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Benjamin Zycher: Banning Exports of Crude Oil and Refined Products Would Increase Prices

Repealing the oil-export ban in 2015 was a good idea. The U.S. would be foolish to reinstate it. A number of perverse Beltway ideas never seem to die despite their underlying fallacies. The latest such nostrum is the argument that a renewed ban on the export of crude oil and refined products would reduce domestic fossil-energy prices, as asserted in a recent letter to President Biden from four U.S. senators urging Biden to preserve petroleum supplies for the U.S. and our allies.

Just such an export ban on crude oil was implemented by the U.S. beginning in 1975. This followed the 1973 global price increases and the imposition of price and allocation regulations on the U.S. market, resulting in an artificial suppression of domestic production. (It was the regulatory regime and not the embargo that created the queues and massive market dislocations.) The export ban was ended by legislation in 2015, after the technological revolution in fracking and horizontal drilling yielded a sharp increase in U.S. output.

Notwithstanding ubiquitous assertions to the contrary, the ban did not reduce U.S. prices below international ones because it created a disincentive for foreign producers to export oil to the U.S. Why should foreign producers sell to us for less? Market forces thus resulted in domestic and international prices being equated, controlling for such factors as transportation costs and exchange rates. The same is true for such refined products as gasoline.

But the ban had the effect of reducing domestic production of crude oil by shrinking the market for American petroleum. According to an October 2020 Government Accountability Office report, the repeal of the export ban increased the incentive for domestic crude production, adding to market incentives that yielded the production boom that began with the fracking revolution.

The export ban yielded perverse outcomes for domestic consumers, as recognized by the GAO in an earlier analysis. These were exacerbated by the ban's distortion of the use of differing types of crude oils in U.S. refineries, which vary in terms of the characteristics of the crude oils that they are designed to process. A new analysis finds, unsurprisingly, that the elimination of the export ban in 2015 increased global oil production, yielding a decline in gasoline prices of 4.6 cents per gallon and a reduction in consumer spending on refined products and natural gas (often produced in association with crude oil) by $92 billion over the past six years.

Moreover, an artificial reduction in energy exports would have the effect of weakening the dollar, other factors held constant. That would increase international oil prices (denominated in dollars) even more, as well as the prices of almost all goods and services traded in international markets. So much for easing the strains on household budgets; the reduction in household and business vehicle transportation costs asserted as a benefit of another export ban is a myth. And U.S. utilization of refinery capacity is about as high (around 94 percent) as it has ever been, and there is little room for increases even if one were to assume that another export ban would increase the domestic availability of crude oil.

Proposals to ban the export of crude oil are a blatant attempt to divert attention from the Biden administration's energy policies as the central causes of the increase in international crude oil prices by about 75 percent since January 2021. A partial list of those policies:

  • The various political and regulatory decisions to constrain or disallow investments in pipelines and other such energy infrastructure.
  • The efforts to reduce the fossil industry's access to capital.
  • The new fuel economy rules based upon an analytic framework that is preposterous.
  • The efforts to force a massive substitution of wind and solar electricity – which cannot work simply as a matter of electrical engineering – in place of conventional power generation.
  • The newly tightened methane emissions rule that the Environmental Protection Agency says will reduce greenhouse gas emissions by the equivalent of 75 million tons of carbon dioxide per year.
  • The global temperature reduction by 2100, using the EPA climate model: 0.0016 degrees C, while imposing significant costs.
  • The de facto moratorium on lease sales on federal lands.

And there are the recurring proposals for a windfall profits (actually, an excise) tax on crude oil. The windfall profits tax is far more perverse than commonly recognized, as it would have the effect of forcing the expected return to investment below the competitive return, thus reducing investment artificially, shrinking the industry, and causing a permanent increase in fossil energy prices.

Those policies and proposals have contributed to the sharp increase in energy costs because crude oil can be produced and refined during the current time period or reserved (in the ground or in inventories) for some future time period. A policy-driven suppression of investment in fossil-fuel discovery, production, and transport means that expected future supplies will decline, and expected future prices will increase. This means that current prices will rise in anticipation of higher future ones, so that at any given moment the expected price path slopes upward at the market rate of interest. A ban on oil exports would be yet another perverse policy added to those already hurting American producers and consumers.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.

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Posted: August 9, 2022 Tuesday 06:30 AM