Ending the oil-export ban

The next big, confusing, trans-partisan political free-for-all in Washington might be the proposed lifting of the 40-year-old ban on exporting crude oil.  This one’s a doozy, with some Republicans strongly in favor, and quite a few Democrats – possibly including the Obama Administration – willing to get on board.  Free-market stalwarts view the ban as an absurd offense against free trade, born during a Carter-era oil shock that America can barely remember.  Other Republicans are a bit nervous about moving the oil-export ban to the center of the great energy debate, because there are other issues they would prefer to focus on.  And some wonder if Republican fingerprints on the legislative implements that kill the ban might actually create a political opening for Democrats.

It seems like a confusing political mess, but the core issue is quite simple: there are fears that lifting the oil-export ban could cause American gasoline prices to rise.  Opening the market for American crude to foreign buyers would create price competition, which might oblige U.S. companies to pay more for crude oil they currently purchase from a sheltered market.  It could also cut into exports of refined U.S. gasoline.  The fear of such a pump shock could exact an immediate political price from Republicans, even as the potential economic and national-security benefits would take years to develop.  (The big security benefit would involve weaning Europe off its dependency on Russian crude.)

The danger of pump prices rising is vigorously debated, with studies for and against bubbling out of think tanks as the political battle lines are drawn.  Writing at ForbesRobert Bradley Jr. argues that repealing the “arcane” oil export ban “would drive down domestic fuel costs and create many new high-quality jobs, while spurring growth across the U.S. economy”:

The federal ban on crude exports was an example of government intervention trying to solve the problems created by prior intervention. Congress enacted the prohibition in 1975 with two goals in mind. The first was to preserve domestic price ceilings by preventing U.S. producers from receiving higher world-oil prices. The second was to preserve believed-to-be depleting domestic reserves for the domestic market. ???We have a classic Malthusian case of exponential growth against a finite source,??? President Carter???s energy czar James Schlesinger infamously said.

The real problem was not a shortage of oil but a surplus of regulation. Lawmakers mistook regulatory-induced shortages with physical depletion. Energy economist Joseph Kalt estimated that without price controls, U.S. crude-oil production would have been as much as 1.4 million barrels per day higher, displacing imports and reducing prices from OPEC. Alas, instead of deregulation, the nation got petroleum allocation regulation and a ban on crude-oil exports.

The oil world has flipped since 1975. Federal price controls on oil were abolished by President Reagan in 1981. And breakthroughs in oil extraction techniques, with none greater than hydraulic fracturing and horizontal drilling, have boosted domestic production to levels not seen in decades.

Bradley explains why maintaining ancient controls on the new American oil boom is costing consumers more, not saving them money:

Since there is no ban on exporting gasoline and other oil products, Americans pay the world price at retail, despite the fact that U.S. refiners have lower crude costs. After all, why pass on the savings to American drivers, when foreign consumers are willing to pay a premium for the same gasoline?

Lifting export restrictions would drive down prices at the pump by correcting this market distortion. A study chaired by Daniel Yergin found that removing the export ban could lower U.S. pump prices by an average of 8 cents per gallon from 2016 to 2030. This savings would be $265 billion over the same period.

The impetus for crude exports reflects the current reality of the U.S. refining industry. Our refineries are better equipped to process heavier, imported oil, as opposed to the lighter-grade crude produced here in the United States. This situation has created a refining bottleneck that artificially suppresses crude-oil production.

By unleashing global demand for U.S. crude, a repeal of the export ban would lead to an additional 1.2 million barrels a day in domestic production, according to Yergin???s IHS study. This translates into hundreds of thousands of new jobs and hundreds of billions of dollars in new investment. Free trade does just this, as economists fromAdam Smith to Robert Murphy have explained.

The export ban is also growing more difficult to maintain, as court cases and government rulings create more exceptions, as reported by Bloomberg News:

The Commerce Department’s permission for Enterprise Products Partners LP and Pioneer Natural Resources Co. to ship abroad ultra-light oil known as condensate foreshadows a chain of incremental actions that will chip away at the restriction until it???s obsolete. As much as 1.2 million barrels a day may be freed for export on the recent rulings alone.

[…] ???They???re going to try and get around the export ban in a lot of ways, case by case, without lifting it,???Amrita Sen, chief oil analyst for the London-based research firm Energy Aspects Ltd., said by telephone from London July 16. ???There are a lot of things they can do to alleviate this light crude overhang.???

The Bloomberg piece quotes Daniel Yergin, author of the study about surging domestic production cited by Forbes: “Most people recognize there’s no rational for having this ban.  In Washington, they’re concerned, particularly in an election year, about doing anything that others would say affected the price of gasoline.  It all comes down to gasoline.”

That’s certainly a valid observation about the mindset of politicians, but even if Yergin and others are wrong about the effects of lifting the crude oil ban and gasoline prices spike, is the conventional wisdom about the political fallout no longer valid?  After all, gasoline prices have soared under President Obama – it’s almost surreal to remember what gas cost before he took office – and it didn’t seem to hurt him much.  It’s hard to imagine Democrats hammering Republicans over a bit of post-deregulation pump shock after they spent years telling the public not to blame the Obama Administration for much larger and longer price increases.

Gas price increases are supposed to be politically devastating because those rising prices are right in people’s faces, every time they fill their tanks – they ought to pay more attention to the less immediately obvious effects of fuel cost on other consumer goods, but no matter now many times economists explain that, it’s the brightly-lit numbers on convenience-store signs that capture the public mind.  After making their peace with years of elevated prices, perhaps they’re not as troubled by gas prices as they used to be, as long as they don’t blow up too high, for too long.

Of course, if the studies related by Forbes are correct, gas prices would go down after de-regulation, and that would be a political winner for the responsible party.  It would also provide metaphorical fuel for free-market arguments across the board.  The high cost of regulations, and their often arbitrary nature – not to mention the way they’re exploited by those with political clout – are winning issues Republicans should be eager to discuss with voters.  People are going to expect them to put some bold legislation on President Obama’s desk if they take the Senate in 2014.

Politico has a review of Republicans speaking out in favor of ending the oil export ban:

Boehner spokesman Michael Steel referred a question on the issue to the House Energy and Commerce Committee, where Chairman Fred Upton of Michigan is also holding off ahead of hearings on the ban next year. People familiar with McCarthy???s position say he supports free markets but will let the GOP Conference work out its concerns through the committee process.

McCarthy ???is committed to working with all committees of jurisdiction to identify and advance solutions that will reduce energy costs for Americans and create jobs,??? spokesman Matt Sparks said via email.

Meanwhile, likely presidential candidates such as Christie, Paul and Rubio are calling for free oil trade. Sen. Ted Cruz of Texas has joined the chorus, calling on the GOP to ???think bigger than Keystone??? when it comes to its energy agenda.

Other Republicans are confident congressional leadership holdouts will come around.

???Republicans are the party of free markets,??? former GOP Sen. Bob Bennett of Utah said in an interview. ???That???s enough in the party???s DNA that ultimately a free-market approach will prevail.???

The push to lift the ban ???will certainly stand a much better chance of moving forward with a Republican Senate,??? said Karen Harbert, president of the U.S. Chamber of Commerce???s Institute for 21st Century Energy, though she acknowledged that the congressional debate is still in its infancy.

One of the key holdouts is Senate Minority Leader Mitch McConnell, who sees this as an issue for next year, and prefers to focus on the Obama Administratiion’s War on Coal while he locks down his 2014 re-election campaign.  Some Republicans aren’t waiting for the leadership to get on board:

McConnell???s No. 2, Senate Minority Whip John Cornyn of Texas, is already on board with giving U.S. oil producers a wider market for their product. ???On balance, it strikes me as a pretty good idea??? as long as refineries are prepared for the transition, he said in a recent interview.

Another oil-patch Senate GOP leader, John Barrasso of Wyoming, said he would push for votes on crude exports next year as he spreads the word among fellow Republicans about the potential benefits. The average American tank of gas is hitting four-year lows despite geopolitical turmoil, Barrasso observed, which puts backers of free oil trade in a good political position.

Some GOP fans of crude exports are ready to move even without party unity. Asked if he had qualms about getting ahead of his leaders in pushing to end the ban, Oklahoma Sen. Jim Inhofe said, ???No. Because it???s right.???

Another outspoken export advocate is Alaska Sen. Lisa Murkowski, who???s in line to chair the Energy and Natural Resources Committee if Republicans retake the chamber.

I think the repeal movement has both the economics and politics right.  It’s long past time to break some of the rusty old regulatory chains holding the U.S. economy back.  A strong case against capricious regulation that endures through some combination of bureaucratic inertia and special-interest appetite should be mounted.  Studies touting the beneficial effects of loosening the export ban are compelling, and there will probably be even more of them floating around next year.  The legal decay of the ban seems irreversible, and that makes its tattered remnants increasingly difficult to defend as sound policy.

Harnessing the American energy boom for jobs and economic growth will be a big part of many potential 2016 Republican presidential campaigns.  The energy plan presented by Louisiana Governor Bobby Jindal, for example, says that “America should not put policies in place that ban exporting our natural resources,” and specifically encourages lifting the ban on oil exports, citing a study by energy consultants that such action “would result in increased domestic oil production, reduce global oil and gasoline prices, and create at its peak 1 million jobs, with 25 percent of those jobs in non-producing states.”

Does any free-market conservative really have to read past that Carter quote about the “classic Malthusian case of exponential growth against a finite source?”  The intellectual resource we most urgently need to regulate into oblivion is Carter thinking.