No Scarcity of Economic Ignorance in Congress

With US oil production booming, pressure has increased to repeal an archaic law that prohibits the export of crude oil without a license.  The law dates back to the early 1970s when OPEC nations imposed an embargo on exports to the US.  That was a time when many in the nation were obsessed with predictions of scarcity.  Look back at articles on the Club of Rome and Limits to Growth.

Senator Menendez of New Jersey is championing a policy of keeping US oil production in the US to benefit US consumers.  That is nothing but sound bite politics and economic ignorance.  Economists generally disagree about almost everything, except the benefits from free trade.  The economic theory on free trade and the associated law of comparative advantage go back to the mid 1800s when it was championed by John Stuart Mill, David Ricardo, and other English followers of Adam Smith, according to the late Paul Samuelson.

The United States has been a major beneficiary of trade and the advocacy of free trade.

Carrying the senator’s logic, that is being generous, to its logical conclusion, why not ban the export food, medicine, meat, cereals, machines, pharmaceuticals, computers, smart phones or a host of other products since keeping them here would make them cheaper for consumers.  However, as the cost dropped because supply clearly exceed demand, investment in production would shrink and jobs and production would also.

Denise Froning of the Heritage Institute recently wrote, “International trade is the framework upon which American prosperity rests. Free trade policies have created a level of competition in today’s open market that engenders continual innovation and leads to better products, better-paying jobs, new markets, and increased savings and investment. Free trade enables more goods and services to reach American consumers at lower prices, thereby substantially increasing their standard of living.  Moreover… Free trade helps to spread the value of freedom, reinforce the rule of law, and foster economic development in poor countries. The national debate over trade-related issues too often ignores these important benefits.”

The US has a long history of championing free trade and supporting the WTO and is legally obligated with by international obligations.  To attempt cut out an exemption for crude oil would not only violate those agreements, it would expose the Congress to another act of hypocrisy as well as WTO sanctions.

The case for crude oil also extends to LNG.  Last year, DOE commissioned a study by a prestigious economic consulting firm which provided extensive detail on the benefits of gas exportation and exports. The report concluded that “the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased.”

The arguments in favor of exports do not come just from producers who would gain economically.  They also come from international organizations as well as the Department of Energy.  An OECD report found, “Export restrictions have negative consequences for international trading partners and producer countries. By diverting raw materials from export to domestic markets, these restrictions raise prices for foreign consumers and importers. At the same time, by reducing domestic prices in the producer countries and increasing global uncertainty about future prices, export restrictions discourage investment in extracting and producing raw materials… Also, export restrictions … may lead to a spiral of restrictions by other countries, which would mean further trade distortion and global price increases.”

The heads of the International Energy Agency and DOE’s Energy Information Administration both support allowing exports of crude oil.  IEA’s Maria van der Hoeven warned that the “restrictions on exports is a threat to the viability of the current production boom”.  Adam Sieminski, EIA’s head argues that crude exports “could benefit the economy by creating jobs and reducing prices”.

While Senator Menendez and like minded ideologues in Congress oppose the export of crude, they seem perfectly content to allow the export of products made from crude.  Over the past several years, product exports have grown from trivial levels to over 3 million barrels a day.  One of the clear benefits of those exports has been to keep some refineries from shutting and running at high levels of utilization.  That has meant jobs, domestic investment, and lower prices.

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