Energy / Politics

We Have Bigger Issues than OPEC: Outdated Law Bedevils U.S. Oil Boom

When I recently visited Professor Robert Weiner at the George Washington University (GW), he was unimpressed by the flurry of speculation about Saudi Arabia’s response to falling global oil prices. Dr. Weiner, the chair of the International Business Department at GW’s School of Business, pointed out that Saudi Arabia doesn’t mind the lower oil prices and could likely sustain prices of less than $10 per barrel in the short-term.

Saudi Arabia is the big dog of the oil petroleum exporting countries’ cartel (OPEC). The country could adjust its crude oil supply or cut production to boost the price of oil; when there is less supplied of a good everyone wants, prices go up. On November 19, New York bank Morgan Stanley forecasted that there was a two in three chance that OPEC would do this at its November meeting. Other analysts maintained that Saudi Arabia wanted lower oil prices to hurt U.S. oil production. OPEC’s Thanksgiving Day meeting concluded with no production cuts; the group’s output target was held steady at 30 million barrels per day.

Commenting on how this would affect the United States, Professor Weiner said that the average cost of U.S. oil production is high but that marginal costs are not. Basically, there are a lot of costs to start producing oil in the U.S., but once production is up and running, it is not expensive to maintain. Falling oil prices may deter investment in new domestic oil projects, but will not reduce or halt current U.S. production.

Professor Weiner steered our conversation towards issues of greater importance to U.S. policy: The Energy Policy and Conservation Act of 1975 (EPCA). While the energy sector nervously watches the world oil price dip and speculates about the outcome of OPEC’s decision, this middle-aged set of laws lounges, free from harassment, in the Code of Federal Regulations.

The EPCA bans the U.S. from exporting its crude oil. The reasons behind passing the legislation back in the 1970s were economically misguided but understandable. The EPCA attempted to insulate the U.S. from the Organization of Arab Petroleum Exporting Countries oil embargo of the 1970s by holding on to as much crude oil as possible and limiting imports.1

Today, the nearly 40-year-old energy Act bedevils booming oil production in the United States. Despite crude oil production at record levels – 8.5 million barrels a day was the average in July – that same month saw crude oil exports at less than 400,000 barrels per day for the July monthly average. Because domestic refineries are struggling to process the influx of this light sweet crude oil, exporting excess crude makes economic and logistic sense. Read more about different types of crude oil and refineries here.

It bares mentioning that an average of nearly 2.9 million barrels per day of finished petroleum products were exported in the month of July. Most crude oil is processed into various products such as gasoline or diesel, which then can be legally exported. U.S. refiners buy cheap domestic crude oil but sell their refined products on the world market, reaping bigger profits. Some refiners oppose removing the export ban because they will pay more for the oil they refine while other refiners stand to benefit from selling their crude to the highest global bidder.

Jamie Webster of IHS, one of the big companies in energy consulting, estimates that if the crude oil export ban was lifted, U.S. consumers would experience an $0.08 decline in gasoline prices (holding all else constant). Webster explains that by allowing crude oil exports, producers receive higher international prices. This motivates more production and increases the global supply of oil. From economics 101 we know that when there’s more product supplied, prices come down. These lower crude oil prices are reflected in what is paid at the pump.

Regardless of whether you support or oppose exporting crude oil for environmental or other reasons, lifting the ban is politically dead in the water. At the recent Ideas Forum hosted by the Atlantic Council, Secretary of Energy Ernest Moniz diplomatically skirted the interviewer’s question about lifting the crude export ban, suggesting that no one in the current administration would touch the issue. The Energy Policy and Conservation Act appears to be the hot potato that no one wants to catch despite the logistic and economic benefits of lifting the crude oil export ban.

1To read more, check out Brookings’ comprehensive study: Economic Opportunities from Lifting the U.S. Ban on Crude Oil Exports

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3 thoughts on “We Have Bigger Issues than OPEC: Outdated Law Bedevils U.S. Oil Boom

  1. You bring up some good points about lifting the ban on crude oil exports. Maybe the next congress will be willing to tackle the issue. In the meanwhile, I am enjoying the drop in prices at the pump.

  2. Really nice piece Julia. I always enjoy reading your stuff. Fortunately, and maybe unfortunately depending on where you stand, I don’t see any changes in policy. The prospect of larger profits for refiners and other players in the market via increased production of crude oil strikes me as probably a bit troubling…of course I’m looking at it from a political and environmental POV.

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