Back in 1975, President Gerald Ford signed the Energy Policy and Conservation Act, officially banning most U.S. oil exports. The United States was importing an average of 3.2 million barrels of crude oil per day at the time. Three decades later, that figure tripled to 10.1 million barrels per day, and imports of foreign oil and petroleum products rose from 36% of total consumption to 66%.
How things have changed. The International Energy Agency is projecting that the U.S. will surpass Saudi Arabia and Russia as the world's top oil producer in 2015. And yet for the most part, the crude oil export ban remains in place -- 40 years later. It's time to reconsider this policy.
A growing body of evidence suggests that the potential benefits from lifting the ban on oil exports outweigh any potential costs. A Brookings report issued in September that used econometric modeling by NERA Consulting projected positives across the board -- in economic, wage, employment and trade growth. Now a new report by the MAPI Foundation and the Aspen Institute, relying on modeling by Inforum, provides data suggesting that American manufacturing would benefit greatly from such a policy change.
A growing body of evidence suggests that the potential benefits from lifting the ban on oil exports outweigh any potential costs.
The new report, co-authored by the MAPI Foundation's Don Norman, Aspen's Tom Duesterberg, and Inforum's Jeff Werling, compares scenarios envisioning increased crude oil exports with a baseline projection that followed the U.S. Energy Information Administration's energy outlook (which includes only insignificant amounts of crude oil exports).
According to the authors, ending the ban would benefit manufacturing in multiple ways:
- Oil producers would increase expenditures for exploration, production and transportation of crude oil, intensifying the need for new equipment made in this country -- drilling pipes, pumps, drilling rigs, earth-moving equipment and motor vehicles.
- Higher oil production would keep energy prices relatively low, benefiting a sector responsible for roughly one-third of the annual energy consumption in the United States. It would also help keep prices low for natural gas, a byproduct of drilling for oil in shale formations.
- Economic growth and expanded employment generated by the continued shale boom would create induced demand for products indirectly related (and even unrelated) to the oil field supply chain. Considering manufacturing has the largest multiplier effect within the economy, this would in turn benefit business sectors upstream and downstream.
There are other reasons the ban on exporting shale oil should be reconsidered. For one thing, it doesn't take into account that oil supplies derived from shale exploration come in the form of lighter (sweet) crude oil, while most of our refinery capacity is built to process the heavier (sour) crude oil that flows from Canada, Mexico, and Venezuela. With billions of dollars invested over the years to build facilities that can refine heavier oil, it will take a while to revamp them to refine lighter crude. At the same time, European and Asian refineries are already built for light crudes and would likely welcome access to our crude oil.
Lifting the ban would also help improve this nation's imbalance in trade. Further, as global oil prices remain low, oil exports would provide an important economic incentive for energy companies to continue exploring and drilling. According to a recent report by Goldman Sachs Group, for many shale oil frackers in the United States, once prices drop below $90 a barrel it starts becoming uneconomical to continue exploring and drilling. In October, the global price of oil fell below $90 for the first time in two years.
Energy guru Daniel Yergin has observed that the crude oil export restriction is a political issue that really just comes down to the price of a gallon of gasoline. U.S. exports of oil won't drive those prices up, because as the MAPI Foundation-Aspen study notes, crude oil prices are determined in the world oil market by the forces of global supply and demand, "not by how much oil is exported from the United States." Indeed, the increase in American production of crude oil put downward pressure on worldwide prices despite supply disruptions from the Middle East. An analysis by IHS issued earlier this year confirms this; it projects that lifting the ban would reduce gasoline prices by 8 cents a gallon between 2016 and 2030, a consequence of rising oil supplies worldwide.
To create new growth opportunities for manufacturers, when the 114th Congress reports for duty in January 2015, it should make lifting the crude oil export ban a priority.