United States: Domestic Crude Exports: To Ban Or Not To Ban

Congress has begun to seriously debate the law prohibiting the exportation of domestically produced crude oil, and there appears to be momentum behind an effort to overturn the ban. At the same time, in response this effort, some commentators and analysts have come out in favor of maintaining the export ban, on both policy and economic grounds.

This debate has led us to ask some basic questions:

  • What is the scope of the export ban and what policies underpinned its adoption?
  • What policies support the effort to overturn the ban?
  • What would be the true economic impact of an overturning of the ban?

The crude oil export ban was a Congressional reaction to the 1973 Arab oil embargo, and was essentially codified in the Energy Policy and Conservation Act of 1975 and the Export Administration Act of 1979, with the details in the Export Administration Regulations (EAR) if the Bureau of industry and Security (BIS), a Department of Commerce agency.

With limited exceptions, "U.S. crude oil can only be exported if the BIS finds that proposed exports are 'consistent with the national interest and the purposes of the Energy Policy and Conservation Act.' The agency has the right to accept or reject applications for an export license according to its own unarticulated definition of the 'national interest.' The only specific case the EAR mentions as meeting these strict criteria is when the exported crude is exchanged for more or better refined oil imports, under a contract that can be terminated if U.S. oil supplies are 'interrupted or seriously threatened,' and could not have 'reasonably [been] marketed' in the United States."

In many respects the ban was more symbolism than effective policy, as even in 1973, the U.S. was a net importer of crude oil, importing an average of 3.2 million barrels of oil per day. By 2005, those import levels had increased to 10.1 million barrels per day. According to an October 2014 paper issued by the Aspen Institute, "Reliance on oil and product imports as a percent of total petroleum consumption increased from 36 percent in 1973 to 66 percent in 2005."

In that same paper, the Aspen Institute concluded that lifting the oil export ban would lead to increased oil production and "[h]igher levels of oil production require higher investment expenditures for capital equipment and construction, which in turn boost overall demand for goods. This stimulates the manufacturing sector and its supply and distribution chains. The resulting improvement in income and employment boosts the economy significantly."  Similarly, Jeffrey Folks in The American Thinker contends that the "real issue is the benefit that exporting would provide to the U.S. economy, and there can be no doubt that the benefit would be substantial."

On the other hand, The Financial Times, in an article by Ed Crooks published yesterday, referenced a study conducted by the U.S. Energy Information Administration that concluded that "if production stays reasonably close to present levels, ending export restrictions would not raise either the price or the output of US crude."  Nevertheless, the article quotes Lynn Westfall, the EIA's director for energy markets as stating that "liberalisation of crude exports won't do any harm, and could even do a little bit of good."

A different analysis of the EIA report, this one from Bloomberg in a September 3, 2015, article, arrived at a much more bleak conclusion, particularly with respect to the refining industry: "Buried in the latest government analysis on lifting the crude-oil export ban is a piece of data that shows why ending the limits will be a heavy lift: It would cut refiners' profits by $22 billion a year. The report shows that dropping the ban, which dates to the 1970s Arab oil embargo, could lower gasoline prices for drivers and boost domestic oil drillers. But refiners — one of the nation's most powerful industries — would be the losers."

Notwithstanding this impact on refiners, Bloomberg notes that "not all refiners are aligned on the issue. Integrated oil companies, which both produce and refine oil, support ending the ban. ExxonMobil Corp., BP Plc and Royal Dutch Shell Plc are all members of the American Petroleum Institute, which is leading the lobbying to lift the ban. Tesoro Corp., the San Antonio-based refiner with the most capacity in the western U.S., supports repeal, too."

The EIA study concluded that there were no plausible scenarios where a relaxing of the export ban would result in higher gasoline prices for U.S. consumers.

Some analysts have concluded that lifting the export ban would actually make the U.S. more, not less, dependent on foreign oil. Kurt Cobb, in a post on Resilience.org, republished from Resource Insights, reached that conclusion:

There is not enough U.S. refining capacity for all the so-called light tight oil produced from U.S. deep shale formations which have been the mainstay for domestic oil production growth. That means that refineries that can use this type of oil are paying less (because of the excess supply) than they would if foreign refineries could also bid on the oil – which, of course, they can't because of the export ban.

Lifting the export ban would allow domestic oil producers of light tight oil to sell their output to foreign refineries at a higher price than they currently get from domestic refineries. But given the now ongoing decline in U.S. oil production, selling that oil to foreign refineries would mean that the United States would have to import more of other heavier oils (for which we have adequate refinery capacity) to make up for the light oil that is exiting the country. Thus, the United States would become MORE dependent on foreign oil if we lift the export ban.

To further the back-and-forth analysis, the Council on Foreign Relations supports a lifting of the export restrictions, concluding that such a move would be good for the economy, generating "upward of $15 billion a year in revenue by 2017 at today's prices," which, in turn, would "encourage investment in oil and gas production in the United States rather than abroad."  In a February 2014 editorial for the Heartland Institute, Paul Driessen, a noted policy adviser, was even more strident in his support for relaxing the export ban:  "The bottom line is simple. Exporting U.S. oil and natural gas will benefit American workers, families, consumers, balance of trade and government revenues. We must not let provincial views, anti-hydrocarbon ideologies or misinformed policy positions perpetuate this antiquated ban."

Conclusions? The only consensus seems to be that if the export ban is lifted, consumers would not see a rise in the price of gasoline at the pump. Everything else, appears subject to considerable (and strident) debate. That leaves the issue in the hands of the President and Congress; i.e., the export ban is now a political football to be thrown around Washington. In fact, the White House recently announced that it opposed a House Republican bill to lift the crude export ban because the decision should be made by the Commerce Department, not Congress. At the same time, the White House press secretary accused Republicans of trying to "cozy up to oil interests."

We believe any effort to lift the oil export ban should be studied and carefully considered because the ramifications of any action – for or against the ban – could have significant impacts on the oil and gas industry and the economy as a whole (not to mention national security issues). But now the issue is in the hands of the politicians. It is hard to see how this turns out well – for anyone.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Melissa J. Lyon
 
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