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Robert Rapier

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Reinstating An Oil Export Ban Would Be A Disaster For The U.S.

In December 2015, President Obama signed into law the Consolidated Appropriations Act, 2016. A provision of this bill repealed a crude oil export ban that the U.S. had in place since 1975. This repeal was part of a deal that also extended certain renewable energy tax credits.

The shale oil boom had created a glut of light, sweet crude in the U.S. The export ban had made it difficult to ship crude oil to countries other than Canada. Domestic refiners had invested heavily to process imported crudes that were becoming heavier and more sour each year. In the span of a few years, they were awash in light, sweet crude oil from the shale oil plays that wasn’t a good match for their refineries.

Implications of Ending the Crude Export Ban

The provision addressing the export ban says that “to promote the efficient exploration, production, storage, supply, marketing, pricing, and regulation of energy resources, including fossil fuels, no official of the Federal Government shall impose or enforce any restriction on the export of crude oil.”

The bill allows for exceptions to this rule in certain circumstances. The President can impose export licensing requirements for up to a year after declaring a national emergency, or if the Secretary of Commerce reports that crude oil exports are causing supply shortages or sustained premiums on domestic crude above global prices.

Following the repeal of the export ban, monthly crude oil exports from the U.S. soared, rising from less than half a million barrels per day (BDP) in 2015 to more than 3 million BPD in 2019.

The repeal provided some relief to U.S. oil producers suffering from an oil price collapse that began in 2014. However, there are plenty of people who aren’t happy about the change. Related: Jim Cramer: ‘’Fossil Fuels Are Done’’

Why Some Presidential Candidates Want to Bring Back the Export Ban

In fact, several candidates for President have promised to reinstate the crude oil export ban. Elizabeth Warren, Bernie Sanders, and Tom Steyer have all said they support reinstating export limits. Joe Biden has supported phasing in new export limits. Andrew Yang and Michael Bloomberg have stated that they would not support reinstating the ban.

The concern is whether growing U.S. crude oil exports are causing an increase in global carbon dioxide emissions.

This week Greenpeace and Oil Change International released a report that argues for reinstating the ban. From their Executive Summary:

“In this briefing, we find that reinstating the U.S. crude oil export ban could lead to reductions in global carbon emissions by as much as 73 to 165 million metric tons of CO2-equivalent each year.”

They further claim:

“This range of carbon emissions reductions is the equivalent of closing between 19 and 42 coal plants, and delivers a carbon benefit comparable to implementing President Barack Obama’s proposed light-duty vehicle efficiency standards.”

This explains why politicians like Sanders and Warren support reinstating the export ban.

A Flawed Analysis

Although I would acknowledge that the calculations in the report are detailed, I would disagree that certain basic assumptions are sound. As a result, I don’t think the outcome would provide the expected emissions savings, and there would certainly be consequences the authors do not discuss.

The authors do admit:

“The ultimate impact of a reinstated export ban could be smaller than the values presented here, for example, if OPEC responds to the ban by increasing oil production to keep global supply constant, or if U.S. refineries are more able to adapt and their response is better described by a smaller discount.”

Related: Oil Bankruptcies Are Reaching Worrying Levels

While the paper doesn’t attempt to quantify how much smaller the ultimate impact may be, let’s consider the likely outcome.

OPEC’s initial response to the growing volumes of U.S. crude exports was to declare an ill-advised price war to bankrupt shale oil companies. That would, incidentally, be one possible outcome of banning crude oil exports. If the oil price crashed it would push some shale oil producers into bankruptcy.

We Already Know How OPEC Would Respond

Two years after oil prices collapsed, OPEC figured out that shale oil producers could survive longer than they expected. They then changed tactics and have been reducing production since then. In cooperation with Russia — one of the world’s three biggest oil producers — OPEC has been restricting production for more than three years. Currently, these production cuts amount to 1.7 million BPD.

There is absolutely no question that if U.S. exports were taken off the market, OPEC and Russia (who cumulatively produce 54% of the world’s oil) would step back into that void. This would amount to a tremendous win for them. They probably have the spare capacity to make up for 100% of lost U.S. exports, but if they didn’t it could be an even better deal for them. Remember where oil prices were before the shale oil boom? OPEC would love a return to $100/bbl oil, which once contributed about $400 billion a year to the U.S. trade deficit.

I would further point out that environmental rules in the U.S. are much more stringent than they are in Russia or in most OPEC countries. So an added disadvantage of reinstating the ban is that it will empower countries that produce oil in a less responsible manner — with respect to people and the environment — than we do here in the U.S.

So the basic premise here is that banning U.S. exports would hurt the U.S. oil industry and cause oil production to fall, while strengthening OPEC and Russia significantly on the world stage. Because of the spare capacity they currently have, there may be no emission reductions at all, except for perhaps as a result of a small amount of demand destruction as oil prices race back to $100/bbl.

This reminds me of the efforts to prevent the Keystone Pipeline from expanding. The oil was already getting to market by rail, but protesters assumed that shutting down the pipeline would shut down the oil. Meanwhile, President Obama’s State Department estimated that about six more people a year would die due to increased rail traffic without the pipeline. That inconvenient piece of analysis was consistently ignored by those protesting the pipeline. In other words, the protesters held onto expectations of a fanciful outcome while ignoring the potential for unintended consequences.

These sorts of proposals are often short-sighted. They fail to consider all of the implications, while exaggerating the benefits. In this case, the proposal would hurt the U.S. economy, strengthen OPEC and Russia, and have minimal impact on global carbon dioxide emissions.

By Robert Rapier

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  • Bill Simpson on February 04 2020 said:
    Do not worry. No truly far left candidate has a chance to beat Trump because the US economy is too strong, and will not have a chance to go into a recession in only 8 months.
    The US electorate is centrist, and the US is a capitalist country. Most people would never vote for a far left liberal. Trump is assured another term, if the Democratic Party nominates socialist, Bernie Sanders, or probably even left leaning, Elizabeth Warren, as their candidate.
    Now if the economy was in recession, Trump would lose to anybody, since he is widely disliked. That dislike will not overcome personal greed, as long as the economy stays strong. Money counts the most for most voters, who care less about corruption or mismanagement of the government, than they do about making money and keeping their job and employer provided health insurance.

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