Has A 1970’s Ban On Oil Exports Outlived It’s Usefulness?

 Crude Conundrum

In 1975, the U.S. government banned crude oil exports as the result of the embargo imposed by the Organization of Petroleum Exporting Countries. With the exception of small amounts of crude oil exported to Canada (which may not be re-exported) and some Alaskan-produced oil, U.S. crude oil still cannot be sold abroad.

The ban, however, “was put into place in a different time,” says petroleum economist Karr Ingham, owner of InghamEcon, LLC, an economic analysis and research firm. “The prevailing thought was to protect and support greater domestic production.

“But U.S. crude oil production was on the decline, and that decline was thought to be irreversible,” he says. “So, with our energy consumption on the rise, we had to import. The political logic of the time didn’t work in terms of stimulating production within the U.S. — as recently as 2006, we were importing 65 to 70 percent of our crude oil.”

But since then, oil production technology has changed, and with it the oil business. Horizontal drilling, hydraulic fracturing (“fracking”) and other technical developments have extended production in mature oil and natural gas fields and opened up new areas once considered impossible to produce.

And given the state’s preeminent position in petrochemical refining, this ocean of oil would seem to be a boon for Texas refiners, right?

Not so fast, says Ingham.

 “We are producing a lot of oil now, but we’re not well set up to refine this oil in our refineries,” he says. “We’re better positioned to refine oil from elsewhere.”

Sweet and Sour

Much Texas oil is renowned as “light, sweet crude,” low in sulfur and highly desirable for the manufacture of gasoline and other fuels. Oil obtained through fracking produces a high yield of this coveted commodity.

Due to America’s long reliance on imported oil, however, its refineries — and those in Texas and along the Gulf Coast in particular — are geared largely to process heavier, sulfur-rich “sour” oil from other countries. 

To be refined in the U.S., much of the oil produced in the current boom has to be blended with heavier crudes.

“Until it can be blended, it has to be stored. Storage is really the hang-up,” says Michelle Michot Foss, Ph.D., chief energy economist and program manager of the University of Texas’ Center for Energy Economics.  

Of course, U.S. refiners could retool their plants for U.S. oil, and perhaps they will — eventually.

“It’s a problem we could solve over a long period of time, but it would take awhile to get our refining complex to where we can handle light, sweet oil,” Ingham says. “But trade would be a solution while we’re waiting.”

Foss agrees. “We have now, and may have in the future, a glut of light crude oil,” she says. “Our domestic prices are low [while] international prices are higher, reflecting shortages elsewhere. Our producers are losing money, and would have the opportunity to rebalance by exporting, ensuring a more sustainable, robust domestic industry.”

In a Post-Ban World

So if the export ban is lifted, what could we expect?

One immediate effect is likely to be increased production, and all the economic activity that goes with it.

“I think the integrated major oil companies and [producers] want to export because they’d see an increase in their revenues — it would probably raise oil prices,” says Doug Ridge, a workforce and education specialist with the West Texas Energy Consortium and a consultant to energy firms. “The more open the market, the more they’ll be able to chase drilling prospects.”

A recent study by the consulting firm ICF International estimates that crude exports could generate nearly 41,000 additional Texas jobs and $5.2 billion in additional state income by 2020.

But economic shifts as significant as removing the export ban will always produce winners and losers, and it wouldn’t necessarily benefit all players in the oil industry.

 “The independent refiners don’t like it because it squeezes their margins,” Ridge says. “They would have to be buying at a higher price. [And] the big guys are already constrained, having invested billions and billions of dollars to prepare for heavy sour crude from countries like Venezuela and Mexico. So it’s hard [for them] to adapt to the changing market we’ve seen.”

And what about the issue that concerns most consumers, the price at the pump?

The ban, of course, was put in place largely as a way to help guarantee American fuel supplies and thus keep gasoline prices from spiraling out of control. Foss says, however, that oil exports are unlikely to have significant effects on gas prices.

 “It’s possible that U.S. consumers would feel price effects, up or down, as domestic and international prices are linked,” she says. “But [free] trade makes markets more flexible and responsive.”