BOHANON & STYRING: U.S. no longer well-served by ban on oil exports

October 31, 2015

Economic AnalysisAnyone on the wrong side of 60 remembers the 1973 OPEC oil embargo. The gas lines. The politicians pitching plans for “energy independence.” Perhaps not so well remembered is how Congress actually responded. It banned exports of U.S. crude oil but not refined products such as gasoline and heating oil.

Not that this did much. The United States didn’t export oil, except a few barrels to isolated places in Canada. But the pols could be seen as doing something to preserve “our” oil.

Forty years later, we have the U.S. fracking revolution. Domestic oil production is way up. Imports are way down. In the middle third of the country, storage tanks are overflowing but the oil can’t be exported. The excess is being sold to refiners at deeply discounted prices. Refiners turn this into products such as gasoline to be sold overseas at world prices: a sweet windfall for refiners. They buy their raw material (crude) at locally depressed prices and sell their (refined) product at world prices. U.S. consumers don’t benefit because they’ve always paid the world price.

If the export ban is lifted, U.S. oil exporters can sell their oil at world prices. Domestic refiners will lose the windfall that comes from having a source of oil at artificially low prices. The gain now in the pocket of the refiners goes to the pocket of domestic oil producers. Nothing happens to the price consumers pay for gasoline—they still pay the world price. Over a longer time frame, the higher price for domestic oil will stimulate additional domestic production. If this effect is large, it might even bring down the price of oil in the world oil market—but that’s a long shot.

Two other constituencies should be mentioned: self-sufficiency advocates and the environmentalists. The former welcome more domestic production of oil and are OK with allowing exports because it increases our domestic capacity. We can always shut off the export spigot if needed.

The latter, however, don’t like oil because its use adds carbon dioxide to the atmosphere. However, if one finds that persuasive (we don’t, by the way), the best way to deal with the “external costs” is to tax carbon emissions—not impose Rube Goldberg rules on the oil market.

In our opinion, allowing oil exports is a no-brainer. Let domestic oil producers sell at the best price they can.•


Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.


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