All Commentary
Wednesday, October 7, 2015

Why We’re Still Debating the Decades-Old Crude-Oil Ban

Keeping Oil "Here at Home" Makes Americans Worse Off

The decades-old ban on crude oil exports is anachronistic, completely disregards basic economics, and on top of it all, arguably makes gasoline more expensive for American motorists.

In early September, a House subcommittee voted to lift the US government’s ban on crude oil exports, which has been in place since the 1970s. The fact that we are even having this discussion shows just how crude (pun intended) public policy remains.

The Crude Oil Export Ban Is Anachronistic

Ludwig von Mises argued that the logic of interventionism could not stop short of full-blown socialism. Any isolated intervention — such as a price control on a particular product — would generate undesirable consequences, leading to further interventions.

The ban on crude exports sounds plausible to the man on the street for a simple reason: it forces producers to “keep oil here at home” for Americans to use, rather than selling it to foreigners.

We see this pattern in the case of oil. In response to the price surge in the 1970s surrounding the Arab oil embargo (and also, I would argue, Nixon’s decision to go off the gold standard), the US government enacted a complicated system of price controls with stringent caps on “old oil” produced from operations that were already established before the price controls. In a speech to the Brookings Institute last year, Harvard economist Larry Summers explained the connection between price controls and the crude oil export ban:

The reason we have a ban on crude oil exports in the United States is that in the 1970s when the price of oil spiked due to the formation and effective implementation of the OPEC cartel…we responded…rightly or wrongly with a system of price controls on oil and a system in particular of price controls on old oil.

Now, if you are one country in a free world and you wish to control the price of a quantity you have no choice but to associate that control with an export ban because if you don’t everything you produce will be exported. So we put this in place, this export regime, in place for a good reason. That good reason was that we had price controls. Price controls might or might not have been a good idea. I doubt they were a good idea but it’s not relevant for the purpose of this argument. What is relevant is that those price controls were eliminated 34 years ago. (emphasis added)

Summers makes the practical argument that the ban on crude exports made sense (in a “second best” framework) given the silly and counterproductive price control regime. But the price controls were eliminated early in Ronald Reagan’s term, so there is no longer even a prima facie case for the export ban.

The Ban Ignores Basic Economics

Even though it long ago lost whatever practical justification it may have had, the ban on crude exports sounds plausible to the man on the street for a simple reason: it forces producers to “keep oil here at home” for Americans to use, rather than selling it to foreigners.

This mentality ignores the standard case for free trade. When American producers can sell a product to the highest bidder, the US economy specializes in what it’s good at and imports products for which foreigners have the comparative advantage. If we’re not allowed to ship them some of our oil, then they won’t be willing to ship us some of their electronics or textiles or cars. If it makes sense to “keep the crude oil here at home for Americans to enjoy,” then why not apply that logic more broadly to all US exports, including wheat and sophisticated jet aircraft equipment?

There’s another way of seeing the foolishness of the hostility to oil exports. Normally, when it comes to international trade, the layperson is wary of “cheap imports.” Those wily foreigners are always scheming to send us their products to help their own producers, at the expense of our own workers.

Government interference with trade leads to inefficiency and makes the community poorer.

So isn’t it interesting that when it comes to crude oil exports, the layperson’s gut instinct has totally flipped? In other words, shouldn’t foreigners be angry at the United States for seeking statutory permission to flood their markets with cheap American oil, hurting their own workers and inculcating “dependence on US oil”? Isn’t it amazing that — apparently — shipping goods across borders causes pain to both the receivers and the senders?

Obviously, I am being facetious. Voluntary trade generally creates win-win outcomes for the participants. Things are more complicated when we analyze entire regions (rather than individual traders), but it is still true that government interference with trade leads to inefficiency and makes the community poorer per capita. In a typical economics diagram, we could show general conditions under which the ban on American crude oil exports hurts US oil producers more than it benefits US crude oil consumers, meaning that the country as a whole is made poorer.

The Ban on Crude Exports Might Make Gasoline More Expensive

In the previous section, I argued that even on its own terms, the ban on crude exports at best showers benefits on domestic consumers while imposing greater total harms on the producers. Yet, keep in mind that the “consumers” of crude oil in this context are US refiners, not the average Joe driving a Ford pickup.

Indeed, several formal analyses have concluded that removing the ban on crude oil exports would lead to a (perhaps modest) fall in average US gasoline prices. This counterintuitive result is due to a quirk in the trade regulation: although there is a ban on crude oil exports, the market for petroleum products is wide open. Thus, the international market for gasoline is competitive, with the world price holding in all major markets (save for local differences attributable to taxes and environmental regulations).

Consequently, it can’t be the case that American gasoline is significantly cheaper than gas sold in other markets — again, after accounting for taxes. If it were, then refiners would simply ship gasoline abroad.

In this context, then, lifting the crude oil ban would make the international market for crude oil more efficient, eliminating arbitrary bottlenecks and letting price signals dictate the flow of crude. This, in turn, would make the refining of gasoline more efficient worldwide, reducing the global price of gasoline.

It is disheartening for professional economists to see that we are still having public policy disputes over something that was supposedly solved centuries ago. The ban on crude oil exports makes no economic sense and it should be lifted.

  • Robert P. Murphy is senior economist at the Independent Energy Institute, a research assistant professor with the Free Market Institute at Texas Tech University, and a Research Fellow at the Independent Institute.