“The exportation of the materials of manufacture is sometimes discouraged by absolute prohibitions, and sometimes by high duties,” Adam Smith observed in the Wealth of Nations. This barrier remains in our day. A recent op-ed in the New York Times by former Obama administration official Stephen Rattner pleaded for the end of the U.S. ban on oil exports under the title “Let Our Oil and Gas Go.”
A triple-win awaits repeal of the 39-year-old federal ban on U.S. crude oil exports. Consumers would receive lower gasoline and diesel prices from global refining efficiencies. Domestic producers would receive (higher) world prices from new markets and in turn, increase production. The broader economy would benefit from increased activity all around.
Back in the 1970s, federal policy restricted and then banned exports of domestic crude oil for two major reasons. First, price controls on U.S. oil, which began under President Nixon and peaked under President Carter, could be circumvented by exporting the oil to receive the higher world price. Second, political authorities, believing that the U.S. was running out of oil and gas, wanted to keep every BTU in home markets.
President Reagan ended oil price and allocation controls in January 1981, eliminating the specter of gasoline lines that consumers had experienced in 1974 and again in 1979. But Reagan did not champion repeal of the oil-export ban, which had more political support. Fears about future domestic production remained, and the demand to export crude oil was very small.
That was then. The United States today is leading a global oil-extraction boom that is productively shifting international trade in crude oil, oil products, and oil-intensive manufacturing. The “Great Revival,” to use a term of Daniel Yergin, has increased domestic production by approximately two-thirds since 2008, reducing imports by one-half compared to a decade ago. The crude-oil surge is led by lighter crudes in excess of U.S. refiner demand, increasing the need for export.
Today, the oil-export ban is a policy without a purpose—and distortive of natural market incentives at home and abroad. The fact that domestically produced crude oil cannot be exported—but petroleum products can be—has discouraged domestic production and left U.S. consumers paying world prices for gasoline and other petroleum products.
This peculiar worst-of-all-worlds situation reflects half-slave, half-free regulation in light of new market developments. Domestic consumers do not benefit from U.S. refiners’ lower crude-input costs because the same refiners can (and do) sell their product internationally. (The U.S. is the world’s leading oil-product exporter.) The situation is exacerbated because domestic refineries are geared toward processing heavier oils, largely imported, while surging domestic crude-oil production is of lighter grades.
As explained in a study chaired by energy expert Daniel Yergin:
Gasoline connects US gasoline prices to the global market—and not to the price of domestically produced US crude oil. This creates a market distortion that disadvantages crude production in the United States relative to global production. Permitting US exports of crude oil would put additional supply onto the world market, lowering international crude prices and international gasoline prices. Lower international gasoline prices flow back into the US gasoline market….
If not corrected by export liberalization, the price differential between domestic crude and oil-product prices will grow–and leave the U.S. with the peculiarity of less domestic production and higher oil-product prices.
The gasoline-price savings for U.S. consumers from abolishing the ban is estimated by IHS to average 8 cents per gallon between 2016 and 2030. Another study by Resources for the Future estimates near-term gasoline-price reductions of as much as 4.5 cents per gallon, but no less than 1.7 cents per gallon, from removing the ban.
With such analysis, Yergin has exploded the bogeyman of higher pump prices in the U.S. from repealing the export ban. This simplistic, errant argument appears to be more of a special-interest ruse than an industry-informed insight.
Not surprisingly, legalizing crude-oil exports from the United States has attracted support from across the political spectrum. In his aforementioned New York Times op-ed, Steven Rattner called for liberalization to end a “supply and pricing mish-mash”.
A policy analysis by the Council on Foreign Relations has also called the ban’s repeal, citing the fact that “Republicans and Democrats alike, including President Obama, express support for boosting U.S. exports in general.”
As it is, the growing distortion between domestic production and refining capacity has led the U.S. Department of Commerce to approve applications to export lightly, field-refined oil called condensate. This will be sent to foreign refineries to produce gasoline and other high-valued products. Yet the ban on crude-oil exports remains in place.
“To hurt in any degree the interest of any one order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sovereign owes to all the different orders of his subjects,” wrote Adam Smith in 1776. The same is true with oil exports today where a very few businesses benefit at the expense of the many. Environmentalists, too, want crude oil to be bottlenecked to shut-in production of fossil fuels as such. This is most evident in their attempts to stop the Keystone XL pipeline, which in reality is designed to slow or stop production of Canadian oil.
It is time for the visible hand of markets to replace the dead hand of a regulatory past. The U.S. and world oil markets have changed, and U.S.-side public policies must too.
Berthelsen, Christian, and Lynn Cook. “U.S. Ruling Loosens Four-Decade Ban on Oil Exports,” Wall Street Journal, June 24, 2014.
Phillips, Matthew. “The Fight to Export U.S. Oil,” Businessweek, July 10, 2014.
Phillips, Matthew. “Can the U.S. Double Its Crude Exports in a Year?,” Businessweek, July 28, 2014.
 Certain exceptions to the ban, such as crude oil sales to Canada, were enacted that remain in place today. In 2013, crude-oil exports averaged 120 thousand barrels per day compared to (legal) oil-product and gas liquid exports of 2.76 million barrels per day. U.S. Energy Information Administration at ttp://www.eia.gov/dnav/pet/pet_move_exp_dc_NUS-Z00_mbblpd_a.htm.
 Oil-export limits in 1973 reflected domestic price controls; export bans in 1975 and 1977 reflected the additional concern about domestic energy depletion. See Robert Bradley, Oil, Gas, and Government: The U.S. Experience (1996), pp. 770–74.
 Robert Bradley, Oil, Gas, and Government: The U.S. Experience (1996), p. 774.
 IHS Global, US Crude Oil Export Decision (2014), ES-2.
 IHS Global, US Crude Oil Export Decision (2014), ES-3.
 IHS Global, US Crude Oil Export Decision (2014), ES-3–ES-4.
 Stephen Brown and Charles Mason, “Lifting the Oil Export Ban: What Would It Mean for US Gasoline Prices?,” (2014) Resources for the Future.
 Brown, Stephen, Charles Mason, Alan Krupnick, and Jan Meyers. “Crude Behavior: How Lifting the Export Ban Reduces Gasoline Prices in the United States,” Resources for the Future Issue Brief 14-03, February 2014, pp. 2–3.
Robert L. Bradley Jr. is the CEO and founder of the Institute for Energy Research. As one of the nation’s leading experts on the history and regulation of energy markets, he has testified before the U.S. Congress and the California Energy Commission, as well as lectured at numerous colleges, universities, and think tanks around the country. Bradley’s views are frequently cited in the media, and his reviews and editorials have been published in the New York Times, Wall Street Journal, and other national publications.