Equal Export Rights for U.S. and Iranian Oil Companies
Many outdated federal laws and regulations contribute to increasing regulatory red tape. One example is the ban on exporting domestically produced crude oil. Refined oil such as gasoline is permitted to be exported, but domestic crude oil must be sent to American refineries before it can be sold to other countries.
The recent deal President Obama and other world powers signed with Iran lifts economic sanctions, so Iranian companies can now export their goods—including crude oil. In this respect Iranian oil companies have more economic power in an energy-dependent world than do U.S. companies.
House Speaker John Boehner (R-OH) has called for a repeal of the ban. Lifting the export ban would benefit the U.S. economy.
The ban was implemented in the 1970s when oil scarcity caused prices to skyrocket, taking an enormous toll on the economy. By banning exports, the government could ensure that domestically produced oil would stay in the United States, preventing high prices and a shortage of oil. Scholars are divided on whether the ban was even effective when it was implemented. Oil imports only temporarily declined after the ban was implemented, but quickly rose after a few years.
Even if the ban was helpful in the 1970s, the economic situation has significantly changed. Domestic crude oil production is rising, largely due to shale fracking and other improved drilling techniques. Much of the American crude oil, such as the oil produced in North Dakota or Texas, is lighter than foreign crude oil. Most American refineries are designed to refine heavier, foreign crude oil, so they are not able to process all of the domestically produced crude oil.
Under certain circumstances, oil companies can gain exceptions to the ban. These exceptions can lead to favoritism, when the government picks winners and losers not based on the value they create for the consumer, but based on the companies’ political connections. For example, oil from the Trans-Alaska Pipeline System is exempt from the export ban. BP benefits from this exemption since it is the major owner of the Alyeska Pipeline Service Company, which owns the pipeline. The export ban should be lifted for all domestic oil producers, rather than exempting a select few.
The supply of domestically-produced crude oil would increase if the ban is lifted for two reasons. First, permitting exports creates a financial incentive for oil companies to increase their supply. When they are only allowed to sell to domestic refineries, their market is limited. In the short-run, the price of domestic oil will increase as it catches up with the world price, encouraging American companies to increase production.
Second, permitting exports gives American oil companies the financial ability to increase supply. Exports inject revenue into the oil companies, which they can use to further invest in drilling equipment and technology that will lead to an increase in the supply of domestically-produced oil. Building new oil rigs and pipelines are expensive operations. Exports provide oil companies a certainty of demand for their product, which allows them to invest in new oil rigs and pipelines.
Some fear that lifting the ban on exports would lead to an increase in domestic gasoline prices. However, since there is no export ban on refined oil products, the price of domestically produced gasoline is already equal with the world market price. A supply increase in crude oil might lead to a decline in the prices of refined oil products; it should not lead to an increase. Jason Bordoff and Trevor Houser of the Center on Global Energy Policy found that lifting the ban would lower domestic gasoline prices by up to 12 cents per gallon.
Internationally, lifting the export ban would reinforce the credibility for the United States to advocate for free and open markets globally. Lifting the ban would also reduce the political power of the OPEC nations over energy-dependent nations, while enhancing American energy security. Nations with a growing dependence on energy, such as China or India, would see the United States as a competitive source of crude oil supply.
President Ronald Reagan once said, "The nearest thing to eternal life we will ever see on this earth is a government program.” Even laws that were designed to address a specific situation, such as the oil export ban, are hard to repeal. It is time to give American oil companies the same rights as their Iranian counterparts—the right to export.
Jonathan Nelson is a contributor to Economics21. Follow him on Twitter here.
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