The Energy Policy and Conservation Act was signed into law in December of 1975. This law states that crude oil harvested from wells inside the United States cannot be exported out of North America and therefore has to be refined in U.S. refineries, with some limited exceptions.
There are many sound economic reasons why this ban should be lifted. These include U.S. refinery limitations, the smoothing of global price volatility, and the continued health of the American oil and gas industry as well as the American economy itself. However, the most important reason to lift the oil export ban lies with U.S. national security.
Oil production in the United States has increased to almost eight million barrels a day, up 15% in the last year alone. This production increase is likely to continue, that is if crude oil producers have customers to sell it to. Before the American shale oil boom hit full steam in the last few years, refineries on U.S. coasts began to upgrade their infrastructure to handle a heavier, sour crude imported mainly from Venezuela and Mexico.
Now, most of the light sweet crude imported into the U.S. has been replaced by rising production of American light crude. Soon there will be no one for shale oil producers to sell to without relief from the crude oil export ban. This will cause investment in oil production capacity to drop and slow economic growth and future production.
I recently flew into Midland, Texas. The view from the air looks like a giant chessboard of square patches of land for oil wells. The airport is filled with advertisements for hydraulic fracturing equipment. The highways are jammed with heavy trucks and equipment. There is a buzz in the air. Economic activity in the Permian Basin is exploding. Texas has supplied an overwhelming percentage of the new jobs created in the United States in the past few years. All of this good stuff could end if the ban is not lifted.
There is little doubt that the 1975 Energy and Conservation Act did not lower prices or shield the U.S. from price volatility, as was the stated purpose. America has been held hostage to mainly Middle Eastern swing producers for decades. Totalitarian states globally have used energy as a weapon repeatedly in the last century. With the crude oil export ban lifted, America would become a large swing producer. The rest of the free world would not be beholden to Iran closing the Strait of Hormuz, for example. Forty percent of the world's crude oil would not be forever endangered and susceptible to blackmail by this rogue state. American allies could feel secure that the U.S. could ramp up production at any time to counter embargoes and/or severe price hikes.
In short, America could smooth the volatility of the global crude oil market. The lower price and supply volatility would result in a much safer world with fewer flash points for conflict.
Of course, there are well-healed interests intent on preventing the oil export ban from being reversed. The environmental lobby is probably the main culprit, leaning on the Obama administration to do its bidding on this issue. We've seen the stonewalling that has happened with a similar issue, the Keystone XL pipeline approval. A free market for a commodity to flow where the market requires it will always lower prices amongst greater competition. This price reduction will cause the use of fossil fuels to rise and impair the economic viability of government pet alternative fuels projects.
There will also be lobbying from U.S. refinery interests as they are forced to compete for American crude oil production with overseas buyers. Consumers of U.S. refined products are also warning of price increases; however, this just doesn't make sense. Increased competition always reduces prices.
The consensus legal opinion is that the Obama administration could lift the export ban alone without any action from Congress. The original statute gives the executive branch broad leeway to do just that. The President is charged with faithfully executing the laws of our country and guarding our national security. Perhaps President Obama should get out his pen and pick up his phone to do just that by lifting the crude oil export ban.
L. Todd Wood is a former special operations helicopter pilot and bond trader. His historical fiction novel, Sugar, deals with American energy policy. LToddWood.com