Saturday, September 19, 2015

America’s Crude Oil Export Ban

Politics often leads to economic policies that are nothing short of stupid. One of the especially stupid periods for such policies was the 1970’s. It was if the country had hit a string of bad luck so the politicians figured they’d start kicking it while it was down.

I’m done now. Winking smile 

One of the things that came out of that was a ban on the export of crude oil.

This was at the time of the two OPEC oil crises (1973-5 and 1978-9). But note the bizarreness: because oil we imported was getting more expensive we banned the export of our own oil.

An analogy may help. In the labor market, a teenager exports time/labor from the family when they work outside the home, and when the parents hire, say, a cleaner, they’re importing labor. With those ideas in mind, the oil export ban is like the parents responding to cleaners getting more expensive by telling the teenager they have to quit their job. Yeah … that might make more time available within the home so that they teenager could do more cleaning … but I think it’s fair to say it’s probably not the approach most parents would choose. But that is what the politicians chose back in the 70’s when they instituted the oil export ban.

And don’t fail to note that even if this could be justified as a slightly panicked response to a transitory problem with crude oil supplies … we still have the ban in effect 40 years later.

Yet high prices are an incentive to develop new technologies, and while it took decades, the response of Americans to higher crude oil prices was to develop horizontal drilling and its ugly stepchild fracking. Now we have cheap crude oil. But we’re not allowed to sell it to people who’d pay more for it.

There’s also a problem with path dependence. Path dependence is the idea that you get where you are by following a certain path, and that path may have had side effects. In the case of the U.S., some of the crude oil that we import comes mostly from Mexico, Venezuela, and other places. And it’s the dirtier, nastier, harder to refine kind of oil. So we have a refinery industry based around turning the nastiest crude oil into lots of nicer products, like gas, jet fuel, plastics, and so on. Except that now, not only are we producing a lot more crude through horizontal drilling with fracking, but it’s also coming out of the ground in a nicer form that we’re not well-equipped to process. Importers in other countries will pay a premium for the good stuff, but we’ve made it illegal to sell it to them.

Mind you, it’s not illegal to export all the good stuff we make out of the lousy crude we import. So, we still need to import a lot of lousy crude to keep the refineries we have doing what they’re designed to do.

You can’t make this stuff up.

Oh, and BTW, it’s been several years since the horizontal drilling boom started to hit, and D.C. still hasn’t fixed this.

Here’s an op-ed from an oil industry executive entitled “The Oil Export Ban: A Relic of the 1970s”. It’s from the April 24 issue of The Wall Street Journal and it touches on some of these issue.

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