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The Economist: Exporting Oil; It’s About Time!

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The author of this entry is responsible for this content, which is not edited by the Wilson County News or
Dr. M. Ray Perryman
January 7, 2016 | 2,437 views | Post a comment

In a development that seemed highly unlikely as recently as a few months ago, Congress and the Administration have made it legal to export crude oil from the United States. For 40 years, it had been illegal to export crude except in certain very limited cases, primarily to Canada. While refined products (gasoline and other fuels, for the most part) were legal to sell into world markets, US companies could not export crude oil without a special license which was hard (or impossible) to get.

The original law banning oil exports was passed in the 1970s in response to the Arab oil embargo and the resulting massive jump in crude prices. This era also brought “double-nickel” speed limits, daylight savings time, and many other concessions. As the US economy dealt with fallout from the rapid rise in the cost of oil, the export ban was conceived as a way to preserve domestic oil supplies and limit future dependence on imported oil. Of course, the fact that you refine domestic crude and then ship it anywhere made the ban completely ineffective in achieving its stated purpose. Irrespective of its merits, however, for many years the ban was essentially a moot point. Oil production in the US was falling due to aging fields, and cost differentials strongly favored imports. Many regions around the world were able to produce oil far cheaper, and there simply wasn’t a market for comparatively expensive domestic oil.

Enter the shale boom. With evolving technologies allowing for more efficient exploration and fracking enabling the withdrawal of oil from shales, US production began to rise, going from 1.8 billion barrels produced in 2008 to almost 3.2 billion barrels in 2014. This increase far outstripped demand growth, putting downward pressure on prices. The West Texas Intermediate crude benchmark dropped from over $103 per barrel in July 2014 to $47 just six months later, and is well under $40 per barrel as I am writing. Production has leveled off, but given the nature of wells and the industry, it’s not yet dropping precipitously.

Given the surging supply, the price has fallen even more in the US than elsewhere, and there is a resulting incentive to export. Last fall, the House of Representatives passed a resolution which would remove export restrictions. President Obama indicated in a Statement of Administration Policy on October 7, 2015 that he strongly opposed and would likely veto the bill. However, in a rare cooperative effort, congressional leaders added a measure allowing oil exports to the massive $1.1 trillion spending bill (which also allows us to avoid a fiscal cliff for a while, but that’s a topic for another day). President Obama signed the spending measure, and the export ban was lifted. A ship full of crude from the Eagle Ford Shale left the Port of Corpus Christi a few days ago.

Industry experts predict that the ability to export will spur billions in investment and production which would otherwise not take place. Developing domestic reserves not only generates significant business activity, but also improves US energy security because a larger proportion of our energy needs can be met without reliance on imports. (Ironically, energy security has been an argument used in favor of keeping the ban, the idea being that the US is more secure with a larger supply of oil in the ground. However, in the event of a major catastrophe, producing wells are required to be able to access the resource, and drilling does not happen overnight. Better to develop the resource than have it and not be able to use it.)

The end of the US export ban is also good news for the energy security of our allies in that American crude can now be available to them. In addition, it’s difficult to argue for free trade and a level playing field globally with such a ban in place. Over time, if US supplies continue to develop thanks to the ability to export excess production, the power of other producing regions (many of which have interests very different from our own) is diluted.

Much has changed since the 1970s, and it was time to lift the export ban (even if had been effective before). There are some groups which may experience the downside of the change, but these artificial gains have been at the expense of efficiency and optimal resource allocation. Moreover, the positives outweigh these negative effects. As a major oil producing region, Texas stands to benefit from the change. Even so, don’t look for a huge bounce in drilling activity for a while. It helps to be able to sell into world markets and some of the spread between oil prices in the US and elsewhere will narrow (it already has, in fact), but until global supply and demand shifts so that worldwide prices begin to rise in earnest, the economic benefits of allowing exports will be muted. In essence, when there is too much everywhere, it doesn’t matter where you sell it. In more normal circumstances that will resume once global suppliers retrench and demand accelerates, domestic producers can expect prices $6-$7 per barrel higher than those with the ban in place. With improving technology and lower costs, the increment will have a profound long-term impact on prosperity.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group ( He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
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