Report

U.S. Aims to Lift 40-Year-Old Oil Export Ban

Finally allowing crude oil exports shows the strength of the U.S. energy boom, but shipping crude overseas makes little sense right now with rock-bottom prices.

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U.S. lawmakers are set to lift a 40-year-old ban on exporting crude oil, a symbolic recognition of the United States’ resurgent role as a major energy producer. But the measure, if passed by both houses of Congress and signed into law, won’t make much difference to U.S. oil exports in the near future, thanks to a global glut and rock-bottom prices.

Republicans and Democrats struck a deal late Tuesday to lift the ban, put in place after the OPEC oil embargo of 1973-1974, in exchange for more government support for renewable energy like wind and solar power. The pact is part of a broader spending package worked out in Congress, making it more likely to become law than stand-alone legislation the White House said it opposed.

The idea of lifting the ban has gained backers in Congress in recent years, mostly among Republicans, as the U.S. fracking boom has unleashed a huge amount of new oil production that has no easy way to reach global markets. Except for small amounts sent mostly to Canada, U.S. crude can’t be exported and American oil producers generally suffer lower prices than peers in the rest of the world. Momentum for lifting the ban has grown amid mounting evidence it would lower gasoline prices and help boost U.S. GDP.

Champions of lifting the ban, such as Rep. Joe Barton (R-Texas), see in unfettered exports visions of sugarplum fairies, with U.S. oil steadily displacing crude produced by major oil producers and exporters. “We have the best technology, the best oil, and over time we will drive out Russian oil, we will drive out Saudi, Iranian,” he told Bloomberg.

Environmentalists are more ambivalent on the deal, even though it marks the first real bipartisan pact on energy in almost a decade. They are happy with the quid, a five-year extension of juicy subsidies for wind and solar power, but hate the quo, which they worry will just encourage more U.S. oil production right as the world is trying to come to grips with the specter of climate change. Rhea Suh, president of environmental group Natural Resources Defense Council, said lifting the ban is a “major disappointment.”

But for all the bombast and hand-wringing, lifting the export ban is likely to make little difference, at least for now, in U.S. energy markets. The United States is, and will remain, a net importer of crude oil, even if it is free to export small quantities to refiners in Europe, Asia, or Latin America. Indeed, despite the fracking boom and a sense of growing energy security, the United States relies about as much on imported oil now as it did when it slapped on the export restrictions in 1975.

“It is unlikely lifting the ban will lead to any material increase in volumes of exported oil,” said Michael Levi, an energy expert at the Council on Foreign Relations who this week examined the measure’s potential impacts.

The United States currently exports almost 500,000 barrels of crude oil a day, mostly to Canada. It also exports 4.4 million barrels a day of refined oil products, like gasoline and jet fuel. But those numbers are dwarfed by imports: The United States buys about 7.2 million barrels a day of crude from the rest of the world, and an additional 2 million barrels daily of oil products.

Right now, there’s no money in shipping U.S. oil overseas. U.S. crude oil sold to Louisiana refineries, for example, fetches higher prices than it does in Europe right now, Levi noted, meaning exports would be a money-losing proposition.

However, many U.S. refineries prefer foreign-produced crude oil — creating a mismatch in the American market that opens the doors to exports of U.S. crude. Mexico, for example, produces heavy crude oil but refines light crude. The U.S. does the opposite, greasing the way for the two nations to trade.

Today’s low oil prices have already helped curtail production in the once-booming U.S. oil patch, easing the need to find a safety valve through exports. And the price of crude oil fell sharply in New York on Wednesday to under $36 a barrel, and slipped to about $37 a barrel in London.

That means it is also uncertain just what impact the lifting of the ban will have on future U.S. oil production. Some analyses estimate that access to global markets and higher crude prices will, over time, encourage U.S. producers to dramatically increase output; other studies suggest much smaller production upsides. Ultimately, global oil prices, which depend on factors like economic growth, demand for oil in emerging markets, and geopolitical tensions, will determine future U.S. oil production more than export rules.

But while the material impacts of the measure will be limited, its symbolic and psychological importance is potentially much larger. Since the OPEC embargo and the subsequent ban, U.S. policymakers across eight presidential administrations have labored under a mentality of resource scarcity, essentially opting to hoard oil produced in the United States for use at home.

Lifting the ban is a recognition that U.S. energy resources are in fact abundant and that booming U.S. output is helping reshape the entire global oil market, even though American producers have been essentially locked out of full participation in that market. Liberalizing trade in oil will also make life easier for U.S. diplomats pushing for free-trade deals with countries in Asia and Europe.

Coupled with the looming advent of U.S. exports of natural gas, another product of the recent fracking boom, Washington is finally coming to grips with the implications of the country’s metamorphosis from energy consumer to a bigger energy producer.

“With the threat of terrorism growing daily, oil exports are needed now more than ever to reduce volatility and provide our allies, and the world, a stable and secure source of energy,” Sen. Lisa Murkowski (R-Alaska), chair of the Senate Committee on Energy and Natural Resources and a longtime export booster, said in a statement.

Jason Bordoff, a former White House energy adviser who now heads the Center on Global Energy Policy at Columbia University, said U.S. exports could help make the global energy system more robust.

“When the U.S. oil market is integrated into the global oil market, it allows the U.S. to be part of the solution when you’re facing global supply disruptions,” he said.

And U.S. allies in Europe and Asia have indeed been clamoring for U.S. energy exports, both natural gas and oil, to give them alternative sources of supply other than countries such as Russia. While allowing exports of a few hundred thousand barrels a day won’t give the United States the kind of geopolitical leverage OPEC or Russia currently has, it could still pay dividends by creating the impression of a freer global energy market.

In other words, even if few tankers load crude oil in U.S. ports and steam to Europe, lifting the ban could have important psychological effects, Levi said.

“If it makes Europeans feel more secure, that has consequences. They think the United States is more supportive of them,” he said.

Photo credit: LOUIS VEST/Flickr

 

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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