By Jim Krane and Anna Mikulska
With crude oil supply in flood stage and prices downshifting, America’s political elite still finds itself unable to lift the outdated ban on US exports of crude oil.
Ditching the export ban, Baker Institute research shows, would accomplish at least two worthy goals. First, it would raise domestic prices of US crude oil, providing relief to the struggling US shale patch. Second, allowing US crude to reach global markets might reduce international crude prices, which would, in turn, reduce gasoline prices.
This unlikely sounding scenario is possible because the ban has led to a glut of un-exportable light crude that is sitting in storage tanks around America. Since it cannot reach international markets and U.S. refining sector is not configured to run this much light crude oil, American crude sells at prices well below those of comparable international grades.
The discount is being pocketed by US refiners configured to handle light crudes. Naturally, they oppose lifting the ban because doing so would end the extra profits they earn by converting artificially cheap crude into gasoline. Gasoline, unlike crude oil, is exportable. The price at your local service station is based on the global price, not the depressed domestic price for light crude oil.
In short, the ban on exports makes crude cheap for refiners, but not for you.
Why would we forbid people from trading such a globalized commodity? The export ban emerged as a populist response to the shortages buffeting America in the mid-1970s. Its companion measure, price controls on domestic oil, was dropped long ago.
The protectionist ban made for pretty ineffectual legislation for most of the last 40 years as America grew ever more dependent on imports. Only since the US shale revolution has it even become an issue, and for the wrong reasons. The ban is increasingly problematic for the US oil and gas industry and the US economy as a whole.
But the political appetite for lifting the ban remains stunted.
Why would so few US politicians – Republicans or Democrats – be willing to remove a bottleneck to US oil production? Plenty of reasons.
One is that politicians are afraid of being blamed for the forthcoming rise in gasoline prices, which is inevitable because prices are at longtime lows. As our colleague Ken Medlock has shown, allowing exports won’t be the act that raises prices. It might actually reduce them, all else constant, by increasing the crude supply to global refiners and depressing the international price of oil.
But the false perception persists. When prices rise, it will have more to do with demand in China or geopolitical issues affecting supply from the Middle East than reforms of US policy. But Americans will be looking for scapegoats, and misguided accusations would not need to be accurate to be effective.
At a time when Congress is already hamstrung by polarization, few members are willing to be associated with “experimental” energy policy ahead of rising prices.
That’s too bad, because ending the ban makes more economic sense than ever. As we write this, West Texas Intermediate crude is priced $8 below Brent. If exports were allowed, the spread between these grades would disappear, or even reverse, given WTI’s lighter gravity. Absent an export ban, in fact, most US shale crudes would command a premium to both WTI and Brent, given that they are of higher quality than either of those benchmarks.
An additional $8-12 per barrel would allow breathing room for US oil producers, helping them weather a difficult period, while allowing for innovation and setting them up for growth when oil prices revive.
Unfortunately, other interests are arrayed against oil exports. Another reason that the export ban retains support in some quarters is because lifting it would increase fracking activity and the associated negative externalities: traffic, noise, local pollution, natural gas flaring, and carbon emissions.
While these are certainly valid concerns, a ban on exports is an awkward way to address them.
Water disposal issues have begun to be addressed in draft legislation. However, the wasteful and polluting flaring of natural gas remains persistent, especially in North Dakota. Why not predicate future oil exports on legislation that tightens guidelines on natural gas flaring and venting?
Others oppose exports because blocking trade creates a market inefficiency which leads to higher global oil prices and reduced demand. This is a roundabout way of making oil less attractive. Oil sands opponents have taken a similar strategy with the Keystone XL pipeline. A price on carbon or an increased US fuel tax, or even tighter efficiency standards on vehicles and appliances, would be more effective.
Finally, the argument based on US self-sufficiency also falls flat. Exporting oil does not make America more vulnerable to foreign competition, or more supportive of dictatorship, as some would argue.
Those who think America can cut ties with exporting countries like Saudi Arabia by retaining the export ban ignore a number of awkward realities.
First, most of America’s imported oil comes from Canada and Mexico. Second, these imports are mainly heavy crudes that are unavailable domestically but that certain US refinery configurations require. Third, lifting the export ban will not stop Saudi imports since Saudi Aramco owns stakes in US refineries that were built around its sour crudes.
For most of us, freer trade makes more sense. It will allow refineries to compete more efficiently by removing the discount for valuable light crude, restoring the investment rationale for firms which poured cash into configurations that can handle heavy crude. And anyway, America is a member of the WTO. We’ve already committed to avoiding this sort of protectionism.
We recently warned about the dangers of making long-term decisions on the basis of short-term fluctuations in oil prices. In this case, overturning the crude export ban makes sense, both in the short-term context of low prices, and the longer-term context of improving energy security by participating in more integrated crude oil markets. Oil is a tradable commodity, and that’s where its value lies.
Jim Krane is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy.
Anna Mikulska is a Senior Research Analyst for Energy Studies at Rice University’s Baker Institute for Public Policy.
