The question of whether our country should continue a 40-year ban on exporting crude oil is much more political in nature than economic, but it does involve some interesting economic questions. Politics are such that it is doubtful the ban will be repealed anytime soon, but there are ways of getting around nearly any ban and crude producers and some refiners will take advantage of that to whatever extent possible.
The most basic economic perspective is that resources are used most efficiently when raw resources and finished goods are allowed to flow as market forces determine. That is true between countries as well.
Taxes on imports or quantitative limits on them including bans, raise prices and transfer money from consumers to domestic producers. Taxes or quantitative limits on exports can lower domestic prices and transfer money from producers to consumers.
Both lower economic efficiency: The world as a whole and each individual nation potentially involved in trade get fewer goods and services to meet people’s needs from the same use of available resources. So most economists’ first reaction to the question would be to oppose export limits.
They also might ask why we limit exports of oil when we don’t limit exports of coal, iron ore, steel, automobiles or soybeans and myriad other agricultural products. If we did limit such exports, prices for consumers would be at least somewhat lower.
The principal answer reflects public irrationality rather than economic reality: The oil industry is perceived by many in the public as iniquitous, while most domestic producers — farmers, in particular — are thought of as virtuous.
Those opposed to removing the ban might note that there are substantive differences. We are large net exporters of coal and agricultural commodities. That is, domestic production is far greater than domestic consumption and exports are far greater than imports. Not so with oil.
Still, domestic prices would be lower if we banned such exports, to the benefit of consumers, though at the expense of producers. And exports of iron ore, steel and cars are far less than imports, yet no one would think of banning such sales abroad.
A practical difference is that consumers directly buy little coal, steel, iron ore, soybeans, corn or wheat. But most households buy gasoline every week. Prices of crude oil and gas at the pump are more apparently linked than soybeans prices and margarine or iron ore prices and a refrigerator. Moreover, gasoline purchases make up a sizeable fraction of total household spending, so high prices bite sharply.
The crude oil export ban was introduced after the first OPEC oil embargo of the 1970s. The rationale was that decreasing U.S. dependence on oil from abroad decreases the vulnerability of the U.S. economy to disruptions in supplies of crude.
There has been much demagoguery surrounding “energy independence” with some pundits and politicians implying that if we somehow produced as much domestically as we consume, we would enjoy lower gas prices than now and much lower pretax prices than the rest of the world.
The reality is that U.S. production has increased because higher world market prices for crude have made new technologies financially viable.
When I followed the North Dakota oil industry for the Minneapolis Fed 20 years ago, the weekly “rig count” would show a dozen or so wells being drilled at any time. Now, it is more than 200. But then oil was well under $30 per barrel. Now it is more than twice as expensive, even after adjusting for inflation.
A dramatic fall in world crude prices, driven perhaps by some miraculous move toward peace across the Mideast, would cut that rig count back, not necessarily to the levels of the mid-1990s, but certainly well below the frenzied levels prevailing now. Ditto for drilling in the Marcellus shale of the northeast and the Permian layers in Texas.
As long as we are a net importer, a ban on exports has little real effect on domestic prices, either of crude or refined products like gasoline or diesel. If oil were a “homogeneous commodity,” like No. 2 yellow corn, and each barrel was exactly equal in all ways to any other barrel, and if transportation costs were zero, the ban would have no effect at all.
Oil is not homogeneous, and moving it is not free, so the ban does have some effect, particularly in certain geographic regions. But it is not saving consumers as much money as many perceive.
In part this is because we don’t limit exports of refined products. You cannot ship U.S. crude abroad, but you can ship as much gasoline, diesel or jet fuel as you want. You can even ship crude that has gone through initial stages of refining but is not yet fully refined.
So as U.S. motor fuel consumption has declined in the past decade in response to more fuel-efficient cars, mandated increases in ethanol blending and consumer responses to higher prices, U.S. refiners have found themselves with excess capacity.
The response has been sharply rising exports of refined products even though we still import such products.
Part of this apparent anomaly is that there are regional imbalances. We have excess refining capacity on the Gulf Coast and are short in the Northeast.
It is cheaper in many cases to export to other nations from the Gulf Coast and import refined products from abroad into New England. Economists would rightly see this as more efficient resource use, but it demonstrates the fallacies inherent in the export ban.
Crude producers, including the oil “majors” that are household names, are pressing to end the ban. Fuel-using groups, including trucking and railroads as well as household consumer groups, oppose it. So do refiners, who have enjoyed an artificial boost in demand for their services from the ban.
Expect the opposition to win. But don’t kid yourself that the ban is saving you a lot of money.