Ban the oil ban

Houston Business Journal Op Ed

In the 1970s, Congress made it illegal to export domestically produced crude oil to try and sustain domestic oil reserves and enhance our national security.

Supporters of the ban argue that it not only keeps prices low, it protects jobs and also helps national security, by promoting self-sufficiency.

It is difficult to listen to the argument that the ban boosts our national security. It undermines America’s moral authority at the World Trade Organization, where the administration berates China, for example, for imposing export bans on scarce minerals. Most important, American crude-oil exports would hurt hostile petrostates, such as Russia and Iran.

Free crude exports would make America richer, its allies stronger, its foes weaker and the world safer, so what stands in the way? Ending the export ban should be an easy call. Not only will it enhance national security, it will also increase jobs and anchor the sputtering U.S. economy. And, it doesn’t take a brain surgeon to figure out how or why.

Today’s oil export ban was part of a wave of ridiculous, ill-considered responses to the 1970’s Arab Oil Embargo, all of which produced disasters of different duration. As Milton Friedman said, “Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail. Do you want a shortage? Have the government legislate a maximum price that is below the price that would otherwise prevail.”

Allowing domestically produced oil to be exported would raise production at home, helping boost employment. Currently, we are producing more sweet crude than domestic refineries — which are mostly set up for heavier oil imported from Mexico, Venezuela, and Canada — can handle. Oil is overflowing U.S. storage facilities. If the oil ban stays in place, domestic producers may have to shut down production because they won’t have anywhere to store their oil.

Lifting the ban would also put more oil on world markets, cutting the price. Ultra-light crudes account for a high proportion of booming shale production in the U.S. Asian refiners especially covet such crudes, which means domestic producers are denied a premium of $10/bbl because they are not able to export their sweet crude. Understand that the delta between WTI (West Texas Intermediate) and Brent is 20 percent. Somewhat paradoxically, were U.S. producers allowed to compete globally, WTI and Brent prices would converge, and all things being equal, gasoline prices would fall.

Lifting the ban would also help U.S. producers adjust to lower oil prices while creating an incentive to increase U.S. production. The result would be less reliance on foreign oil, while reducing severe economic hardship in the oil patch if prices stay low for a prolonged period.

Who wins with the ban? Domestic refiners get artificially cheap oil to process and often to sell on the international gasoline market. Gasoline flows freely in and out of the country, so its price is set by the world market. U.S. refiners simply pocket a higher margin whether they sell their gasoline at home or abroad.

By the estimate last year of the American Petroleum Institute, if the archaic export ban were lifted, the additional export opportunity would allow another 500,000 barrels a day to be produced, worth 300,000 jobs directly and indirectly. With the global oil price 50 percent lower now than it was a year ago, the difference between the depressed domestic price may well be the margin of ruin for some producers.

Refiners do have one leg to stand on: They would be horribly disadvantaged by exports due to the operation of another idiotic law, the Prohibition-era Jones Act (1920), which only allows oil and other cargo to be hauled between U.S. ports aboard U.S.-built, -owned and –operated vessels. The Jones Act delights ship owners and unions, but imposes a hefty cost on anyone wanting to send a tanker from a refinery on the Gulf Coast to a port in the Northeast.

It costs $2/bbl to ship Texas crude to Europe or Asia and $7/bbl to ship it to Philadelphia. If the Jones Act was to stay in place but the export ban lifted, a great deal of U.S. oil would go to overseas refineries solely to take advantage of cheaper shipping rates.

The noncontiguous states of Alaska and Hawaii are especially damaged by the Jones Act, which is actually an archaic throwback to the steamship era. There is no earthly reason to continue the charade that we are somehow being protected by artificially raising the cost of commercial ocean shipping. In today’s competitive, globally interconnected age, it only raises the cost of goods (gasoline) to American consumers.

We need to repeal the Jones Act and lift the ban on domestically produced crude exports, and we need to do it now.

This article originally appeared in the Houston Business Journal, May 7, 2015.