America’s energy sector is enjoying an extraordinary boom. Domestic oil production is now at 8 million barrels a day — the highest level in 25 years. That production figure is on track to reach 9.3 million barrels a day next year, according to the latest U.S. Energy Information Administration forecast. And our natural gas output has jumped by 17% since 2008.
This is a revolution. It’s creating thousands of new jobs and injecting billions into the economy. And yet public regulations haven’t kept pace. Many of the rules governing the American energy sector are thoroughly antiquated, designed decades ago when the industry was much different from what it is today.
Case in point? The ban on crude oil exports.
This is a relic left over from the 1973 Arab oil embargo. Although our oil import dependence was lower in the early 1970s than it is now, U.S. oil production had recently peaked and was declining sharply. U.S. oil imports doubled in 5 years, and President Jimmy Carter had predicted global oil production would peak in 1980. Suddenly, the nation that had supplied almost two-thirds of the world’s oil during World War II had become heavily dependent on foreign oil to fuel its economy.
Obviously, times have changed. The U.S. is believed to have surpassed Russia as the world’s biggest producer of oil and gas combined in 2013. Energy imports are declining and will constitute just four percent of total domestic consumption by 2040.
Advances in drilling and completion technologies have enabled producers to economically exploit massive oil and natural gas resources that had previously been impossible to produce in economic volumes. Most notably, fracking and horizontal drilling have dramatically expanded the volume of producible crude oil and other petroleum liquids and natural gas in formations that extend for thousands of square miles, such as North Dakota’s Bakken Shale, Texas’ Eagle Ford Shale, and the Northeast’s Marcellus Shale.
But these technologies are also significantly more expensive than conventional methods. And because of restrictions on crude oil exports, most producers can sell their oil production only on the domestic market at severely depressed prices.
If the export ban remains in place, there’s a risk that drilling costs will get so high and market prices so low that it will become economically infeasible to develop in places like North Dakota in the first place. Oil and gas producers typically produce from the “sweet spot” first-the highest-quality, most prolific, easiest to develop parts of oil and gas reservoirs. As development of these enormous formations fans out increasingly to the fringe areas of a play, where the ultimate recovery of hydrocarbons per well shrinks while drilling and completion costs go up, the returns dwindle and a few dollars can make the difference on drill/no-drill decisions. Private industry will scale back on new investments. They’ll hold off on hiring. And Americans will needlessly be deprived of new jobs.
In fairness, a small handful of producers have been granted special exemptions to ship crude abroad. The Commerce Department has handed out a couple export licenses for trade with Canada and Mexico. But these special cases only add up to about 67,000 barrels per day.
That’s tiny compared to the overall energy market. And most developers haven’t been granted such exemptions anyway.
Fortunately, there’s growing political support for getting rid of the crude oil export ban. Notably, Senator Lisa Murkowski from Alaska, the ranking member of the Senate Energy and Natural Resources Committee, has repeatedly called on the Obama administration to lift the ban.
Sen. Murkowski has aptly noted that the United States already allows domestic producers to export coal, distillate fuels, petroleum, jet fuel and natural gas. The logical next time is including crude on that list.
Proponents of the ban argue that getting rid of it will lead to higher prices at the pump, as increasing exports will shrink the supply of locally available fuel.
That’s flawed reasoning. In energy markets not currently weighed down by export restrictions, such as the one for refined gasoline, the product price is set globally. And, as a rule, global markets are highly competitive and steadily pressure down prices. Indeed, according to a recent study from Citigroup, lifting the crude oil export ban would likely lead to lower prices at the pump.
Additionally, it’s important to note that many U.S. refineries, especially on the Gulf Coast and West Coast, were retrofitted decades ago to accommodate a crude oil slate that was increasingly declining in quality-more viscous and higher in sulfur. Unlike the few Midwest refineries making a killing off these steeply discounted new light, sweet crudes coming from the giant new shale plays, the Gulf Coast refineries are a mismatch for these new crudes and not a viable option for them. So the ban isn’t helping these refiners, located in the largest concentration of refining and petrochemical capacity in the world.
American energy producers are eager to sell to foreign markets. Federal regulators should let them. The crude oil ban is a damaging law from a bygone era. It’s stifling industry expansion. Doing away with the ban will lead to more jobs, investment and growth here at home.
Written By: Chris Faulkner