Too Much of a Good Thing? That’s Crude Economics | Commentary
The shale revolution of the past decade has fueled the bulk of our continued, albeit anemic, economic recovery and has sparked a resurgence in a number of industries, including manufacturing. The increased supply has pushed us to consider the proverbial dilemma: Is it possible to have too much of a good thing? The good thing we have is an abundance of oil and gas. Drilling techniques, new technologies, expanded resource recovery and new resource discoveries have yielded unprecedented productivity among domestic drillers. Today, the United States is the world’s top petroleum producer, bigger than either Saudi Arabia or Russia.
These goods things — domestically produced oil and gas — are good news for our economy. Growth in the petroleum industry is boosting gross domestic product, reducing consumer energy prices, creating jobs and fueling growth in other industries. It is also good news for the world: Our exports help allies such as Germany reduce reliance on Russia and OPEC. Selling natural gas to countries such as Ukraine could literally save lives by reducing their dependence on Russia and by reducing their vulnerability to having their gas supply shut off in the middle of winter, as has happened in the past.
The good thing is an increasingly abundant supply of oil and gas. But do we have too much of it? At first glance, America’s record production capacity seems to be an unmitigated blessing. Government-enforced market manipulations, however, hamstring U.S. workers’ and producers’ ability to benefit fully from the oil boom. In response to the oil price shocks of the 1970s, Congress ignored sound economics and tried to “do something” by instituting a ban on exporting crude oil. The minor exceptions to this ban are inconsequential. It has stood for 40 years because we’ve never had such a boom as the one we are experiencing.
But now, this beneficial energy boom is being curtailed by outdated legal restrictions. The problem isn’t on the supply side; it’s on the demand side. It’s not that there isn’t demand for U.S.-produced oil, but that domestic producers are barred by federal law from supplying that rising global demand. This is where the export ban starts to hurt, not help, the American economy.
As oil production overtakes our refining capacity, a bottleneck will form. This puts limits on the amount of oil that drillers can extract, regardless of actual physical capacity. They won’t be able to sell it to anybody. This artificially imposed limit on domestic production prevents the petroleum industry from continued expansion, costing us jobs and slowing our economic growth.
There is no better time than now to lift the ban on crude oil exports. Eliminating this economic distortion will restore a greater measure of freedom to our energy markets. This simple step will help make sure the United States never has “too much of a good thing” in domestic oil production — because there will be an outlet for it in the global market.
Furthermore, the light sweet crude that is produced domestically cannot always be efficiently refined at our domestic refineries, most of which are designed to handle heavier crudes from international producers. Lifting the ban on crude oil will increase efficiency as U.S. crude producers can ship oil to the global refineries best suited to handle their products.
A common concern raised in objection to crude oil exports is that we want to keep U.S. oil here so we can use it ourselves. As it turns out, this isn’t really an option — there is no restriction on exporting refined petroleum products such as gasoline, kerosene and diesel fuel. The main beneficiary of the ban are refineries, which can boost margins by purchasing domestic crude at a discount and then sell refined products on the world market.
In contrast, an efficient market benefits all parties, including the public. Imagine that. Consumer fuel prices follow global crude prices. Lifting the crude oil export ban and allowing United States drillers to sell crude on the world market will increase the total global crude supply with marginal impact on demand. Basic economics tells us that this increase in supply will push crude prices down, and prices at the pump will follow. Multiple studies have reinforced this, some pegging cost-per-gallon savings at 2 cents to 12 cents per gallon, or billions of dollars in savings each year, to you the consumer.
As with most policies that impede free markets, the crude oil export ban doesn’t serve public or national interests, despite the ostensible good intentions that established it. Its imposition was motivated by politics, not sound economics. It is time for Congress to take the sensible step of lifting the ban.
Rep. Dave Brat, R-Va., sits on the House Budget, Education and the Workforce, and Small Business committees. Rep. Robert W. Goodlatte, R-Va., is chairman of the House Judiciary Committee. Rep. Morgan Griffith, R-Va., sits on the Energy and Commerce Committee.