America’s New Energy Paradigm

Since the first Arab oil embargo, US energy policy has been driven by the search for “independence”, concerns about energy security, a commitment to alternatives to move the economy off oil.  Policy initiatives have wasted hundreds of billions of dollars in pursuing these objectives because they were not based on energy realities.

Over the past seven years there has been a dramatic change in the domestic outlook for oil and gas thanks to private initiatives that developed hydraulic fracturing—fracking—horizontal drilling, and advanced seismic technologies.  These technologies and access to private lands have launched an energy renaissance that can benefit the US economy for decades to come.

One of the major obstacles to lifting the ban has been by some short-sighted, rent seeking businesses who are myopically pursuing their own self-interest at the expense of the national interest.  Now the Brookings Institution has released a powerful study laying out the economic benefits available to the economy: Changing Markets:  Economic Opportunities From Lifting the U.S. Ban on Crude Oil Exports.

The Brookings report goes to some length to explain the market distortions created by the ban.  First, the ban applies to crude oil but not products.  This has led to a large increase in products and some producers make minimal modification to crude so that it can be exported as a “product”.  Most of the increased production is lower sulfur— light — crude for which there isn’t an established logistics system and most refineries are not configured to process such crudes.  In the absence of President Obama allowing the export, which he has the authority to do, these distortions will continue until massive, and unnecessary, capital investments are made to the refineries that cannot process light crude.

In conducting its analysis, Brookings used the services of NERA, one of the nation’s leading economic consulting firms.  The conclusions of this analysis are fairly dramatic.  The increase in GDP, in current dollars could reach $1.8 trillion if the ban is lifted promptly.  The boost to the economy not only creates more jobs but households end up with higher incomes.  While the public sees gasoline prices rising fairly regularly, NERA concludes that removing the ban could lower pump prices $0.07 to $0.12 per gallon because increasing exports would lower world crude oil prices.  Other producing countries might try to counter this by cutting their own production but such countermeasures are rarely enduring.  The best example is the evidence that OPEC is a price follower or price taker, not a price maker.

Removing the ban would help strengthen our trading relationships and bolster not only our energy security but also that or our trading partners.  For example, it would hamper Russia’s ability to manipulate price and supply, as it has done, to achieve its foreign policy goals.

The era of perceived scarcity has been replaced by the actual era of abundance.  The benefits crude oil exports are beyond question and remove the label of being a hypocrite who preaches free trade but doesn’t practice it.

This article appeared on the FuelFix website at http://fuelfix.com/blog/2014/09/11/americas-new-energy-paradigm/

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