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You can thank two outdated, anti-consumer, protectionist US trade policies for some of your ‘pain at the pump’
From Mark Perry of "Carpe Diem."
"
A
frequent question I hear is: Why don’t we see falling gasoline prices
at the pump now that the the US is producing increasing amounts of crude
oil, currently at the highest level of output in 26 years, and heading
for an all-time record high by the end of next year? The chart above
shows that since January 2010, US crude oil production has increased by
54% (and by almost 3 million barrels per day), while at the same time
retail gasoline prices in the US have increased by more than 35%, from
$2.70 per gallon in January 2010 to $3.66 in April. So why has America’s
rising oil production been accompanied by rising, and not falling,
gasoline prices for US consumers?
One reason that might explain why gas prices haven’t fallen in the US
is that crude oil is a global commodity, and oil prices are determined
by market forces at the global level (global supply and global demand),
not at the national level. In contrast, rising domestic natural gas production has resulted in falling natural gas prices in the US,
because natural gas is a primarily a local, not global, commodity, and
US natural gas prices are determined by the local (national), surging
supply. Despite the rising production of domestic crude oil, the US
share of global crude oil output has increased only slightly, from 8.6%
of the world’s oil supply in January 2010 to 8.8% of world oil in
December 2013. Therefore, the rising oil production in the US, while
impressive, hasn’t been significant enough to impact the global supply
of oil (or the global price), which would be one reason the rising US
oil supply hasn’t translated into lower prices at the pump.
In a recent Cato blog post, international trade lawyer Scott Lincicome (“Gas Prices Are Pinching Again, and You Can Thank U.S. Trade Policy For Some of the Pain“)
points to some other important reasons that gasoline prices in the US
haven’t fallen: outdated US trade policies that: a) prevent crude oil
exports, and b) protect US shipping unions and shipbuilders from foreign
competition for transporting oil (or anything else) between US ports.
Here’s Scott:
Two archaic, little-known U.S. trade policies –
vigorously defended by the well-connected interest groups who benefit
from them – restrict free trade in petroleum products and, as a result,
force American consumers to pay considerably more at the pump.
First, the Jones Act – a 94-year-old law that
requires all domestic seaborne trade to be shipped on U.S.-crewed,
-owned, flagged and manufactured vessels – prevents cost-effective
intrastate shipping of crude oil or refined products. There are only 13
ships that can legally move oil between U.S. ports, and these ships are
“booked solid.” As a result, abundant oil supplies in the Gulf Coast
region cannot be shipped to other U.S. states with spare refinery
capacity. And, even when such vessels are available, the Jones Act
makes intrastate crude shipping artificially expensive. Shipping U.S.
crude from Texas to Philadelphia cost more than three times as much as
shipping the same product on a foreign-flagged vessel to a Canadian
refinery, even though the latter route is longer.
It doesn’t take an energy economist to see how the Jones Act’s
byzantine protectionism leads to higher prices at the pump for American
drivers. According to one recent estimate, revoking the Jones Act would
reduce U.S. gasoline prices by as much as 15 cents per gallon “by
increasing the supply of ships able to shuttle the fuel between U.S.
ports.”
The second U.S. trade policy inflating gas prices: restrictions on crude oil exports implemented in the 1970s
during a bygone era of energy scarcity and dependence that bans exports
of U.S. crude oil to any country except Canada. Because U.S. and
Canadian refinery capacity is finite, America’s newfound energy
abundance has led to a glut of domestic oil and caused domestic crude
oil prices (West Texas Intermediate currently selling for $99.74 per
barrel) to drop well below their global (Brent) counterpart (currently
at $109.48 per barrel).
One might think that this price divergence would mean lower U.S. gas
prices, but such thinking fails to understand that U.S. gasoline exports
may be freely exported, and that gasoline prices are set on global
markets based on the higher Brent crude prices. As a result, several
recent analyses – have found that liberalization of U.S. crude oil
exports would lower, not raise, gas prices by as much as 7 cents per
gallon.
Thus, the Jones Act and the crude oil export ban together inflate
U.S. gasoline prices by as much as 0.22 per gallon – or about 6% of the
current price at your local gas station. Not everyone in the United
States, however, is harmed. In the case of the Jones Act, the American
shipping unions and shipbuilders that benefit from the law have long
opposed any type of reforms, regardless of the pains imposed on the
American economy and U.S. consumers. The crude oil export restrictions,
on the other hand, have found new support from a small group of U.S.
refiners who profit handsomely from depressed domestic crude prices and
the lack of any legal limits on their exports. As is always the case
with protectionism, these groups win and U.S. consumers lose.
Given this political dynamic, reform of either law appears unlikely
in the near future, regardless of how dramatically the U.S. trade and
energy landscape has changed since the laws were imposed. So
the next time you fill up the tank, note that about 6 percent of your
bill pads the bottom lines of a few well-connected cronies.
MP: While it’s always easy to target and blame the
oil industry for high or rising gas prices, they’re really not to blame.
In fact, they’re at the mercy of two very, very powerful forces: a) the
market forces of supply and demand, and b) government taxes,
regulations and trade policies that artificially raise energy prices.
Simply put, oil companies don’t set oil and gas prices,
the market does; and then government policies play an important role in
raising energy prices above market-determined levels. When it comes to
assigning blame for high gas prices, we should put anti-consumer,
price-raising government policies like the Jones Act and the crude oil
export ban at the top of list. It’s another example of how
well-connected, well-organized special interest groups like the domestic
shipping industry use the political process to protect their industry
(and profits) from foreign competition, while raising prices at the pump
all of us disorganized consumers."
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