This week Senate Energy and Natural Resources Committee Chairman Lisa Murkowski (R-AK) said she would push this year for legislation to end the United States’ export ban on crude oil. “We shouldn’t lift sanctions on Iranian oil while keeping sanctions on American oil,” she said. “It makes no sense.” Murkowski is correct—repealing the ban is long overdue.
The ban on exports was enacted in the 1970s in response to the OPEC oil embargo, which sent global energy prices soaring. The thinking of legislators at the time was that an export ban was necessary to ensure U.S. oil producers sold their product domestically rather than seeking higher profits in the international market. But even after OPEC lifted the embargo and oil prices crept back from their highs, the ban remained in place.
Today crude oil prices are extreme once again, but in the opposite direction. The shale boom in the Midwest has caused production of crude oil to rise 71 percent since 2010. The price of a barrel of crude oil has nearly halved, from $104 this time last year to only $56 today. The low prices are great for American consumers. But they also signal that our economy cannot absorb all the production by itself. Without buyers for their product, the shale boom that brought these states back from recession may come to an end.
America’s existing petroleum refineries along the Gulf Coast are equipped to process heavy crude from Canada and Mexico. While it is certainly possible for the refineries to process the lighter crude of the Bakken Shale, it is not economically efficient to for refiners to displace high quantities of the heavier stuff. Moreover, most of the domestic crude arrives at the Gulf Coast by pipeline, making it difficult to store when refiners do not have spare processing capacity. It is harder to shut off a pipeline than to stall a tanker or freight train.
Lifting the ban on crude oil exports would allow domestic crude to be refined internationally, relieving pressure on U.S. refiners. Now is an optimal time to repeal the ban—not only are domestic crude prices low, but international crude prices have also fallen. A low spread between domestic and international prices puts a definite ceiling on how much prices can rise were the export ban lifted and American crude allowed on the global market.
The above chart shows the spread between an American benchmark, the West Texas Intermediate (WTI) price of a barrel of crude oil, and the Brent price, a European one. Tuesday’s spread was only $4.54, meaning that European crude oil is only slightly more expensive than American. This should assuage the concerns of those who worry that lifting the crude export ban could send oil prices soaring. Unlike in 2011, when Brent crude was $25 per barrel higher than WTI, consumers today are in no danger of a price jump. If Congress is going to repeal the crude oil export ban, now is the time to do it.
According to a recent paper by Jason Bordoff and Trevor Houser, repealing the ban may help consumers where it most counts—at the gasoline pump. Unlike crude oil, the U.S. has no restrictions on the export of gasoline, meaning that American gas prices are roughly in line with world prices after adjusting for taxes and transportation costs. Flooding the world market with American crude would lower the global price of gasoline, and with it the American price. Lifting the ban could thus benefit both producers and consumers of petroleum products, a rare win-win for a change in trade policy.
Senator Murkowski has taken the lead on repealing the ban on crude oil exports. It is the perfect time to abolish a relic of the 1970s that has long overstayed its welcome.
Preston Cooper is a contributor to Economics21. You can follow him on Twitter here.
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