Under current U.S. law, crude oil produced in the United States cannot be exported without a license, while domestic crude oil production and imports from Canada could exceed six million barrels per day through 2040. Tim Boersma and Charles Ebinger urge President Obama to ask Congress to lift the ban on crude oil exports.
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MEMORANDUM TO: President Obama |
Summary and Recommendations
Under current U.S. law, crude oil produced in the United States cannot be exported without a license. Recent and expected developments in the U.S. oil market will lead to a continued increase in U.S. crude oil production: the U.S. Energy Information Administration expects U.S. domestic crude oil production and imports from Canada to be well above six million barrels per day through 2040. In addition, recent experience regarding the export of U.S. liquefied natural gas (LNG) suggests we should re-evaluate the existing legislative framework with a view to getting ahead of the curve of pending market realities.
We recommend that you ask Congress to lift the ban on crude oil exports. The basic idea behind the ban (also referred to as “short supply controls”) was to protect domestic industry from energy shortages at a time of falling domestic oil production. We face, however, a surge of domestic oil production from shale rock layers (“tight oil”) and the prospect of rising volumes of Canadian oil. Domestic consumers do not substantially benefit from an export ban, and U.S. oil producers may soon be affected negatively by it. The
Energy Information Administration forecasts suggest that North America has hydrocarbon supplies for many decades to come and that concerns about energy security are unfounded. Lifting the ban on exports is thus the logical course.
Background
The ban on the export of U.S. crude oil stems from the 1920 Mineral Leasing Act (authorizing the federal government to manage exploration and exploitation of minerals on public lands), the 1975 Energy Policy Conservation Act and the 1979 Export Administration Act (the latter two further limiting crude oil exports as a direct response to the 1973 oil crisis). The Export Administration Regulations spell out the details of the “short-supply” controls.
One major issue is the vagueness of the export ban; it is not a total prohibition. Exports of crude oil to Canada are allowed as long as the oil is used there, as are exports of Alaskan oil using the Trans-Alaskan pipeline and small amounts of specific heavy Californian crude oil. Moreover, companies may request an exemption, which you may grant if the exports are deemed in “the national interest.” This concept, however, seems to be open to multiple interpretations.
This vague legislative framework has discouraged crude oil export requests. As the limits apply only to crude exports, the surge in domestic oil production has resulted in a major increase in the amount of exported refined products (no export restrictions apply to refined products), e.g., petrol and diesel, to a staggering 1.7 million barrels per day in 2012. This benefits primarily a handful of refineries on the Gulf Coast that are equipped to process light and sweet crude oil.
Several reasons argue for lifting the ban on crude oil exports:
Surging domestic production. Domestic production of crude oil has dramatically increased in recent years owing to the rapid rise in the production of oil from shale rock layers. Virtually all projections foresee a peak in production around 2020, after which production is expected to plateau for several decades. Continuous investments in infrastructure are likely to further exacerbate the difference between supply and domestic demand and thus have a downward effect on prices. Without export markets for domestic crude, there is only so much absorptive capacity in the United States unless new crude production in the United States were to become substantially cheaper than Canadian crude. If crude oil exports are not allowed, domestic prices could fall, which would make new investment in tight oil and shale oil production less attractive, similar to what happened to shale gas. The only reason that shale gas production has continued to grow is that it is associated with natural gas liquids, which continue to be profitable.
Lessons from natural gas. The last decade’s natural gas boom shows that an export ban has only a few beneficiaries. The enormous increase in production of so-called unconventional gas sources caused domestic well-head prices to plummet. Manufacturing industries have lobbied—so far successfully—against unrestricted exports of LNG (which the market favors) despite the lack of convincing evidence that exports will substantially raise domestic prices.
Type of U.S. oil vis-à-vis refineries. Most U.S. refineries are designed to process heavier crude oil from the Middle East, Venezuela or Mexico rather than domestic crude oil. That limits the absorptive capacity of refineries for U.S. crude. As a result, there is an increasing mismatch between supply and demand. U.S. crude supply increases will cause domestic prices to fall. Low oil prices can be a boon to the general economy in the short term but, as noted above, have a negative impact in the longer term: if oil prices fall low enough, unconventional oil production in the United States will become uneconomic. The bottom line is that a clear policy is desirable for all involved. We do not see distinguishing between crude and refined product as a desirable policy.
Supporting free trade. Lifting the ban on crude oil exports will increase the credibility of U.S. arguments for free trade in the global economy. This will have positive effects on the U.S. position in current and future trade negotiations and disputes.
Substantial economic gains. While estimates have to be taken with a grain of salt, some industry reports suggest that allowing U.S. crude oil exports could generate up to $15 billion annually. These exports may not benefit everyone equally. For example, some refineries may see a decline in revenues, because some domestically-produced oil will be exported without first being processed. Also, comparable to natural gas, it is likely that domestic prices will rise in the case of unrestricted exports, although the extent of the price rise is unknown and often exaggerated by opponents of exports. On the other hand, unrestricted exports, in combination with increased investments in infrastructure, are expected to provide a boon for domestic oil production, generating income, jobs and taxes along the production chain.
No negative effects for energy security. The proposed change should not weaken U.S. energy security. Countries tend to benefit most from resources when they pursue responsible consumption and trade policies, not by holding stocks and forcing domestic producers to suffer from lower prices due to oversupply.
There is a widely-held view that U.S. domestic supplies are large enough to make the country self-sufficient in the coming decades, even after lifting the ban on exports. If the ban on crude oil exports were lifted, that would most likely incentivize further expansion of the pipeline network (Keystone or alternative pipelines) in order to facilitate a larger flow of oil from the upper Midwest and Canada to the Gulf Coast. The amount of crude oil that would be exported is difficult to predict, and would mostly be dictated by international prices. It is expected that the U.S. influence in the global oil market will not change dramatically, although U.S. oil suppliers such as Mexico and Venezuela may be adversely affected as they lose market share.
Lifting the ban on crude oil exports could also stimulate additional domestic crude oil and some associated natural gas production, bringing additional royalties to the Treasury. Some will oppose this new fossil fuel development, arguing that additional carbon emissions will occur and that there are higher risks of environmental damage. We believe, however, that accompanying a lifting of the ban on crude exports with renewed calls for a carbon tax—with some of the revenue allocated back towards research on advanced renewable energy technologies, carbon capture and sequestration of CO2 for both coal and natural gas, small-scale modular reactors and advanced battery storage—could counteract some of these concerns.
There are possible downsides to lifting the ban on crude oil exports:
Rising domestic oil prices. As noted, domestic oil prices may well rise. The case of natural gas, however, suggests that a more sustainable and predictable price level overall is better for the industry.
Potential job losses. Some U.S. refining capacity for domestically produced sweet crude oil may no longer be required if the ban on crude oil exports is lifted. Those potential job losses in refining, however, would have to be set against the potential job losses in production if there is an unsustainably low price for domestically produced oil.
International repercussions. Lifting the ban on crude oil exports could have effects on oil-producing countries in the region, such as Venezuela and Mexico. The latter is going through important reforms of its domestic market at the moment and the United States might not want to disturb that process. We doubt, however, that U.S. crude oil exports would have a large effect on developments in either the Mexican or Venezuelan market given rising demand for oil around the world.
Conclusion
On balance, these considerations argue strongly for seeking congressional legislation to liberalize the existing ban on crude oil exports. The change would yield substantial economic and political benefits that well outweigh the downsides.
