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BruceMark Petroleum Inc | Let U.S. oil exports flow
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Let U.S. oil exports flow

Let U.S. oil exports flow

01:24 27 February in North America

bildeAnyone who has paid any attention to the news knows about the surge in oil and natural gas production in the United States. While the technique of fracking has been in use for decades, in Michigan since 1952, it has recently begun to yield record production. This has restored America’s role as a major producer of oil. The International Energy Agency predicts that the U.S. will pass Saudi Arabia as the world’s leader in oil production by 2020, pumping 11.6 million barrels a day (bpd), far above our 1970 peak of 9.6 million bpd.

However, not nearly as many people know that if you produce oil in the United States it is very difficult to sell it to customers in another country. Since the enactment of the Energy Policy and Conservation Act of 1975, all exports of U.S. crude oil require a license from the Bureau of Industry and Security (BIS), which is within the Department of Commerce. The BIS has been very reluctant to grant licenses for companies.

The Feb. 15 issue of The Economist pointed out some of the major problems caused by the inability of oil producers to sell their product outside of U.S. boundaries — “The ban on crude-oil exports hurts producers and makes it harder for America to become a swing supplier.”

If U.S. oil producers cannot export, they will have less incentive to develop new technology and drill new wells.

The export ban also distorts the market for refined oil products. Refiners buy light American crude oil below world-market prices, turn it into gasoline and then export the gasoline at world-market prices. This distorts oil prices and gasoline prices in the U.S. and the rest of the world.

The Arab oil embargo of 1973 was the stimulus for the oil export ban. But it was never clear that this made sense even from a national security perspective, as it gave oil exporting countries more power to keep up market prices and gain artificial profit by strengthening OPEC’s ability to restrict world supply. As The Economist also pointed out, when the Arab states placed an embargo on the western allies of Israel after the Six Day War of 1967, the U.S. was able to offset this by massively increasing production. If the ban on oil exports had been in effect, there would have been a major disruption in world oil prices.

The ban makes even less sense today when fossil fuels are adding .3 points to GDP growth. Our trade deficit with China in 2013 exceeded $318 billion. This has led some in Congress to call for restrictions on Chinese imports and claim that the Chinese are manipulating their currency. The U.S. Energy Information Agency estimates that China’s increase in oil demand was about one-third of the world’s total increase in oil demand in 2013 and this will be the case in 2014 as well. A reasonable way to affect our trade deficit with China would be to simply allow oil producers to export crude oil to the Chinese.

The CEO of Pemex, Mexico’s oil company, has recently called for greater collaboration between Mexico, Canada, and the United States in taking advantage of the boom in oil and natural gas in the region. That will be difficult with the current U.S. oil export policy.

If the restrictions on exporting crude oil were lifted today, oil could begin flowing right away. The pipelines and tankers are already there. The U.S. economy would benefit, as would the world economy. There could not be a better time to end a decade’s long restriction on the production and trade of a major energy supply.

Gary Wolfram is William E. Simon Professor in Economics and Public Policy at Hillsdale College.

From The Detroit News: