Lifting the Ban on Crude Oil Exports
For almost 40 years the United States has maintained a ban on exporting domestically produced crude oil with little opposition. In recent years, however, the discovery of new sources of domestic crude oil and new techniques for extracting it has called into question the necessity of continuing the ban. Last year, the International Energy Agency’s annual report found that the U.S. will overtake Saudi Arabia and Russia as the world’s top oil producer by 2017 and would be energy independent by 2035. More and more energy experts, policymakers, and executives in the oil industry are calling for the ban to be lifted.
It is important consider the history of this ban to understand why it was enacted and what effect it was intended to have on U.S. energy security. In 1975, Congress passed the Energy Policy and Conservation Act, creating the Strategic Petroleum Reserve and the Export Administration Act of 1979, which gave the president the power to control exports for reasons of national security. This legislation was drafted in the wake of the 1973 OPEC embargo, which had caused energy prices to skyrocket in the U.S. The ban on exporting crude oil was intended to be a long-term solution, where U.S. oil refineries would be assured of enough domestically produced crude oil to continue their operations if international supplies were cut off. The ban was not a total ban however; crude oil could still be exported for consumption in Canada and Mexico. Exports were also allowed from fields in Alaska and California. The Commerce Department was allowed some leeway to grant export licenses of crude oil under certain circumstances and exports of products produced from crude oil were completely uncontrolled.
Currently, there is a debate going on about whether lifting the ban would benefit the U.S. Many experts claim that it would be economically beneficial. A report by NERA Economic Consulting released this September found that lifting the ban would have a positive economic impact, both for consumers and producers. The report indicated that consumers would benefit from somewhat lower energy prices and producers would benefit from being able to sell crude oil on international markets for prices higher than the cost of production. According to some industry estimates, oil exports could generate $15 billion a year by 2017. However, if the ban continues, domestic markets would not be able to absorb all of the new supply, causing prices to decrease to the point where producers would not continue their investments in domestic supplies.
The amount of crude oil that the U.S. could put on the market wouldn’t be enough at this point to unseat Saudi Arabia’s and other countries in the Organization of Petroleum Exporting Countries (OPEC) influence over energy markets, but it may boost the U.S.’s leverage.
On the other hand, many U.S. refiners argue against lifting the ban because they would no longer have access to cheaper domestic oil that they then can refine into gasoline and sell at global prices. However, this argument fails to account for the fact that U.S. refineries refine mostly heavy oil. There is a mismatch between the new sources of domestic oil and the kind of oil that U.S. refineries are most effective at processing. In the 1980s, the U.S. began to import heavy crude oil from the Middle East. Refiners spent billions of dollars to build refineries that could process the heavy oil. Domestically produced oil is light oil and while it is possible for U.S. refineries to refine it, it is far more economic for them to continue processing heavy oil. Due to the enormous cost of remodeling a refinery, it is unlikely that US refiners would want to make the investment. Given this mismatch, the U.S. will still need to import heavy oil for its refineries even if the ban is lifted.
What kind of effect would the U.S. becoming an exporter of crude oil have on U.S. foreign policy? The amount of crude oil that the U.S. could put on the market wouldn’t be enough at this point to unseat Saudi Arabia’s and other countries in the Organization of Petroleum Exporting Countries (OPEC) influence over energy markets, but it may boost the U.S.’s leverage. A report from the Brookings Institution states that lifting the ban would boost the U.S.’s credibility on free trade and give it a better position in trade negotiations and disputes.
Some analysts have questioned whether or not the U.S. would want to intervene in the Middle East to safeguard oil supplies and trade routes if it were an exporter and energy independent. The answer is most likely still yes, as no matter where the U.S. gets its fuel, prices will still be tied to the global market and therefore will be susceptible to shocks such as a crisis in the Persian Gulf. The only thing that will lessen the Middle East’s importance in the energy sector is if its supplies dry up or if global energy demand dramatically shifts towards another energy source.
Most likely, lifting the ban on crude oil exports will have little impact on the U.S.’s energy security, as refiners will still need to import foreign heavy oil for their refineries. While increasing its position as an oil exporter, the U.S. will still not be able to draw influence away from the major OPEC countries. Still, it will be a step forward towards freer trade and may possibly boost the U.S.’ position in trade negotiations. Given the economic benefits, it seems like it’s finally time to lift the ban.
Sarah Westfall is a Research Fellow for Young Professionals in Foreign Policy.