By Institute for Energy Research ——Bio and Archives--September 26, 2014
Global Warming-Energy-Environment | CFP Comments | Reader Friendly | Subscribe | Email Us
The reason we have a ban on crude oil exports in the United States is that in the 1970s when the price of oil spiked due to the formation and effective implementation of the OPEC cartel, we found ourselves dangerously vulnerable and much more importantly we responded to that vulnerability rightly or wrongly with a system of price controls on oil and a system in particular of price controls on old oil.
Now, for most of those 34 years, did this ban matter? No. We were a large-scale importer of all kinds of crude oil. It would have been goofy for us to have exported the oil. The ship would have come to our port, and then the ship would've left our port. It wouldn't have made any sense. So, this restriction was like the PGA Tour passing a restriction that said that Larry Summers was ineligible to play. It didn't really matter given the realities of the situation. The feared outcome would not materialize even in the absence of the restriction. So, we have, for the first time, a situation today that we have not had in at least two generations, namely that the market is sending signals that it is desirable on free market grounds to export U.S. oil. [Bold added.]To rephrase, Summers is saying that even though the original rationale for the crude oil export ban evaporated with the decontrol of oil prices in 1981, in practice the ban hasn’t been very relevant until recently. This is because even without the ban, the market wouldn’t have sent barrels out of the U.S., for most of this time. However, in recent years the situation has changed. The free market outcome would involve the production and export of U.S. crude oil, and therefore the government’s ban on exports is taking a larger and larger toll.
[E]very President of the United States since the Second World War has professed our allegiance to the concept of free trade….This is not just some hypothetical economic theory stuff. On dozens if not hundreds of occasions the United States at the World Bank and at the IMF has voted in favor of programs that included conditionality where the conditionality stopped export controls with respect to raw materials that were motivated by helping domestic producers. Just to make that more concrete, some country in Africa had lumber and in order to help them develop a domestic furniture industry they limited the export of lumber so that there would be low cost wood available to their furniture industry so that they could develop one. What was the position of the United States? Against free trade, inappropriate, must be removed as a condition for IMF and World Bank support. It's not a position we've taken once, it's not a position we've taken five times, it's a position we've taken dozens to hundreds of times as part of a general commitment to an open world economy. We have a long history of believing that export restrictions are not an appropriate policy tool. [Bold added.]To be clear, the U.S. government’s position vis-à-vis these other governments made economic sense. It was an inefficient interference with international trade when these other governments restricted the export of commodities in order to favor their domestic use. Yet by the same token, it is an inefficient interference with international trade when the U.S. government restricts the export of crude oil, in order to help American motorists.
If you allowed oil to be exported people would ship it from West Texas to Brent or to someplace that would otherwise receive it from Brent. They would make a profit. There would be a larger supply of Brent oil. The same demand and a larger supply means a lower price and so in fact the price of gasoline would be lower. How much lower? There have been three large scale econometric evaluations that I'm aware of…They all agree that the price of gasoline will be lower. They differ on the amounts with a range of estimates from about two cents a gallon to about twelve cents a gallon.I actually think Summers’ explanation here is a bit opaque; I humbly suggest that I explained the matter more clearly in my IER post. (To summarize the argument, gasoline can be freely exported, and so there must be one world price, disregarding taxes and other frictions. Therefore allowing crude oil exports reduces the price of gasoline for foreign drivers, meaning it also reduces the price for American motorists.) Even though Summers’ explanation of the mechanism is a bit unclear, I wanted to emphasize that Summers agrees—and cites three empirical studies backing up his intuition—that the current ban on U.S. crude oil exports makes gasoline more expensive than it otherwise would be.But the crucial point is that the price of gasoline will be lower and will not be higher and so if you want to help American consumers consume gasoline at lower costs or for that matter American heating oil consumers in New England consume heating oil at lower cost, you want there to be more oil exports. [Bold added.]
View Comments
The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.