Is Free Trade in Energy Finally on the Horizon?

Over the last few months, the media and the policy world have discovered that America’s archaic crude oil export restrictions are really bad policy. Two new and important developments give this welcome and growing movement even more momentum:

  • In a much-publicized speech yesterday, Sen. Lisa Murkowski (R-AK), ranking member of the Senate Energy Committee, advocated modernizing U.S. export restrictions on energy products, particularly natural gas and crude oil. Accompanying her speech was a new white paper on the same topic, which (i) highlights the serious economic problems caused by the current crude oil export licensing system (which is effectively a ban on exports to all countries except Canada); (ii) confirms the widely held view that oil exports won’t cause higher gas prices; and (iii) recommends that the president, the Commerce Department, or–if they continue to do nothing–Congress relax the export ban. Just as importantly, Murkowski’s views were recently echoed by Sen. Mary Landrieu, (D-LA) who stands to take over the Senate Energy Committee this year. Thus, there could be bi-partisan support for easing the U.S. crude oil ban on the Senate committee arguably most integral to any such reforms.
  • Also, today, the American Petroleum Institute’s president and CEO Jack Gerard reiterated his organization’s support for lifting the crude oil export ban:

Gerards’s formal announcement echoes a few previous statements from folks at API (which is the largest U.S. energy trade association and a big player on Capitol Hill) and is a good sign that they’re going to push harder on this issue in the future. (API’s related blog post, which calls the crude export ban “obsolete,” certainly indicates as much.)

These two developments should be welcome news for anyone concerned with free markets, economic growth, and well-functioning energy markets. As I argued in a February 2013 Cato paper (and subsequent podcast), the crude oil export restrictions–and the similar, more well-known restrictions on U.S. natural gas exports–raise a host of economic, legal, and policy concerns. These restrictions should be replaced with a simple, transparent, and automatic licensing system for all exports of U.S. energy goods (not just fossil fuels).

Does this week’s news and the growing momentum for reform mean that the U.S. crude oil export ban will finally die the fiery death that it deserves in 2014? I’m a bit pessimistic for two reasons. First, Sen. Murkowski is not calling for a complete overhaul of the crude oil export licensing system (or its natural gas cousin): her white paper merely recommends that the Commerce Department or the president exercise their discretion within the current system and thereby approve crude exports to countries other than Canada (which, as noted above, enjoys a presumption of approval). And, according to the Financial Times, Murkowski stated today that any legislation from her on this issue would be “small, targeted bills” to “move the ball forward”–clearly not the systemic reform (or total elimination) that free traders, supporters of U.S. energy production, and America’s trading partners would ideally want. Indeed, the maintenance of an ad hoc discretionary export licensing system for crude oil would do little to provide energy markets with the consistency and predictability that they need to operate most effectively. Additionally, such a system wouldn’t quell concerns that the export restrictions violate World Trade Organization rules.

Second, while API’s support is obviously important, there will undoubtedly be intense opposition to any reform efforts. As National Journal reported yesterday, some uninformed U.S. politicians and certain domestic refiners–who benefit greatly from the ban–have already come out against reform. Combine that opposition with the inevitable push-back from fossil fuel-averse environmentalists–who have a new and sympathetic ear in the White House in John Podesta–and you have a recipe for a big political battle in Washington and diminished hopes for any quick resolution to this problem. (That Podesta’s former digs immediately “blasted” Sen. Murkowski’s remarks may be a good indication of his position.)

In short, crude oil exports could end up being like KeystoneXL or natural gas exports all over again–a frustrating and cripplingly slow process that’s subject not to rational market forces but the mercurial whims of our political class.

And, make no mistake, the crude oil situation really is a problem. As I detailed in June, beyond the legal and policy issues, the export restrictions harm U.S. producers and workers, and even worse problems are on the horizon:

[B]y curtailing exports and subjecting license approvals to the whims of bureaucrats, the current system slows domestic production, breeds economic distortions, discourages investment and destabilizes energy markets.

U.S. oil producers, for example, lose an estimated $10 billion a year due to their inability to sell crude in foreign markets. They’ve also spent hundreds of millions of dollars building “mini-refineries” in the Midwest and Gulf region to circumvent the current restrictions and export a slightly processed, cheaper product — leaving another $1.7 billion in potential profit on the table.

As Rube-Goldbergian as this sounds, producers have few alternatives, given that U.S. oil consumption has collapsed in recent years and building new refinery capacity is virtually impossible in many “environmentally friendly” states. These problems prompted the head of the International Energy Agency to warn recently that U.S. export restrictions put the “American oil boom” at risk.

Unfortunately, the serious oil supply and price disruptions that I contemplated–already experienced for natural gas–could be happening a lot sooner that anyone thought, as a domestic glut of light, sweet crude oil (i.e., the type of oil gushing from U.S. shale finds and spearheading the American energy revolution) finds itself at U.S. ports with literally no place to go.

The obvious solution to this problem is for the U.S. government to completely lift the ban on crude oil exports as soon as possible. Doing so would restore a little sanity to U.S. energy policy (although more definitely needs to be done), avoid global trade conflicts, and provide ample benefits for the domestic economy–all issues that we’ll be discussing at an upcoming Cato forum in February. However, if the aforementioned concerns and the government’s track record with KeystoneXL and natural gas exports are any indication, U.S. energy producers, consumers, and the broader market may endure a lot more pain before any serious, long-term solution is implemented.

If it ever is.