The export of crude oil was banned largely in reaction to the 1973 Arab oil embargo. Now, momentum seems to be in favor of reversing the ban. Many argue doing so will substantially enhance the U.S. economy by increasing domestic production, creating jobs and reducing consumer fuel prices.
The oil embargo restricted supply, thereby increasing the price of oil. In banning the export of domestic production, Congress sought to stabilize or offset rising prices. The idea was to ensure a domestic supply in order to reduce importation. That did not work so well. In 1973, the U.S. imported about 3.2 million barrels of crude oil per day. Currently, we import about 7.4 million barrels per day. Additionally, since the mid-1980s, domestic production fell year after year until around 2008 when hydraulic fracturing and directional drilling substantially increased domestic production.
The rise in domestic production would seem to militate against lifting the export ban. After all, we now have plenty of domestic oil, so why export it? First, most of the increased production in domestic oil is a lighter crude oil, and U.S. refineries have reconfigured themselves over the past 25 years to process heavier crude oil. Although refineries could process the lighter crude, the efficiency of the process drops sharply in terms of yields of certain petroleum products. As a result, there is no ready market for the lighter crudes we now produce. Second, OPEC has increased production, which has lowered the international price of oil and made domestic production economically difficult. Domestic light crude oil has traditionally sold for even less than the world price of oil.
Lifting the ban changes this dynamic and helps the U.S. economy. Currently, the price of lighter crude oil is depressed. Allowing exports will increase the price provided to producers, thereby spurring additional development and an increase in production. Such an increase in development will also have a profound ripple effect in the economy. A March 2015 study by IHS Energy found not only will producers benefit, but the overall oil and gas supply chain will as well. The supply chain is composed of equipment and machinery manufacturers, construction and well service companies, materials providers and even financial service companies. Every new production job creates three jobs in the supply chain, and every dollar of GDP in the oil and gas sector creates $2 in the supply chain. IHS estimated lifting the ban would add $26 billion to $47 billion in GDP and support up to 240,000 jobs. The economic impact on the broader U.S. economy was even greater — $86 billion to $170 billion in increased GDP and up to 859,000 jobs.
Some have raised the concern lifting the ban will lead to increased gasoline prices. The Government Accountability Office (GAO), though, recently reported to Congress consumer fuel prices would decrease based on its review of relevant studies. The reason is consumer fuel prices mirror or track international crude oil prices rather than domestic crude oil prices. Additional domestic exports would tend to dampen the international oil market, reducing international oil prices and consumer fuel prices along with it. GAO reported a decrease from 1.5 cents to 13 cents was possible.
Congress has stirred and seems poised to vote to lift the ban. Committees of the Senate and House have recently voted to lift the ban, supported by oil production interests. However, some environmentalists and labor and oil refinery interests want to keep the export ban in place. While it is unknown which side will ultimately prevail, the weight of evidence seems to suggest lifting the ban will be beneficial for the overall U.S. economy.
John B. King is a partner with Breazeale, Sachse & Wilson LLP in Baton Rouge, Louisiana. His practice relates mainly to environmental regulatory permitting and compliance. Prior to joining the firm in 2003, he served as chief attorney for enforcement for the Louisiana Department of Environmental Quality.
For more information, contact John B. King at (225) 381-8014 or email jbk@bswllp.com.
