Tuesday, June 30, 2015

A Crude Awakening: Why Lift the Crude Oil Exports Ban

Oil production in American has been on the rise since the end of the Great Recession, all in spite of the fact that the American government likes to metaphorically shoot itself in the foot with bad policy. No, I'm not talking about implementing wind and ethanol subsidies, cap-and-trade regulation, the gasoline tax, or the inability to finish the Keystone pipeline. I'm referring to the crude oil exports ban.

During the Nixon administration, the United States government enacted a crude oil exports ban to deal with the oil crisis. Essentially, the government's thinking was that if it kept American oil here in America, we wouldn't run out of oil at home. The basic economics of free trade show that when a country exports, five things take place in an exporting country's economy: prices increase, consumer surplus decreases, producer surplus increases, net economic welfare increases, and supply consumed increases (see below).

Keep in mind that the inverse is true for the importing country, and that consumers in a foreign country are deriving net economic welfare as a result of the export. When looking at this on a global level, there is net economic benefit, which means that free trade makes the world a better place than an export ban does. Free trade improving the global economy is one of those few concepts that has general consensus amongst economists. Also, let's consider if we replaced crude oil with any other product, such as wheat or automobiles. Wouldn't it sound silly to stop trading with other countries simply because you think prices might rise?

However, that sort of thinking doesn't even apply in this case: the crude oil market operates differently because it is a global market. Normally, lifting the export ban would not do much to shift prices. However, as the think-tank Resources for the Future (RFF) points out, better allocation of refinery activity would improve refinery productivity, thereby lowering prices. So let's get beyond economic theory: would lifting the export ban help?

In short, the crude oil exports ban is a self-punishing policy that is a populist relic of the 1970s, and should have remained in the 1970s. This viewpoint was affirmed when I read the Independent Institute's "The Economic Case for Lifting the Crude Oil Exports Ban." It wasn't just this libertarian think-tank that thought it was a bad idea. There are studies and reports from the Aspen Institute, Baker InstituteBrookings Institution, Columbia University Center on Global Economic PolicyCouncil on Foreign Relations, Dallas Federal Reserve BankGovernment Accountability Office, Heritage Foundation, ICF InternationalIHS Inc., and the Manhattan Institute that affirm the same thing: lifting the export ban would create net benefits. What sort of benefits would derive from lifting this exports ban?

GDP Growth and oil production: While not perfect, the GDP is still the best measurement of economic progress and health we have. Removing this ban would allow for up to 1.2 million barrels of crude oil per diem between now and 2025 (Columbia University, p. 44). Allowing for further production means greater economic output. ICF estimates that it will generate up to $14.8B per annum for the next 20 years, which would amount to $296B. Brookings Institution estimates that it will yield anywhere between $550B and $1.8T in present discount value from the years 2015-2039. While increasing the GDP by 0.4 percent in 2015 seems small, "there are very few actions the government can take that as a long-term instrument of economic policy would make as measurable of a difference in the economy (Brookings, p. 33).

More jobs: Lifting the ban would allow for more jobs in manufacturing, construction, and refinery services. Estimates put the job growth between 300,000 (ICF) and 4.2 million (IHS) jobs by the end of the decade.

Decreased gasoline prices: As previously mentioned, both crude oil and gasoline prices are very closely tied to the global market since crude oil is a globally traded commodity. Since oil is truly a global product, we have to view supply and demand in terms of one big, global market. That means that the export model shown above does not apply here. Instead, it is basic, global supply and demand: supply increases as a result of increased production, and assuming demand remains the same, prices drop. This is all the more the case once the refinery mismatch mentioned above gets resolved, not to mention a steadier supply of crude oil in the global market will decrease odds of supply shocks and major price fluctuations. As a result, gasoline prices [in today's dollars] would drop anywhere between 2¢ (RFF) and 12¢ (Brookings).

Higher disposable income: Due to increased investment, additional jobs, and lower gasoline prices, consumers would have additional disposable income of anywhere from $158 to $285 per annum (IHS). In 2025, this figure might be as high as $3,000 (Aspen).

Improved foreign policy: The United States was a nation built on the idea of freedom. Having isolationism in the energy sector is merely repeating the same bad mistakes we made with Smoot-Hawley back in the 1930s. Removing these trade barriers not only solidifies current trade arrangements, but also provides the opportunity to create new ones (Columbia University).

I know that good politics  usually come at the expense of policy being poor, but given the positive effects of lifting this ban, couldn't we set politics aside this one time?

9-10-2015 Addendum: In addition to the aforementioned studies, the U.S. Energy Information Administration just came out with a study showing, amongst other conclusions, that oil prices would not increase as a result of lifting the oil exports ban.

1 comment:

  1. This is amazing, thanks for sharing… This awakening is the best source to evaluate how things will be in the near future.