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US lifts oil exports ban, now what? | The Triangle

US lifts oil exports ban, now what?

In a vote of 261-159, the United States House of Representative passed a resolution to support lifting the 41-year old ban on U.S. oil exports. However, the U.S. Senate is still divided and the debate on removing the ban has pit the senators from states with oil production against those with refinery operations. The Obama administration also opposes lifting the ban and threatens to veto the related bill. Congress first put the ban after the 1974 oil embargo in an environment that was not favorable to the nation’s economy, inflation, and trade and energy sector. This intervention in the market mechanism immediately sent gasoline prices soaring, and now there is a fear among politicians that if the ban is lifted, fuel prices will increase and they will be blamed.

The oil export ban has been one of the oil industry’s top priorities. A coalition of more than a dozen of oil companies has lobbied Congress for more than a year to lift the ban. The push for the ban removal has recently been motivated by the shale oil boom, which has increased domestic oil production by more than 40 percent since 2008. The lift should allow those companies to sell the U.S. trapped oil at a higher price in the world’s markets. The exported oil may fetch one extra dollar or so per barrel to those companies, compared to selling it at home under the ban. We should note that the world’s oil market is one great common pool, and thus is global and not regional. Therefore, any small amounts of exported oil will not affect the global 93 million barrels per day oil production significantly, and again, we should not expect any considerable increase in oil prices in the U.S. and the world. Some studies even expect a small price decrease as a result of increased competition among oil producers, the U.S. oil companies are already allowed to export ultralight oil (condensates blended with heavy crude by refineries), which is lightly processed as well as other processed oil products such as gasoline.

This measure is likely to allow those companies to produce more oil: though not substantially so, as more production may lead to lower prices. Currently, U.S. oil production has plateaued, even starting to decline in the last three months as a result of the collapse in oil prices. This pushed small shale oil prices to marginalize expensive oil wells. The collapse also reduced capital investments significantly, which should negatively impact future oil production.

Recent studies show that lifting the export ban will not lead to a material increase in gasoline prices because oil companies are now selling U.S. produced gasoline overseas and will not be able to sell much more gasoline abroad since the ban does not apply to gasoline and other refined products exports. Moreover, large refineries in Saudi Arabia and United Arab Emirates are coming on stream, which will strongly compete with American gasoline in global markets.
Moreover, a recent study produced by the energy consulting firm IHS shows that lifting the ban has also some benefits. This study demonstrates that a lifting of the ban would bring in $750 billion in new investments which in turn would increase oil production by 1.2 million barrels a day. It would also create about 360, 000 new jobs, which justify some lifting of the ban.

The U.S. is not unified in what to do with the ban. The chemical companies oppose lifting the ban because oil is the feedstock for their chemical products which means that their costs will rise. The oil refineries also oppose the lift because they believe that this measure would increase the price of gasoline to American drivers, thereby reducing the demand for this fuel. A U.S. design of experiment study estimates that the U.S. refineries would lose $22 billion lower by 2025 because of higher prices of refined products. The ban conflict between oil companies and oil refiners is now known as the battle between the “Crude” and the “Refined”. The environmentalists also oppose this measure because it may encourage the production of more fossil fuels which could hinder the efforts to move to a low-carbon economy. They also cite the example that lifting the Alaska oil export ban in 1996 worsened the then existing price differential between the West Coast and the national gasoline to support their argument in favor of keeping the prohibition. The Alaska crude oil exports measure was ended in 2000 after the differential widened over time.

Since the ban constitutes a market intervention, it leads to market distortions and misallocation of resources. However, the U.S. is not self-sufficient in oil as it still imports a significant amount of oil from Canada, Saudi Arabia, Venezuela and Mexico and exporting oil means. Lifting the ban all the way is not the optimal policy but partial lifting is beneficial to the U.S. economy. Therefore, the ban should partially be lifted so that eventually about two million barrels of crude oil can be exported per day.