Free Trade Should Not Exclude Domestic Crude

The ban that has existed on exporting domestic crude oil was the result of a political knee jerk reaction to the 1973 oil embargo. It made no sense then and it is without any redeeming value today.

Democrat and Republican Administrations and Congresses have been complicit in keeping the law on the books.  We have too many laws and too many overly detailed regulations and getting rid of this one would be a good start at a triage process.

Crude oil is a commodity like any other that we export—plastics, metals, wheat, fruits, autos, etc. The main difference is that crude oil has a strategic economic value that distinguishes it from other commodities. That is not a reason for banning its export. It simply means that the freedom to export has to be balanced with a way to compensate for interruptions– the role of the Strategic Petroleum Reserve–and to make sure that we have reliable trading partners. Continuing the ban on crude oil exports will eventually produce a glut, forcing prices down and leading to less production. All of that has negative economic consequences.

US refineries, for the most part, were designed to process heavy, higher sulfur crude oils. The increase in domestic production is mainly light, low sulfur crude oil. The mismatch between refineries and crude is leading to a large crude stock build that suppresses domestic prices. Some refiners are using technology to partially process the light crude so that it can be exported as a “product” since there is no ban on product exports.  But, that leads to higher costs and distorts investment.

IHS Global, a leading energy consulting firm, in its Crude Oil Special Report made the case for lifting the export ban, indeed a compelling case for doing so. “Lifting the export ban and allowing free trade will…increase US production—from 8.2 million B/D currently to 11.2 million B/D—and add investment of nearly $750 billion”. Increased production translates into fewer imports and more dollars staying here rather than going to another country. Discouraging more production ultimately translates to higher gasoline prices since less crude means that crude prices are higher than they would be with more production. IHS estimates that gasoline prices could drop 8 cents per gallon and over the period of 2016-2030 saving motorists $265 billion. More domestic investment also means more new jobs. According to IHS, the number of new jobs created would average 394,000 over this time period.

Free trade leads to economic efficiency which is something we are not experiencing since the great recession. The Obama Administration has pursued policies that have produced anemic economic growth—about half of what it should be based on economic history for the last half century.  With the right policies, domestic investment could soar and bring with it the creation of good paying jobs, which have been in short supply. Instead, the Administration has made all of the above, not much of the above. It is dragging its feet on Keystone XL, an insult to Canada and causing it to look to Asia, and pursuing a regulatory agenda that is anti-growth. It continues to have a leasing program that moves at the speed of a glacier while taking credit for a renaissance that it had nothing to do with.

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