U.S. Crude Oil Policy – The Case for an Export Ban and an Import Quota

By Ed Hirs, College of Liberal Arts and Social Sciences

Ed_Hirs_EFCongress is considering lifting the crude oil export ban that prevents American oil from being sold overseas. The ban was enacted in the midst of oil market turmoil in 1975. Domestic producers of crude oil want the ban lifted; refiners want the ban to stay in place. Each side has a raft of studies from paid experts citing the supposed benefits of its position. Each is so deep into its position that it has missed the larger picture on both humanitarian and financial grounds. Here is why:

OPEC, the Organization of Petroleum Exporting Countries, was formed in 1960 as a response to a precipitous drop in the world price of oil. The drop resulted from President Eisenhower’s strategic decision in 1959 to limit U.S. oil imports. Why did he do this? Simple; he realized that no matter who owned the oil in the Middle East, it would always be available on the world market. He had already rejected Great Britain and France in their 1956 war over the Suez Canal saying: “Let them boil in their own oil.”

President Eisenhower knew that everything in the Middle East was about the money that oil brings. As former Federal Reserve chairman Alan Greenspan said in The Age of Turbulence, on page 483,

“I am saddened that it is politically inconvenient to acknowledge what everyone knows:  the Iraq war is largely about oil.”

The price for cheap oil is the violence in the Middle East. Since the events of September 11, the U.S. has been embroiled in conflicts in which alliances shift every moment. As of the date of this posting, U.S. military casualties include 6,868 dead and 52,375 wounded. (You can look it up at http://www.defense.gov/casualty.pdf) The Cost of War project at the Watson Institute at Brown University estimates that the nations involved in the oil conflicts have seen more than 500,000 dead and over 7.6 million war refugees and displaced persons. (http://www.watson.brown.edu/costsofwar/)

The Cost of War project puts the cost to the U.S. at $4.4 trillion. If the war cost were pay-as-you-go, it would amount to a surcharge of more than a dollar for every gallon of gasoline consumed in the U.S. since 9/11. Instead, the war is financed by the government printing press and the American public remains in the dark.

On the import side, see our paper “Crude Oil Imports and National Security.”

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1544606

There we made the case for going back to an import quota in order to alleviate the effects of a major, negative supply shock.This could result from something as simple and easy to implement as a blockade of the Strait of Hormuz. Today, the argument for the import quota is made stronger by very low crude oil prices. U.S. GDP will drop by more than $200 billion this year due to continued cheap oil. U.S. employment has already suffered the loss of more than 100,000 jobs. The impact of cheaper crude has also dampened the economic and climate benefits of switching to electric automobiles and other low-carbon modes of transportation.

The argument made by oil producers in favor of removing the export ban, i.e. that they require unfettered access to export markets, makes little sense. The U.S. will remain a net importer of crude oil even if the export ban is lifted.  Pronouncements by politicians that the U.S. will run OPEC out of business by exporting crude oil are simply nonsense, because U.S. producers of oil will never be able to produce it as cheaply as the Saudis and thus cannot compete in a global market. To produce almost 5.0 million barrels per day, U.S. shale producers operated about 22,000 wells in 2014. To produce almost 9.0 million barrels per day, the Saudis needed only 3,100 wells.

Lifting the current export ban will do nothing to make the U.S. more competitive, or to quell conflict in the Middle East.  Accordingly, it should stay in place. Producers would do well to consider a return to President Eisenhower’s import quota.  Thousands of oilfield workers would return to work. U.S. GDP will increase. Higher domestic oil prices will encourage conservation and provide an economic support to alternative modes of transportation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s