Andrew Cullen / Reuters A service truck drives past an oil well in North Dakota, November 2014.

From West Texas to the World

Why Washington May End its Ban on Crude Oil Exports

On October 7, the U.S. House of Representatives voted overwhelmingly to repeal a 40-year-old ban on exports of domestic crude oil to foreign countries. Two Senate subcommittees also support the repeal, and the full Senate will likely vote shortly. The Obama administration has threatened to veto the repeal, but that has only made it a hot issue in the 2016 presidential campaign. Republican presidential candidates Jeb Bush and Marco Rubio favor repealing the ban; Democratic candidate Hillary Clinton opposes it.

Why is Washington suddenly debating the ban? For 40 years, ending the injunction was, in the words of Jason Bordoff, a former energy adviser to U.S. President Barack Obama, “unthinkable.” When it was put in place in 1975, following the Arab oil embargo and the soaring oil prices of 1973 and 1974, politicians in both parties viewed it as essential to the national interest and a cornerstone of U.S. energy policy. Technically, the ban only requires crude exports to be licensed; licenses are routinely granted for exports to Canada but almost never for other markets.

The New York Times suggests that the reason for the renewed focus is simple: oil prices have fallen. Oil companies, seeing their profits shrink, are pushing for access to overseas markets. But if falling oil prices were all it took, why didn’t politicians push for the repeal at other times when oil prices declined steeply, such as in the mid-1980s or the late 1990s?

In reality, the current debate results from three factors. First, oil companies needed a reason to oppose the ban. They didn’t have one so long as the price of oil in the United States was close to the world price. There was always more than enough domestic demand for U.S.-produced oil because the country consumes far more than it produces (and imports the rest). As long as the U.S. price was roughly equal to the world price, high or low, it didn’t really matter where the U.S. producers sold their oil. 

Starting in 2011, though, U.S. prices began moving away from world prices. Roughly speaking, West Texas Intermediate offers a good indicator of U.S. prices, whereas Brent Crude is a good benchmark for world prices. Since 2011, the WTI price has been considerably lower than the Brent price, sometimes by as much as $10 per barrel. That translates into hundreds of millions of dollars in lost revenue for U.S. oil producers in the aggregate.

Brent-WTI

Brent-WTI Spread / Dollars per Barrel

The Brent-WTI difference means that U.S. oil producers are selling their oil for less than they could get on the world market—and the export ban has compounded the problem, since it prevents them access to the world market. Naturally, oil producers resent the ban, although oil refineries benefit from it. The ban limits crude oil exports but not the foreign sale of refined products such as gasoline, diesel, and jet fuel. U.S. refineries could buy the low-priced U.S. crude oil, refine it, and then sell those products at (high) world market prices.

The result is a political contest that pits different parts of the oil industry against one another. And the refineries have a powerful ally: environmentalists, who like the ban because it discourages oil production and its accompanying environmental hazards.

But the oil producers have a strong constituency, too. They are helped by a second factor: the rise of the fracking industry. In the past five years, oil fracking has become big business in states such as North Dakota and Texas. It employs hundreds of thousands of people and is responsible for a sizeable amount of the job growth during Obama’s presidency. 

When the oil industry says that ending the export ban will create jobs and boost profits, politicians listen. When the oil industry says that ending the export ban will create jobs and boost profits, politicians listen. Republican Representative Joe Barton of Texas, Democratic Senator Heidi Heitkamp of North Dakota, and Republican Senator Lisa Murkowski of Alaska are personally involved in the fight against the export ban. It’s no accident that jobs, votes, and campaign contributions are all heavily tied to the oil industry in those states.

Even with a growing constituency in the fracking industry, though, supporters of the ban have been able to resist the political pressure. Refineries have formed lobby groups, such as Crude Coalition, and are actively campaigning. Jay Hauck, executive director of Crude Coalition, says, “The ads write themselves: Senator X voted to help his friends in the oil industry and export our oil to China and raise prices on the backs of American families.”

As long as the U.S. price was roughly equal to the world price, high or low, it didn’t really matter where the U.S. producers sold their oil.

Environmentalists, who see the ban as a way to limit greenhouse gas emissions, add strength to the refineries’ political coalition. Their concerns loom large. The Obama administration’s statement on the issue specifically says that “Congress should be focusing its efforts on supporting our transition to a low-carbon economy” and on “investing in wind, solar, energy efficiency, and other clean technologies to meet America’s energy needs.”

That brings us to the third factor: falling oil prices, which bring oil producers’ profits down with them. The pain in the oil sector is palpable. The number of active oil rigs has fallen by more than half since 2014, and oil companies are cutting costs just to stay alive. They are desperate for additional earnings, and ending the export ban could generate just that.

The real question is: how desperate are they? Is the oil industry willing to make concessions to end the export ban? So long as a Democrat is in the White House, some concessions appear required. The Obama administration’s views are clear, and Clinton has said, “In the absence of a broader energy plan that does include concessions from the oil and gas industry, I don’t think that the ban should be lifted.”

Gasoline in Europe

A customer fills up his tank in a gasoline station in Nice, December 2014.

Like Clinton, thoughtful environmentalists will see the export ban as a bargaining chip. On its own, its environmental value is low. True, the ban discourages U.S. oil production, but its repeal would be partially offset by production decreases elsewhere in the world, making the net effect fairly minor. But as a political sweetener for a meaningful climate change policy, a potential repeal holds real value.

In the mid-1980s, oil prices fell but oil companies had no reason to end the ban; after 2011, oil companies had a profit motive for the repeal and a big political constituency to support them, but until 2014, oil prices were so high that they were busy just getting rich. Now the stars are aligned for a big fight to end the export ban.

Congress should stay the course. Repealing the ban is a big gift to oil producers—and Congress shouldn’t give it away for free. Obama and Clinton are right to demand that the oil industry support a shift toward the greener, less polluting economy needed to sustain long-term prosperity.

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