Time to Get Policy Right on Oil Exports

Mark Green
Posted December 15, 2015

That Congress soon may act to end the United States’ 40-year-old ban on domestic crude oil exports is signaled in the number of reports and posts on exports-related themes.

The Wall Street Journal has a report that says talk of lifting the export ban is narrowing the difference between U.S. and global crude prices. The Council on Foreign Relations’ Michael Levi has this post discussing the impact of an exports deal on markets, the recent climate deal and geopolitics. National Journal reports on the legislative horse-trading some think could be part of lifting the exports ban. And there’s more. A couple of observations:

First, though the White House previously threatened to veto legislation that ends prohibition on oil exports, recent remarks are more guarded. The Guardian reports:

[Press Secretary Josh] Earnest also indicated that the White House anticipated having to hold its nose on some provisions of the funding bill, though he knocked Republicans for pressing the policy riders. “I would anticipate that there would be some elements of the budget bill that are not consistent with the kinds of policies that we have long supported here, but that's the essence of compromise,” Earnest said.

Does that mean the president has changed his mind on oil exports? Not necessarily, but it is a different tone from the unequivocal veto threat of just a few weeks ago.

Second, it’s interesting that many analyze the impacts of reversing a key U.S. energy trade stance, one that has been around four decades, in the context of immediate potential results. Levi writes:

There is currently little if any incentive for U.S. oil producers to export crude oil even if the ban is lifted. Light sweet crude oil for January delivery in Northwest Europe (Brent) – the destination most commonly envisioned for U.S. crude oil exports – is currently selling for less than similar oil delivered on the Louisiana coast (LLS). It costs in the neighborhood of three dollars a barrel to ship oil from the U.S. Gulf coast to Europe. Spending three dollars in order to lose money is not something sane people do. (The spread could, of course, change, particularly during refinery turnarounds.) The result is that large sustained oil export volumes are unlikely to materialize soon.

Yet, in the next paragraph Levi adds:

This should remain unchanged until U.S. oil production recovers to substantially above previous highs. U.S. refineries were previously able to accommodate U.S. production despite the export ban; they will presumably continue to be able to unless and until production rises above historic highs.

Similar from Morgan Stanley’s Adam Longson to Bloomberg:

“There is little urgency or price advantage for US crude producers to export currently. However, the advantages could be much larger in a couple years’ time as the US resumes growing production.”

And this is the point to be understood: Ending the ban on U.S. crude exports is a big, long-term policy decision. It shouldn’t be focused on current market conditions or short-term impacts. Instead, it should be about restoring American trading policy to its historic position – which is to allow the export of a domestic commodity because, fundamentally, trade is good for the United States. It should recognize that over time energy, economic and trade benefits will accrue to the U.S. from exporting crude oil, and that U.S. consumers will benefit as well.

Certainly, the weight of scholarship in favor of lifting the exports ban appears to have advanced things in Congress – mainly, the acknowledgement that the United States no longer is the nation of energy scarcity it was when the ban was imposed. Rather, as the world’s No. 1 producer of oil and natural gas, the U.S. should be engaged in the global crude marketplace, for U.S. crude to compete fairly with crude from other countries. The security angle also is persuasive, with a number of countries and foreign policy experts making the case that the world would be a safer place if the United States resumed exporting domestic crude. CNN Money:

Today, the world has too much oil – thanks largely to the American shale oil boom. That's why crude oil prices have crashed below $35 a barrel and a gallon of gasoline is on the verge of falling below $2 per gallon. In other words, there is no longer an oil scarcity that justifies keeping it at home. In fact there's too much of it. “Restrictions on free trade of energy are a legacy of a bygone era that doesn't reflect the realities of today,” said Jason Bordoff, a former energy adviser to President Obama who testified on Capitol Hill about this issue.

In the same report, there’s this from Joe McMonigle, who served as chief of staff of the Energy Department under former President George W. Bush:

“This really is a case of not if but when this is going to happen. There is a window right now to get this done.”

And to get the policy right.