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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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A Point To Consider Before Lifting The US Oil Export Ban

Even as politicians in Washington look increasingly likely to vote and probably pass a deal regarding the Trans Pacific Partnership, one critical US good remains stymied by trade restrictions; oil. The US continues to restrict the export of oil to other countries despite the antiquated rationale for that ban. The US initially passed a ban on the export of oil in an effort to help hold down domestic oil prices when the country was reliant on the Middle East for much of its needs. Now that the unconventional production has taken off though, the rationale for the ban no longer makes sense.

The ban remains in place largely because of the opposition of environmentalists who fear that it would create greater incentives for increased US oil production, and due to concerns over the foreign policy damage that lifting the ban would have with Saudi Arabia and other oil producing nations. A recent report from IHS indicated that removing the ban would lead to 400,000 to 800,000 jobs beyond the actual oil extraction over the next couple of decades. Ironically then, a policy that was actually designed to help the general population of the US now is hurting it. These jobs would come in both oil producing states like Texas and non-oil producing states like Florida and Massachusetts. Related: How To Spot An Undervalued Oil Company

If the US does eventually lift the ban on US oil exports, it could help narrow the roughly $10 gap between US WTI oil and international Brent oil. But that won’t be the only challenge the country faces if it manages to produce and export a sea of oil. Much like the proverbial lottery winner who finds himself bankrupt a few years later, vast troves of natural resources can often become more of a curse than a blessing. Just ask Russia, Iran, Venezuela, Nigeria, and Libya among others. Related: We Are Witnessing A Fundamental Change In The Oil Sector

In fact, the problems that result from a country suddenly receiving a wind-fall of natural resources are so severe, that they have a special term for the phenomenon in economics: the resource curse. Many economic studies have shown that countries that rely on natural resources for more than about 20% of their economic output generally find that the economic harm is greater than the benefits. This has held true pretty much throughout human history with the only notable exception being Norway. Even Australia today is finding itself going through a severe rebalancing of its economy as the darker side of a resource-reliant economy emerges. Related: This Development Could Revolutionize Renewable Energy

As countries become more reliant on oil and other natural resources, they tend to invest greater and greater amounts of their national wealth in the extraction and development of those resources. These resources distort the countries exchange rate reducing the competitiveness of other manufactured goods, they shift workers towards natural resource production rather than a more balanced set of industries, and they lead to fighting by politicians and oligarchs to control natural resources rather than develop new companies and industries.

None of this is to say that the US should not produce or export oil. But it is important to understand the value of a diversified economy and try and implement policies that keep oil from becoming too dominant an influence on the country overall. And maybe that is Norway’s secret. For all of the wealth that the country generates from oil, the Norwegians have used most of that money to fund other sources of economic prosperity and avoid reliance on a single economic driver. The US would be wise to follow their example.

By Michael McDonald of Oilprice.com

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  • Bud on May 01 2015 said:

    The fact is the American oil and gas drillers and the US economy was already experiencing the benefits of an export base since we were producing well more light crude, ie high API oil, than we can use domestically. At 90-110 oil price, we would have drilled at least 5000-10000 more wells in North America alone in 2015. Maybe OPEC and global economics would have slowed this pace in any case, but we are at a pace to lose nearly a million high paying jobs when you add in all the down stream jobs, such as in the manufacturing of steel, etc. If your numbers are correct, in a growing global economy above 4-5 percent with the US exporting oil and natural gas, and building all the required pipelines and infrastructure required therefore, we are looking at a potential difference of millions of jobs.

    Given the diversity of the American economy, I think these jobs are more important than your implied concern. When I read articles like this, it makes me believe there is a global desire to slow the United States in deference to the growth of others. Interestingly, I don't read a lot of articles about the burning of rain forests in Asia, Africa and South America. Population growth is the worlds problem, not US growth. God help us when our country is no longer the strongest.

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