The crude oil export ban is a relic of flawed policy

Forty years ago, Congress passed an energy policy act that banned the export of crude oil. It did not ban the export of products like gasoline and diesel oil.

The ban was in response to the Arab oil embargo and the prevailing perception in scarcity. From an economic perspective, as well as an energy perspective, the ban made little sense. Now, it makes no sense. It was driven by politics and emotion. When oil was discovered in Alaska’s Prudhoe Bay, it would have been cheaper to export it to Japan and then buy an offsetting quantity on the world market. But because of the ban, it was politically radioactive to even raise such a prospect. So U.S. consumers, mainly in California, paid a price for an inefficient outcome that was driven by the ban and another bad policy called the Jones Act.

As long as imports were growing and domestic oil production was declining, there was little interest in the export ban or to running the risk of a political backlash by removing it. It is now a serious impediment to our economic self-interest.

{mosads}Today, the notions of scarcity and excessive dependence on foreign oil have finally been discarded. They have been replaced by abundance from our energy renaissance and the economic benefits it has produced. So, why doesn’t Congress pass legislation removing the ban and why doesn’t the president direct the Commerce Department to freely grant export licenses? Politics still trumps good economics.

Although it is counterintuitive, exporting domestic crude oil is most likely to result in lower gasoline prices, but the explanation of why is not simple. Politicians like simple sound bite explanations and removing the ban does not lend it self to simplicity. Presently, there is an excess of crude oil in storage, including in tankers leased to increase storage capacity. Increasing storage serves no purpose other than letting traders bet on higher future prices that will allow them to profit. Allowing the export of crude into the world market would lower the world price of crude oil and that would lead to a lower price for gasoline.

There is another practical reason that also will benefit consumers. Most of our refining capacity has been built to handle high sulfur imports while the increase in shale oil production is lower sulfur. As a result, either refiners have to spend billions of dollars to modify their refineries or they have to find other ways of dealing with the increasing volume of shale oil. Some are doing exactly that by investing in “splitters” (simpler refineries) that can process the low sulfur crude enough for the output to qualify as products. Clearly, either option is more costly than just removing the ban.

The free trade of any commodity leads to increased efficiency and that always benefits consumers by lower prices, increased investments and jobs. Eventually continuing the export will lead to further reductions in exploration and production, undermining the energy renaissance that has been an economic benefit to a struggling economy. The U.S. has always taken the lead in promoting free trade because of the global benefits that it produces. It is hypocritical to preach a policy and then ignore it as we have done with the export ban.

Some also claim that removing the ban will result in more exploration and production that will lead to more greenhouse gas emissions. The belief that carbon dioxide emissions lead to climate change has become an article of faith even though it is contradicted by climate history, physics and the pause in warming that began in 1998. The International Energy Agency projects that for the next several decades, fossil fuels will continue to provide over 80 percent of the world’s energy consumption. That reality trumps the environmental argument.

The case for removing the ban is overwhelming. Ideology, politics and special interests should not continue to be obstacles to doing the right thing for the economy and global trade.

O’Keefe is CEO of the George Marshall Institute and president of Solutions Consulting, Inc.