The U.S. government mostly bars the export of crude oil — a restriction that benefits a handful of politically connected companies and nobody else.
A new study from the U.S. Department of Energy found that repealing this little bit of corporate welfare would not drive up the price U.S. drivers pay for gasoline, thus undermining the only semi-plausible defense the subsidized special interests could mount.
Here’s the background: Exporting crude oil and natural gas are mostly illegal in the U.S., thanks to laws dating back to the 1970s. The Energy Department occasionally grants limited exceptions, but in general, if you drill up some oil in the U.S., you have to sell it in the U.S.
That’s good for U.S. oil refiners and chemical companies, who buy crude oil and turn it into end products, such as plastics or gasoline. And of course the refiners and chemical companies love this law. They are the only reason it still exists.
The lobby against free trade in crude oil is powerful, but weakening. Leading refiner Valero is probably the most prominent player. “Free markets sound great in theory,” a Valero spokesman told me last year, “but … we have to deal with realities, not theories.”
Much, but not all, of the refining industry is on their side. The economics here are simple: If you reduce the demand for crude oil you can reduce the price. The best way to reduce the demand is to ban a vast majority of potential buyers from the market. Prohibiting crude exports is basically locking all foreign buyers out of the market for U.S. crude.
Of course, refiners and other manufacturers who use petroleum are themselves allowed to export their final products.
“We wouldn’t be doing as well financially if it weren’t for [the ban],” one refiner lobbyist told National Journal. He’s right.
“This restriction on free trade helps our bottom line,” doesn’t normally count as a good policy argument. Every special-interest policy always wears the mask of a public-interest policy. In this case, the argument was that American oil belongs in America, and that freeing the market would drive up gasoline prices. There’s almost some logic there.
The new Energy Department study undercuts that argument. “Gasoline prices would be either unchanged or slightly reduced,” if crude exports were allowed. The reason: A broader market for U.S. crude could increase oil production, thus driving down gasoline prices.
This could result in “slightly lower gasoline prices to U.S. consumers compared to parallel cases that maintain current export restrictions,” DOE said.
This confirms what economists have been saying for years. “The ban on exports of crude oil has been with us for 40 years, and the justifications for it have been erroneous for that entire time,” my American Enterprise Institute colleague Ben Zycher says. “It has distorted the market, increased the cost of producing gasoline, and weakened the dollar.”
Good news for free trade and U.S. drivers would be bad news for U.S. refiners. “Refiner margins (measured as the spread between crude input costs and wholesale product prices),” the DOE writes, “would be lower without current restrictions on crude oil exports than with them in high-production cases where export restrictions lead to a widening Brent-WTI spread.”
In some scenarios (since nobody can really predict future oil prices), the refiners would barely suffer, if it all.
U.S. refiners have long thrived on big-government regulation, at the expense of the consumer. Last decade the L.A. Times quoted Thomas O’Malley, a California refinery CEO, saying “My view for the industry was: Why in the world would you fight clean fuels? That’s what the consumer wants.” O’Malley continued “Make no mistake about it, the more stringent you make specifications, those become barriers to entry … Strong companies would have an advantage.”
Delta Airlines, oddly enough, has joined the refiners. In 2012, in an effort to hedge against high jet fuel prices, Delta bought a refinery in Philadelphia. So now Delta has a vested interest in crude protectionism, and is aggressively lobbying against free trade.
Businessmen, Milton Friedman used to say, favor free trade for themselves, but not for others. The refiners are the clearest example of that. But in Washington, they’ve found themselves opposite the lobbying clout of oil drillers. As a result, the special interests might lose, and free enterprise might win.
This article appears in the Sept. 8 edition of the Washington Examiner magazine.
Timothy P. Carney, The Washington Examiner’s senior political columnist, can be contacted at [email protected]. His column appears Tuesday and Thursday nights on washingtonexaminer.com.
