Lift the Ban on U.S. Oil Exports

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.

Take a look:

This editorial was published in the Sri Lankan Guardian on 27 March 2015.
Congratulations! Outside validation is always good.

By Nels Guloien

The 1970s ban on the export of US crude oil is a policy issue that must be reexamined and repealed by Congress. This ban, created through the Export Administration Act of 1979, which prevents the export of US-pumped crude oil, is outdated, uneconomical, and inhibits growth of the US economy. The US government should allow firms to export US crude oil because the act no longer serves its intended purpose, and exports would be beneficial to businesses and consumers alike.

The ban on crude oil exports was a major step towards American energy independence. In the 1970s, the US had been hit by the oil embargo of 1973, caused by the Organization of Oil Exporting Countries (OPEC). As Blake Clayton of the Council on Foreign Relations argues, this supply-shock was exacerbated by the fact that the US had decreased domestic oil production in 1970 and consequently drove up the price of gasoline, so Congress enacted the ban to ensure that domestic oil would be available for American consumers. While this was a vital step in securing energy independence at the time, the threats that led to a reliance on imports have since diminished, as illustrated using data from the US Energy Information Administration. First, as of December 2014, monthly domestic crude oil production was 286,003 thousand barrels, compared to the 223,494 thousand barrels imported during the same period. This means that the US can satisfy much of its oil demand using domestic sources, which reduces the risk of international shocks similar to the 1973 crisis. Second, Canada and Mexico, two close trading partners and members of the North American Free Trade Agreement, are the source of 56% of the US’s total crude oil imports; whereas the OPEC countries are the source of only 35%. This distribution shows that the risks of trade with OPEC are much less than in the 1970s, because even if an embargo occurs or trade barriers are enacted, then the US still has secure relationships with its North American allies who will continue to import oil, in addition to the high levels of domestic production. Finally, the US now has the Strategic Petroleum Reserve maintained by the Department of Energy, which holds enough crude oil to sustain approximately 154 days of total imports: if the US is unable to import oil, then these reserves will be used to sufficiently alleviate the reduced supply. Moreover, while crude oil reserves one important part of energy security, they may become less relevant as alternative sources of energy are developed such as solar and wind energy technologies. Therefore, the ban on crude oil exports is no longer needed to protect US energy independence because other factors are now at work.

Repealing the ban would also be beneficial to American firms involved in the exploration, extraction, refining, and transportation of crude oil. There has already been significant investment in oil production across the US, especially recently in the Eagle Ford and Bakken shale deposits. If firms were able to export crude oil, long-run production would rise to meet the increased demand from foreign consumers, such as China, India, Japan, and the European Union, who currently import oil from more volatile OPEC nations. As Jason Bordoff of Columbia University writes in the Wall Street Journal, American oil producers have a proactive interest to seek higher profits through export because crude oil fetches a higher price abroad than in the US. This can be shown through the spread between the West Texas Intermediate (WTI) and the Brent crude oil benchmarks. The WTI benchmark is calculated using prices of crude oil refined near the Gulf Coast of the US and represents the domestic price of crude oil, while the Brent benchmark is calculated using prices from offshore oilfields in the North Sea and represents the international price of crude oil: both are similar, but because WTI crude oil has less sulfur content, it has historically traded at a premium to Brent. However, due to the oversupply of oil in the US, Brent now trades at a premium to WTI, thus creating an opportunity for domestic firms to capture pricing inequalities through exports. If firms are allowed to export crude oil, more workers will be needed in the oil industry and in supporting industries as well, thus providing new job opportunities for many Americans. In fact, the American Petroleum Institute estimates that oil exports would create 72,000-220,000 new jobs per year. Firms will need to become more efficient in order to compete with foreign companies, especially the refineries that are only prepared to processes lower-quality imports, according to Bordoff. This will be beneficial because it will support comparative advantage and will encourage the American firms to invest domestically in order to improve production technology. This will be particularly beneficial for refiners, because the increased investment and technology will allow them to refine the crude oil in the US and export higher-value petroleum products. Therefore, repealing the ban will increase production, promote job growth, and encourage investment and competitiveness.

Exporting crude oil would also be beneficial for both American and international consumers. Higher export volumes of US crude oil will decrease the international prices and raise domestic prices, as the surplus of American oil floods onto the international market. However, as the US Energy Information Administration showed in a report, US consumer gasoline prices are highly correlated to Brent crude oil prices, so the increasing international supply due to exports would lower Brent prices and allowing American gasoline users would save at the pump. Lower gasoline prices would also allow US consumers to have more disposable income, with which they could purchase other products that would otherwise be unavailable. Not only would oil exports help consumers, but intermediaries as well: the logistics, airline, and freight industries would benefit from lower gasoline prices. Therefore, lifting the ban on crude oil exports would help consumers and other oil users, which would increase spending and improve economic growth across the world.

Why should we care? If the export of crude oil continues to be prohibited by the US government, then it will continue to burden the economy through higher fuel prices and consistent unemployment. The US must seize this opportunity to take advantage of its energy security, size of the domestic oil extraction and production industries, and the meaningful training and education in the men and women exploring, extracting, shipping, and refining US crude oil. It takes time to repeal important legislation through Congress, such as this ban on oil exports, so it needs to start now. The risks of failing to act are severe; in failing to repeal this bill, we fail the 2.6 million Americans directly employed by the oil and natural gas industry, as estimated by PwC, in addition to the countless others who benefit from its continued prosperity and job creation. It is not just in our interests, but in our duty to ensure that this legislation is repealed.

In short, the ban on American crude oil exports must be repealed for the sake of the nation and its citizens. Export controls are no longer a major factor in America’s securing energy independence, nor does the geopolitical environment need such extreme nationalist measures. Exporting oil would increase production and revenue for domestic firms, in almost every aspect of the oil industry, and would thus create new jobs. Finally, oil exports would decrease international prices, reduce costs for consumers and businesses, and enable increased spending in the global economy. In the interests of the American and international consumers, businesses, and economies, Congress should allow the export of US-pumped crude oil.

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Nels Guloien is a sophomore at Georgetown University’s McDonough School of Business, majoring in Finance and International Business.

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