November 9, 2015 | By

Guest Commentary – The Next Oil Fight: Crude Oil Exports

REUTERS/David Mdzinarishvili

The Keystone XL Pipeline drama may be over, but the next oil fight is just around the corner.

Last month, the House of Representatives voted to repeal the 40-year old ban on crude oil exports. While the Senate has yet to take up the bill, oil exports have already been politicized, with Secretary Hillary Clinton recently coming out in opposition, and Senator Marco Rubio in support.

This is a messy issue, filled with industry jargon, tangled interests, and less-than-straightforward economics. Here’s a primer on how to navigate some of the fundamental issues at stake:

Why do we have an oil export ban, anyways?

The US has effectively banned exports of domestic crude oil since 1975, when Congress approved the Energy Policy and Conservation Act (EPCA). The ban came in response to the oil price shocks caused by the Arab oil embargo, and the deep national uncertainty over energy security that followed. Gerald Ford, in his 1975 State of the Union address, said the basic purpose of the ban was “to provide the critical stability for our domestic energy production in the face of world price uncertainty…”

Forty years later, the argument that the ban ensures energy independence has been weakened by the surge in oil from America’s fracking revolution (America today produces more light sweet crude than US oil refineries can handle). Nevertheless, some influential lawmakers, such as Robert Menendez (D-NJ), claim the ban should remain in place as long as the US imports foreign oil. Environmentalists also support the ban; they fear liberalizing oil exports will increase carbon emissions and the risk of oil spills.

Does the ban prohibit all US oil exports?

The official language of the EPCA states that the “US will not export crude oil and natural gas produced in the US,” but it also carves out an exemption that allows oil exports that are “consistent with the national interest.” This ambiguous provision has allowed for a number of exemptions over the last 40 years. Crude exports to Canada, for example, were permitted in 1985 under Ronald Reagan because of their contribution to the “national interest.” Similarly, President Obama recently relaxed restrictions on crude exports to Mexico, citing economic and environmental benefits. Then there are other, more arcane exemptions, such as exports from Alaska’s Cook Inlet, exports of heavy California crude oil, and crude oil transported through the Trans-Alaska Pipeline.

Importantly, the US does not ban the export of refined oils (such as gasoline, diesel, kerosene), but rather the crude oils from which refined oils are derived. This distinction is becoming increasingly significant, as oil companies try to find ways around the export ban. The question for oil companies is whether they can process their crude oils enough to fit the US Commerce Department’s definition of “refined.”

Do we at least export crude oil to countries with whom we have Free Trade Agreements (FTAs)?

One might think that a Free Trade Agreement between nations would allow for just that: free trade—including trade of crude oil. But, in fact, as long as the US doesn’t make promises to lift export restrictions, it is under no obligation to do so. With this in mind, it will be interesting to see how the US responds to overtures from key trade negotiating partners (see European Commission and Japan) to liberalize its crude.   

What would the economic effects be of lifting the ban?

The economic impacts of lifting the ban would be felt differently for consumers, oil produces, and oil refiners. For consumers, reports from both IHS Global and the Brookings Institution estimate savings at the pump in the range of 7 to 12 cents per gallon.  For US oil producers, lifting the ban would result in increased access to foreign markets, which would yield significant economic benefits. Oil refiners, however, have the most to lose. Most US oil refineries are set up to process the heavy, sour crude that the US imports from foreign countries, not the light, sweet crude the US produces at home. Ending the oil export ban, therefore, would damage the value of oil refiners’ current facilities and harm their competitiveness.

What about the environmental effects?

This is one of the most contentious questions of the oil export debate. Environmentalists can feel vindicated by a report from the Center on American Progress which claims that repealing the ban could potentially lead to 515 million metric tons of carbon pollution every year, as well as increased transportation risks that come from the addition of thousands more railcars per day. But others, such as scholars at the Brookings Institution, find that lifting the ban would have minimal increases in greenhouse gas emissions. They further argue that any environmental risks are offset by the gains in energy and national security.

About the Author

Andy Morimoto joined The Chicago Council in 2014 and currently serves as a research associate.

 

 

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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