Crude Oil Export Controls: A Trifecta of Bad Policy

April 23, 2015 9:15 AM

It’s rare to find a policy that combines bad economics with harmful national security overtones and, at the same time, violates US obligations to the world trading system. But US restrictions on crude oil exports are just that rare bird.

The near total ban on crude oil exports was enacted in the wake of oil shocks four decades ago amid fears about the United States losing energy self-sufficiency. In that era, the United States depended heavily on imported oil. Only Alaska was affected by a policy that foreclosed shipments of crude oil to Japan and other Asian buyers. Now that ban has become an outdated relic of a different epoch. It affects oil-producing states from coast to coast while making the United States less secure at home and in its alliance relations.

Oil markets have changed dramatically since the 1970s, but the ban remains frozen on the statute books, crying out for congressional action.

Foremost, the shale revolution could potentially turn the United States into the world’s number one producer of crude oil, even surpassing Saudi Arabia.1 But this transformation will not happen so long as the ban remains in effect, relaxed only episodically by the Department of Commerce. Indeed, at this very moment, producers across the nation are laying off thousands of skilled workers and idling hundreds of rigs because they cannot earn a reasonable return by selling crude oil abroad. Sensible countries promote exports to create good jobs and spur the economy. Sensible countries maintain their oil production capability as insurance against political upheavals in the Middle East. Antiquated US policy is doing just the opposite.

The harm starts with bad economics and oozes into the realm of national security. Russia’s takeover of Crimea and east Ukraine may be an international outrage, but the burden of retaliatory sanctions falls far more heavily on our European allies than on the United States. And unlike the United States, Europe (in particular Central and Eastern European countries like Lithuania, Slovakia, Poland, and Hungary) depends heavily on Russian energy supplies, which Vladimir Putin could turn off at any moment. The United States should abolish all restrictions on liquefied natural gas (LNG) and crude oil exports to show support for European sacrifices and ease European fears of future shortages. The Europeans have quietly pleaded with Washington for just these actions. But although the Obama administration has, on a case-by-case basis, relaxed the ban on natural gas exports, it has not asked Congress to repeal the ban on oil exports. Nor has the president used his power, under existing legislation, to declare that crude oil exports are in the national interest. Apparently the administration fears accusations that exports would encourage higher energy prices, add to climate change, and cater to big oil. These are doubtful economic or scientific propositions, but they may be strong political beliefs.

Finally, the ban flatly violates US obligations to the world trading system, codified in the General Agreement on Tariffs and Trade (GATT) at its inception. Under the relevant article, export bans are supposed to be imposed only temporarily, for exceptional circumstances. A ban in place for more than four decades clearly fails these tests. Indeed, in the very recent past, the United States challenged China in the World Trade Organization (WTO) for imposing similar bans on the export of various natural resources and rare earths and prevailed in both cases. No country has launched a parallel case against the crude oil ban, but the president and Congress should not wait. They should amend US policy because it’s the right thing to do—for the economy, for national security, and to respect international obligations.

Gary Clyde Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics. The views expressed are his own.

Note

1. The United States is already the number one oil producer, surpassing Saudi Arabia (and also Russia) in total oil production, a broader metric which includes crude oil, condensates, natural gas liquids, and oil from non-conventional sources. See International Energy Agency (IEA), Oil Markets Reports, March 13, 2015.

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