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Page added on February 26, 2014

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Let U.S. oil exports flow

Let U.S. oil exports flow thumbnail

Anyone who has paid any attention to the news knows about the surge in oil and natural gas production in the United States. While the technique of fracking has been in use for decades, in Michigan since 1952, it has recently begun to yield record production. This has restored America’s role as a major producer of oil. The International Energy Agency predicts that the U.S. will pass Saudi Arabia as the world’s leader in oil production by 2020, pumping 11.6 million barrels a day (bpd), far above our 1970 peak of 9.6 million bpd.

However, not nearly as many people know that if you produce oil in the United States it is very difficult to sell it to customers in another country. Since the enactment of the Energy Policy and Conservation Act of 1975, all exports of U.S. crude oil require a license from the Bureau of Industry and Security (BIS), which is within the Department of Commerce. The BIS has been very reluctant to grant licenses for companies.

The Feb. 15 issue of The Economist pointed out some of the major problems caused by the inability of oil producers to sell their product outside of U.S. boundaries — “The ban on crude-oil exports hurts producers and makes it harder for America to become a swing supplier.”

If U.S. oil producers cannot export, they will have less incentive to develop new technology and drill new wells.

The export ban also distorts the market for refined oil products. Refiners buy light American crude oil below world-market prices, turn it into gasoline and then export the gasoline at world-market prices. This distorts oil prices and gasoline prices in the U.S. and the rest of the world.

The Arab oil embargo of 1973 was the stimulus for the oil export ban. But it was never clear that this made sense even from a national security perspective, as it gave oil exporting countries more power to keep up market prices and gain artificial profit by strengthening OPEC’s ability to restrict world supply. As The Economist also pointed out, when the Arab states placed an embargo on the western allies of Israel after the Six Day War of 1967, the U.S. was able to offset this by massively increasing production. If the ban on oil exports had been in effect, there would have been a major disruption in world oil prices.

The ban makes even less sense today when fossil fuels are adding .3 points to GDP growth. Our trade deficit with China in 2013 exceeded $318 billion. This has led some in Congress to call for restrictions on Chinese imports and claim that the Chinese are manipulating their currency. The U.S. Energy Information Agency estimates that China’s increase in oil demand was about one-third of the world’s total increase in oil demand in 2013 and this will be the case in 2014 as well. A reasonable way to affect our trade deficit with China would be to simply allow oil producers to export crude oil to the Chinese.

The CEO of Pemex, Mexico’s oil company, has recently called for greater collaboration between Mexico, Canada, and the United States in taking advantage of the boom in oil and natural gas in the region. That will be difficult with the current U.S. oil export policy.

If the restrictions on exporting crude oil were lifted today, oil could begin flowing right away. The pipelines and tankers are already there. The U.S. economy would benefit, as would the world economy. There could not be a better time to end a decade’s long restriction on the production and trade of a major energy supply.

Gary Wolfram is William E. Simon Professor in Economics and Public Policy at Hillsdale College.

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9 Comments on "Let U.S. oil exports flow"

  1. paulo1 on Wed, 26th Feb 2014 1:59 pm 

    This is the dumbest article I have read in a long time. Let’s see, lift the export ban and a company that imports 1/3 of its oil will be able to magically export and become a ‘swing supplier’. What are these people on? How can an oil importer become a swing supplier? All it really means is at long last the US will have to pay world prices across the country.

    Paulo (from the 51st state)

  2. CAM on Wed, 26th Feb 2014 2:01 pm 

    Apparently this guy doesn’t know that the United States now uses about 20 million barrels of oil a day and that number appears to be recently increasing. So let’s see, we use 20 million and produce 11.6 million (by 2020 a big if!) and export what?!

  3. paulo1 on Wed, 26th Feb 2014 2:01 pm 

    I meant to say ‘country’ and not company that imports. However, not a bad slip considering the Country now exists to serve companies and shareholders, constitution be damned.

    Paulo

  4. Davy, Hermann, MO on Wed, 26th Feb 2014 2:25 pm 

    I think there is a point on the variability of quality and types of crude related to the type, location, and quantity of refining assets. I think comments above make another point on how much flexibility there should be to crude exports. If these US exports are not limited we just have a situation where we are depleting US reserves here at the risk of fuel security latter. The “lobby of plenty” at work again distorting markets and US fuel safety in the name of the god of “Greed”. We will never be oil independent or a net exporter. These claims are ludicrous!

  5. rockman on Wed, 26th Feb 2014 3:52 pm 

    Davy hit the nail on the head. It isn’t about exporting oil or not per se. It’s all about which refineries can max the profit margin on a bbl of oil. In some cases, as with the Eagle Ford production, a better refinery spread can be made by eastern Canadian refineries then the Gulf Coast refineries. So much better that it’s worth shipping that oil half way around the country instead of just 100 miles down the road. And they avoid the oil export ban by doing a minor upgrade of the EFS production and thus reclassifying it as “product” for which there is no ban.

    “If U.S. oil producers cannot export, they will have less incentive to develop new technology and drill new wells.” That’s so true. Certainly $95+/bbl hasn’t been the incentive needed to spur increased drilling activity. LOL.

  6. J-Gav on Wed, 26th Feb 2014 6:29 pm 

    I see a lot of uncertainty ahead (supply-side constraints as per Steven Kopitz’s presentation for example) and downstream activity (refineries for example) sitting on a razor-blade desperately trying to make it feel like a cushion. Europe is already there – other regions may follow …

  7. Boat on Wed, 26th Feb 2014 7:11 pm 

    National Security and environmental impact should not be subject to profit margins from refineries. It would be nice if smart money chased the cheapest oil with the smallest environmental impact when it comes to imports and domestic drilling.
    If we refine 17 million barrels a day and export over 3 million million barrels a day it would seem we could do with less imports rather than add them. Like the Keystone pipeline.

  8. rockman on Thu, 27th Feb 2014 12:29 pm 

    Boat – Here’s another perspective: “we” don’t refine 17 million bopd. And “we” don’t export over 3 million bopd. And “we” don’t export refined products. With the exception of federal/state leases “we” don’t produce and own any oil/NG production in the US. Oil/NG is owned by private citizens who contract with the companies to produce these hydrocarbons.

    The refineries process privately owned 17 million bopd. The refineries export privately owned 3 million bopd. And refineries export privately owned products. I gather that you consider Americans to have some right to hydrocarbons because they are vital to “national security” and happen to be produced within our borders. Here’s a thought: the imported oil we get from Canada, Mexico et al is just as vital to “national security”. If that’s the rationale then we should be able to control what those countries do with their fossil fuels.

    I would offer that if the American people want to control the movement of hydrocarbons in this country then it’s a simple matter: buy the mineral rights from all this citizens that now currently own them. Then the govt can lease those lands out with the same export restrictions they have on oil/NG produced from federal leases. And there isn’t a need to nationalize the fossil fuel industry: the “Golden Rule” applies: he that owns the gold (fossil fuels, in this case) makes the rules. The exploration companies and refineries don’t care who owns the oil/NG as long as they have access to it. As far as environmental impact the citizens/govt would have complete control/responsibility over this situation.

    Problem solved: all the oil/NG under discussion would now be “American” and would be handle exactly like the public/govt wishes.

  9. Nony on Fri, 28th Feb 2014 6:08 pm 

    I don’t think the KSA fears shale strongly. I mean, 120 would be better than 100 for them, but still 100 is pretty nice! And it will run out.

    Yeah, there’s a little backwardation and yeah there’s at least some change (small, but real) of shale going global but it’s not like panic type fear…more something they watch. They remember the 80s price crash…

    Don’t nationalize the oil industry, Rock. I want a bunch of little Rocks competing with each other. Sends shivers up my spine when Cheney or Hamm talk about “limiting volatility” (i.e. locking in high prices). I want dog eat dog competition by the suppliers.

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