Major GOP Victory on Crude Oil Export Ban

By: Patrick Hedger, Policy Director-American Encore

As part of a new major spending agreement, referred to as the Omnibus, Congress has agreed to lift the 40-year-old ban on exports of crude oil by American producers. While it is unfortunate that the associated tax extenders package of this Congressional spending agreement renews other inefficient energy policies, such as renewable energy production tax credits, eliminating the economically backwards oil export ban is a huge achievement for this Congress, the Republican majority, and the new Speaker of the House, Paul Ryan. 

The crude oil export ban was put into place in 1975 in response to the series of energy crises and shaped to address the prevailing theories behind those crises. Many Americans believed gas shortages were being caused by global instability and trade embargoes. Further, there was a widespread belief that the world was rapidly running out of fossil fuels. On both accounts we were incorrect. Gas shortages were primarily the result of American government price controls and the world’s supply of fossil fuels continues to grow as new technologies allow us to discover and access previously untapped reserves.

Yet for years following these realizations, American policy continued to be framed by the increasingly incorrect perceptions of the global fossil fuels market. The oil export ban was nothing but an attempt to hoard oil in the United States for whatever purposes one could imagine a large supply of oil would be useful. The problem is that the average consumer doesn’t actually use all that much crude oil. They consume products like refined fuels, plastics, and other petrochemical products. No similar export ban for these products exists. In effect, this policy was the equivalent of trying to damn a river with chicken wire.

The only real impact of the oil export ban was creating a limited market of buyers for American oil producers, with oil buyers primarily being the refineries who produce the fuels and the plastics. Refineries benefited almost exclusively from this policy, as they did not have to compete with their foreign counterparts when bidding for American supplied oil. This has naturally led to artificially suppressed prices for oil produced in the United States.

While some have argued that lower oil prices means lower gas prices for Americans, this argument again ignores the fact that American refineries are not restricted as to where they can sell the fuels they produce. They can seek out the highest global price and thus global prices for fuels like gasoline determine American prices as well. In fact, the oil export ban actually keeps American gas prices artificially high. The lower prices that benefit American refineries hurt American oil producers and reduce their incentive to supply crude oil to the market. If American crude oil could penetrate the global market, the increased supply would drive down prices for oil refineries around the world, thus reducing the global gasoline price that American consumers pay.

Without a doubt, when the oil export ban repeal goes into effect, Americans will quickly see the benefits. American oil producers will be able to increase production and hiring and American consumers will enjoy lower prices. While the deal struck this week to fund the government is by no means perfect, Speaker Ryan and his colleagues should be commended for making this common sense and long overdue policy change.

Learn more about the economics of the oil export ban in our video below: