeptical public that an economic protection statute is no longer needed, sponsoring studies employing dubious calculations that Americans will be better off shipping our crude directly to China. We must learn from Nigeria, Russia and Venezuela that an economy that prioritizes raw natural resource exports fails to properly develop the true engines of prosperity. Any informed observer of energy markets today recognizes that the real revolution is in clean tech technology. Solar power will be cheaper than fossil fuels in 47 states by 2016. Tesla is building a battery factory that will deliver energy storage at rates lower than the current grid. Exporting oil is great for stagnating states, but terrible for success.
Slocum is director of Public Citizen’s Energy Program. Follow him on Twitter @TysonSlocum.