Why the U.S. Needs to Lift the Ban on Oil Exports

Click here to read the WSJ article by Daniel Yergin And Kurt Barrow. Mr. Yergin is vice chairman, and Mr. Barrow, vice president, of IHS,a research and consulting company. They are lead authors for the new IHS study, "U.S. Crude Oil Export Decision: Assessing the Impact of the Export Ban and Free Trade on the U.S. Economy." Excerpts:

"exporting U.S. crude will increase, not reduce, domestic oil supplies and lower, not raise, domestic gasoline prices."

There were two reasons for the original export ban. First, because of fear of inflation and panic about supplies in the 1970s, price controls were slapped on crude oil and refined products. But if cheaper price-controlled oil could be shipped to higher-priced world markets, it would undermine the price-control system. The second reason was to prevent the newly-flowing oil from Alaska's North Slope being sent to Japan instead of the U.S. West Coast.

Yet oil price controls were abolished in January 1981, and the ban on exporting gasoline and other petroleum products was lifted a few months later."

"Domestic oil production has since dramatically surged—by 3.3 million barrels a day since 2008, a 66% increase."

"Yet the U.S. still imports about 30% of its oil. So why allow exports? The reason is that the new crude being produced—so called tight oil, or "light oil" recovered by hydraulic fracturing and horizontal drilling—is a poor match for refineries in the Midwest and along the Gulf Coast. 

Refineries have spent more than $100 billion in recent decades reconfiguring their equipment to process heavy, lower-quality imported oil from Canada, Mexico and Venezuela, as well as the new supplies coming from the Gulf of Mexico. They have been able so far to absorb the new light crude but are reaching their limit even as tight production keeps growing. If these reconfigured refineries run more light instead of heavy crude oil, they lose output capacity—and revenue—due to a mismatch of the light oil with their equipment. To make up for the lost revenue, refineries won't buy the light oil except at a discount, which could run as high as 20%. At that price, oil producers can't cover the cost of some of the new wells, and cash flows would decline. This means less drilling and lower crude production. 

Specialized new refineries can be built to handle light oil, but that can take years."

"Allowing exports would enable light-oil producers to get world market prices, and their revenues would flow back into higher investment in U.S. production. Meanwhile, refineries would continue to import heavier crude."

"We estimate that removing the export ban, combined with continuing innovation in production technologies, would lead to as much as 2.3 million barrels per day of additional production over the next 15 years, and new investment approaching $1 trillion. That increase would support an average of 860,000 more jobs over the same period and generate nearly $3 trillion of additional government revenues.

Yet what about gasoline? How can U.S. crude oil receiving higher prices on world markets lead to lower prices at the pump?

The answer is the difference between the gasoline and crude oil markets. U.S. gasoline is part of a freely traded global market. The U.S. both exports gasoline from the Gulf Coast and imports it on the East Coast because it costs less to import surplus gasoline from Europe than ship it by tanker from Texas. U.S. gasoline prices are set by global gasoline prices, not domestic crude oil prices. 

The additional domestic oil production that results from allowing exports means more oil on world markets—and lower prices. That means lower global gasoline prices and, because the U.S. gasoline market is part of that global market, lower prices for American motorists. We estimate this would reduce the price by as much as 12 cents a gallon, saving U.S. motorists $420 billion over 15 years."