Lift oil export ban before ‘day of reckoning’

Published in The Hill

Four decades have passed since the oil crisis of 1973, when OPEC’s embargo generated long gas lines and high tensions here in the U.S. In response to this predicament, Congress enacted the Energy Policy and Conservation Act of 1975 (EPCA), which made it illegal to export U.S. crude oil except in certain limited circumstances. In contrast, the export of gasoline and other refined petroleum products remained perfectly legal and has remained that way ever since. Today, gasoline and other refined product exports have increased by over 200 percent since 2000, to more than 2.7 million barrels per day. Unfortunately, crude oil still remains on the sidelines, despite robust growth in our domestic supply.

Today, EPCA is looking increasingly archaic and detrimental to U.S. growth. In view of the surge in domestic crude oil production in recent years, especially in light sweet crude (called light, tight oil or LTO) the crude export ban is limiting opportunities for future job growth in the oil and gas sector as well as in the many industries that support this dynamic part of our economy. If President Obama and/or lawmakers don’t act to lift or ease these longstanding bans, there will soon be a “day of reckoning” when U.S. refineries will no longer be able to process the ever-increasing amounts of LTO. If that bottleneck does occur, U.S. oil production will slow due to lack of demand, with negative consequences on investment, job growth and state and federal tax receipts.

According to a recent analysis by the Brookings Institution and National Economic Research Associates (NERA), the day of reckoning is likely coming. If we reverse course and lift bans, allowing crude oil exports from the U.S. will increase GDP by 0.4 percent to 0.7 percent annually, reduce unemployment by over 200,000 annually and slightly reduce gasoline prices in the U.S, according to the Brookings and NERA. By increasing the amount of crude oil supplied to international markets, the world price of crude falls and since gasoline prices are dependent on crude prices, they also decline. An analysis earlier this year by Resources for the Future (RFF) came to the same conclusion about the downward impact on domestic gasoline prices if crude exports are allowed.
In spite of the analyses by Brookings/NERA, RFF, IHS and other reputable economic modeling firms highlighting the positive economic impact of exporting U.S. crude, some groups support continuing the export ban and argue that U.S. refiners can process all the crude we can produce. For example, a recent report by Baker & O’Brien prepared for Consumers and Refiners United for Domestic Energy (CRUDE) contends that there is “no limit to the amount of LTO that the U.S. can absorb if refining companies are given proper economic incentives and sufficient lead time to modify and/or expand processing capacity.” The Baker & O’Brien report overlooks several key factors impacting U.S. refineries’ ability to continue to process ever-increasing amounts of LTO.

First, the Environmental Protection Agency’s (EPA) pending change to ozone standards is likely to prevent much in the way of refinery expansion or enhancement to process more LTO. The EPA has proposed reducing the current ozone standard of 75 parts per billion to as low as 60 parts per billion. A large part of U.S. refining capacity is in states like New Jersey, Texas, Louisiana and California, which are in “non-attainment” because their current ozone levels are above 75 parts per billion. Thus, the EPA’s proposed rule change is likely to curtail much new investment, especially in energy-intensive facilities.

Second, the maintaining the “proper economic incentives” called for in the Baker & O’Brien report to encourage U.S. refinery expansion will depend the price of West Texas Intermediate (WTI) remaining substantially below that of the international price (Brent crude). From January 2011 through July 2014, the WTI price has averaged $13.64 less per barrel than Brent crude. By not allowing U.S. crude to be exported, the price differential between U.S. and foreign crude will continue and could negatively impact U.S. exploration and development and reduce U.S. production. Third, the Baker &O’Brien report states that “no attempt has been made to assess refinery economics” of processing light versus heavy crude. Thus it’s hard to justify the conclusion that U.S. refineries will be willing and able to process unlimited amounts of LTO.

Perhaps most important, forbidding the export of U.S. crude violates the principle of free trade. Scholarly research over the past several decades has shown that countries that embrace free trade enjoy faster growth in living standards than those with trade barriers and high tariffs. It makes no more sense to “lock in” a product like crude oil than it does to forbid the export of wheat or automobiles for fear that the price of food or autos will rise. EPCA’s crude oil export ban is a classic example of a cure being worse than the disease. Allowing crude oil exports now before the day of reckoning will strengthen the U.S. economy and provide gains to consumers and the overall economy.

Thorning is senior vice president and chief economist for the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies.