Let American Oil Be Free

Posted: Apr 07, 2014 8:12 AM
Let American Oil Be Free

In the April issue of Townhall Magazine, HotAir's Erika Johnsen explains why the ban on crude oil exports was useless in the 1970s, and is actively harmful today.

The United States’ shale revolution came almost out of nowhere.

In the space of just a few short years, innovations in hydraulic fracturing and horizontal drilling have made it economically viable to tap vast oil and gas reserves locked in tight shale formations that were previously thought unrecoverable. These advances have ushered the U.S. into a new era of energy abundance that few experts were expecting (especially not the “peak oil” scaremongers, according to whom we should have now run out of oil supplies several times over).

Energy companies are clamoring to take advantage of this newfound boom, which they could do much more efficiently if they were not beholden to backwards, reactionary, protectionist-minded regulations like the reigning ban on exports of domestically produced crude oil.

Back in the 1970s, when violence was raging across the Middle East, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries enacted an embargo blocking exports to the United States. The move sent shockwaves throughout the global economy.

In 1975, as gasoline prices were quadrupling and “energy independence” became the national vogue, Congress responded by banning most exports of crude oil. The ban was intended to address these temporary conditions and enhance the United States’ energy security. But particularly in the context of today’s exploding energy supplies, the ban makes absolutely zero sense.

According to federal data, we pumped an average of 7.5 million barrels of crude per day in 2013, up from 6.5 million barrels in 2012, making 2013 the year of the biggest acceleration in U.S. oil production, ever. We are on track to shortly surpass our all-time high production record, and we have more of the stuff than we know what to do with, literally.

Over the past decade, U.S. oil refineries invested tens of billions of dollars optimizing their plants based on the assumption that their crude oil supplies would be increasingly dependent on the heavier, more sour types of crude we typically import from Canada, Mexico, the Middle East, and elsewhere.

Our domestically produced crude is usually of the lighter, sweeter variety that our refining capacity is largely unequipped to handle, and even factoring in transportation costs, it still makes more sense for refineries to import these heavy crudes. That means that, if we continue to disallow exports of our own crude oil, we are facing artificially depressed crude prices and a massive glut in which our own rising production levels will be of little economic benefit.

We have so far managed to accommodate our oil boom by rapidly expanding our refinery, pipeline, and railroad capabilities, as well as exporting more oil to Canada (pretty much the only country to which our current crude-export ban does not apply), but there is only so much production growth the stopgap expansion of our infrastructure can absorb before we hit the limits of our self-restricted market.

Fortunately, this fact has not gone unnoticed in Congress, and some lawmakers have begun to address the problem. Unfortunately, this is likely to be a drawn-out battle with certain anti-free trade mercantilists from both sides of the aisle pushing the populist canard of “energy independence.”

Their biggest concern, they argue, is the effect that allowing crude oil to leave America’s shores will have on consumers’ gasoline and diesel prices. But in that case, these lawmakers should really be calling for full steam ahead on lifting the ban.

The prices we pay at the pump are already largely determined by oil prices on the global market, with a few regional factors mixed in. Because American refiners are allowed to ship gasoline and other refined products abroad (and it does not take much processing for a product to qualify for the regulatory definition of “refined”), lower domestic crude prices do not automatically translate into savings for American consumers.

Effectively, the crude oil export ban actually amounts to a subsidy for refiners, who are currently exporting products at record levels. By allowing crude oil exports, Congress would enable not only refiners but also producers to take advantage of higher worldwide prices.

The hoarding, protectionist mentality currently threatening to confine our domestic oil production is not doing us any favors, and sending our crude out into the global market would help to lower world oil prices and enhance our own energy security by diluting OPEC’s market share and price power. The federal government selectively choosing which industries and products can and cannot enjoy the benefits of free trade, in any scenario, is nothing more than another means of artificially manipulating free-market signals and dishing out another form of special treatment at the direct expense of more robust economic growth.

The Obama administration has at least hinted that the time is ripe to reexamine the merits of the ban, but if they want to accomplish President Obama’s own longstanding economic goal of increasing U.S. exports, they need to start actually doing something to convince lawmakers to get on board. •