To Lift or Not to Lift? The U.S. Crude Oil Export Ban: Implications for Price and Energy Security
Medlock, Kenneth B.
In the past few years, innovative techniques involving the use of horizontal drilling and hydraulic fracturing have triggered unprecedented increases in production of crude oil from shale in the United States. This domestic production surge has reduced US crude oil imports and led some to call for an end to the 40-year-old ban on crude oil exports. In this paper, we lay out a framework for discussing the issues germane to this debate and apply empirical tools to evaluate these matters. We find evidence that the export ban already presents a binding constraint on the domestic market. We develop an approach based on a hedonic pricing method to evaluate the discounts being realized on West Texas Intermediate (WTI) and other domestic crude oil prices over a wide range of global crude oil price environments, ranging from $30 to $150 per barrel. The results indicate that even in a low international crude oil price environment, the importance of addressing the export ban is very high, with discounts attributable to the trade barrier erected by current policy reaching as high as $8 per barrel in a $50 world, depending on the quality of the crude oil that is being produced and marketed. The US refining sector has already backed out imports of light crude oil and is now backing out imported crude oils that are heavier than WTI and light oils from shale. This is where the discount arises – the domestic crudes, regardless of quality, must compete with lower quality crude oils, as the only market outlet for domestic crude oil is domestic refiners, regardless of quality. As more imported oil is displaced, the competitive margin for domestic production will increasingly be established by a heavier crude oil, which will drive steeper discounts until a new arbitrage mechanism is introduced, through either new refinery capacity or a lift of the export ban. We find that lifting the ban on exports could benefit upstream producers as well as attract capital investment into midstream infrastructure development. We also find support for the conjecture that lifting the ban on crude oil exports would not raise gasoline prices in the US. Since refined products, such as gasoline, can be freely traded in the international market, the prices of refined products sold in the US are at parity with international prices for refined products. Thus, the discounted prices of oil produced in the US are not reflected in US gasoline and refined product prices. This is an important point when considering the implications of lifting the export ban for US consumers, and more generally, energy security. Finally, we provide an in-depth analysis of the implications of lifting the crude oil export ban for US energy security. It is well-documented that heightened oil price volatility is associated with macroeconomic malaise, and the drivers of oil price volatility are unexpected shocks to global demand and/or supply. Removing the export ban generates distinct energy security benefits by providing a more stable and secure source of crude oil to a growing global market. Therefore, to the extent that US crude oil exports increase fungibility and dampen global oil price volatility, it will transmit an energy security benefit to US consumers. Indeed, we argue that in the longer term, the US can lead a transformation of the global oil market that could see North American and Western Hemisphere production capture a larger portion of the growing international market. This would carry tremendous benefits for US foreign policy endeavors in dealing with hostile oil-producing nations. It would also provide stability to the global oil market and convey benefits more broadly to the US and its allies.