The American “shale boom” is poised to revolutionize global energy markets. It could transform the nation from a longtime net oil importer into an export powerhouse. Consider that the 2012 increase in U.S. crude oil production, announced last week, was the largest not just in U.S. history but the world.
To help this transformation, a bipartisan swath of federal and state officials is pressing for new infrastructure, like the Keystone XL pipeline, to move a glut of domestic oil from the center of North America to Gulf ports. This is a crucial step, but unless Congress reforms archaic restrictions on crude oil exports, all that black gold’s going nowhere.
These restrictions not only contradict global trade rules and national trade and energy policies, they also threaten to derail the American energy revolution. Yet, unlike similar restrictions on natural gas, almost no one in Washington is talking about them.
In a free market, the answer to the key question of where to sell all this new American oil would be simple: wherever demand takes it. Unfortunately, the U.S.crude oil market is anything but free.
Instead, the Energy Policy and Conservation Act of 1975 authorized an export licensing system that, though intended to address temporary conditions, remains in place. It prohibits almost all crude oil exports — even in this time of abundant supply.
Exports today require a license from the Commerce Department that, except for shipments to Canada and a few other narrow circumstances, is only approved if the proposed transaction is “consistent with the national interest.”
Non-Canadian exports of U.S. crude oil are effectively banned. No license applications were approved under the “national interest” exception between 2000 and mid-2012, and subsequent data confirms that this unfortunate streak remains intact.
This de facto ban creates a host of problems. First, by 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.
Second, the export licensing system raises serious concerns under global trade rules. The World Trade Organization generally prohibits members from imposing export restrictions — including “discretionary” licensing systems or those that result in long delays. The U.S. system appears to do both. The executive branch alone decides on what is in the “national interest.” At least six pending license applications — first reported last fall — still haven’t been granted. It also could be legally and politically difficult in this case for the U.S. government to assert WTO-sanctioned defenses for national security, conservation or temporary supply shortages.
Third, the oil export restrictions are at odds with some other Obama administration policies. Restricting oil exports, most obviously, undermines the president’s National Export Initiative, the goal of which is to double U.S. exports between 2010 and 2014. . It also contradicts Obama’s advocacy of other energy exports — particularly renewables and nuclear power.
Using export restrictions to suppress input prices and help downstream industries contradicts the longstanding U.S. policy of classifying other countries’ use of similar measures as “unfair” subsidies subject to countervailing duties. The export ban also exposes U.S. exports of oil-based products to “copycat” duties in other markets.
Finally, Washington has long opposed restrictive and opaque export licensing systems at the WTO — speaking out, most recently, against Chinese restrictions on exports of raw materials and “rare earth” elements. The U.S. licensing system contradicts these positions and undermines multilateral efforts to combat such measures.
Given these problems, it’s clear that the current crude oil export licensing system needs to go. Congressional supporters of the U.S. energy boom must lead the charge.
If advocates really want to develop our vast energy resources and expand the economy, they should craft a licensing policy that reflects the new energy landscape and the immense U.S. export potential.
They’d also be restoring some overall coherence to U.S. trade and energy policy — and avoiding potentially embarrassing trade conflicts. If they ignore these restrictions, and their many flaws, the nascent U.S. oil boom could be snuffed out.