18 Aug 2014

The Ban on Exports of U.S. Crude Oil Is Bad Economics

Oil, Shameless Self-Promotion 19 Comments

My latest IER post. An excerpt:

To see why the logic behind the crude oil export ban makes little sense, change commodities. For example, should the U.S. government make it illegal for American farmers to ship wheat out of the country? After all, don’t we want to make bread as affordable as possible for American households? Or what about banning the export of pharmaceuticals? Don’t we want to keep drug prices as low as possible in the United States? How about jet airplanes or heavy equipment—should American producers of these items be prohibited from selling them in foreign markets?

Also, in case you think I’m just making a generic free-trade argument, you should click the link to see that ironically, the ban on U.S. exports arguably makes gasoline more expensive for U.S. motorists. Here’s a taste of the logic:

First, realize that if there are no restrictions on the import or export of gasoline, then the U.S. price of gasoline is the same as the world price…At the same time, the ban on U.S. crude exports (if it has any effect at all) means that the U.S. crude price is lower than the world price. U.S. producers of crude would like to be able to sell abroad at the higher world price, but this is illegal, so they must be content to sell within the United States at the lower U.S. price.

Now, the U.S. government suddenly lifts the ban on crude exports: what happens? The immediate response is that U.S. oil producers begin shipping crude abroad, to fetch the higher world price. In the new equilibrium, the price that American refiners must pay for crude has risen, because now they are effectively competing with crude buyers all over the world.

In the new equilibrium, with more total crude oil being produced on Earth each day, it stands to reason that refiners across the globe will end up producing more total gallons of gasoline each day. Since the U.S. government’s policy shift wouldn’t have directly affected any motorist’s demand for gasoline, the increased quantity brought to market can only be sold at a lower price per gallon at the pump. The free-flow of gasoline across borders ensures that the price of gas in the U.S. is always the world price, meaning that a lower world price for gasoline translates into lower prices at the pump for Americans, too.

I include estimates from different sources about what the actual reduction on U.S. pump prices could be, if the U.S. government allowed the export of U.S. crude oil.

19 Responses to “The Ban on Exports of U.S. Crude Oil Is Bad Economics”

  1. Tel says:

    From a war footing perspective it kind of makes sense. Suppose you have only two countries of roughly equal size and they are at peace now, but at some random future date they will go to war, but we don’t know when that event will happen.

    After the war does break out, all imports and exports will be blocked, and the country with both the available crude oil resources, and the capacity to produce fuel for war machines (mostly diesel and kerosene) will win the war and take everything in the other country.

    So during peace time you might want to sacrifice some efficiency in order to stay ahead in key industries. The best overall position would be a country that imports a lot of crude, and exports a lot of gasoline. As you point out the sacrifice results in higher world price of gasoline so the burden of this policy falls on everyone equally.

    • Bob Murphy says:

      Tel getting rid of the export ban makes the US develop the infrastructure to pump more barrels of crude per day. Wouldn’t that be important in a war? Or are you talking about a war that lasts 35 years?

      • Philippe says:

        “getting rid of the export ban makes the US develop the infrastructure to pump more barrels of crude per day”

        The problem might be that oil is a finite resource.

        • Major.Freedom says:

          Every resource is finite.

          • Philippe says:

            not necessarily.

            The amount of oil that exists in the earth within US borders is a finite amount. It could be that in a future worst-case scenario the US might have to rely on that.

            • Grane Peer says:

              So you hold it. At what point do you use it? what then becomes the rationale for use in the face of an unknown future emergency? There is also an implication that technological advancement is static, Why should you horde in case of an unknown future event when upon such an event there is no longer a significant need for the oil anymore? I know it is not obvious that would be the case but it is no less tenable. I think it is worth considering that if one country’s actions can appear to adversely effect the cost oil on the world market that that could be an impetus for a war that would ultimately waste the stock pile of oil anyway.

              • Philippe says:

                You might be right. I’m just pointing out that there might be a long term strategic rationale for current policy in this area. As you say, the future is unknown.

                “if one country’s actions can appear to adversely effect the cost oil on the world market that that could be an impetus for a war”

                Possibly, though that isn’t the case at present with regards to US policy.

            • Grane Peer says:

              That seems plausible but in that case I would question their motives.

              Do you believe that no wars in recent history have had oil interests as a factor?

        • Major.Freedom says:

          Oil is a non-renewable resource. At least at current levels of knowledge.

      • Tel says:

        Tel getting rid of the export ban makes the US develop the infrastructure to pump more barrels of crude per day.

        Yeah, depends on whether the bottleneck is more likely to be :
        [A] Crude oil resource availability
        [B] Oil drilling infrastructure
        [C] Refinery and chemical engineering infrastructure

        The present strategy artificially protects [A] and subsidises [C] but allows [B] to somewhat languish on the domestic front, but I might point out that the US oil drilling companies are pretty eager with getting involved on overseas projects so I think the US could fairly rapidly upgrade this side of things if push came to shove.

        Of course there are going to be trade offs, I would guess our evil military overlords would have some grasp on that (one hopes).

        As for how long the next war lasts, good question, someone is no doubt modelling it.

        • Harold says:

          Vangel in recent posts seem to believe that resource availability is the bottleneck.

          Regarding pharmaceuticals, theUSA might want to restrict exports if the stocks of a treatment for an epidemic were limited.

          • Vangel says:

            The problem is the economics of shale. A ban is unnecessary because shale production cannot rise enough to allow the US to become an export nation unless American demand collapses.

    • Vangel says:

      Sorry my friend but I think that you got the economics all wrong. It makes no sense to artificially restrict trade because by banning exports you reduce capital investment and reduce output capabilities.

  2. Scott H. says:

    This post now has the official certified endorsement of Scott H.. Congratulations Bob.

  3. Major.Freedom says:

    We can all thank Keynes for resurrecting long refuted mercantilist dogma.

    Next thing we’ll hear is that governments have to initiate force to redirect spending in order to stimulate exports at the expense of imports so that the domestic money supply and volume of spending remain elevated.

    Oh wait…

    • Philippe says:

      Keynes criticized and was opposed to the mercantilist obsession with accumulating international trade surpluses. So obviously he didn’t ‘resurrect the mercantilist dogma’.

      • Ken B says:

        You forget Philippe that MF has private meanings for resurrect, mercantilist, dogma, the.

      • Grane Peer says:

        Keynes did defend some mercantilist policies and at a time when mercantilist thought was largely dead among economists. So, obviously he didn’t seek to resurrect the mercantilist dogma but it is not entirely unfair to give him some responsibility for it.

    • Tel says:

      Actually, Keynesian dogma (i.e. treating all economic metrics as homogeneous aggregates) should reject merchantalism (although many individual Keynesians seem to have trouble putting the pieces together). If we presume that Keynesian stimulus works as advertised, it should stimulate the whole “lump” of consumption globally, and thus presumably also stimulate global production.

      In order for any one nation to get an advantage over another, there would need to be diversity amongst the production and consumption. If you believe in Ricardo’s Comparative Advantage concept then you can see why one nation would end up specialised in something or other… but the world is nonlinear and the best place to learn a trade is amongst people already good at that trade, the best place to improve a technology is when you already have good grounding in the state of the art. See what I’m getting at here? Positive feedback!

      If one government can identity a key technology and then artificiality accelerate their own position in that technology, they the Comparative Advantage falls towards that that particular country. After this happens, it’s a lot easier to hold the position (provided you can prevent others easily copying what you did) and if this key technology happens to be significantly profitable it can work out rather well.

      Austrian theory supports this, because of heterogeneous production functions. Aggregate supply and aggregate demand won’t give this result. A linear model can’t give this result either.

Leave a Reply