End Of Crude Oil Export Ban Could Have Negative Unintended Consequences

By Michael Krancer
Follow: @MikeKrancer 

The repeal of the crude export ban, which Congress just passed and the president signed as part of the omnibus appropriations bill (read “budget”), may end up being one of those “watch out what you wished for” events. The ban goes back to 1975 when OPEC, in charge of oil supply, liked to deny us the resource from time to time with embargoes. The thinking at the time was that, by keeping all domestic crude oil inside U.S. borders, supply and national security would be protected.

Back then, the United States could easily use all of the oil it produced, and America’s daily production was already waning. But the dramatic increase in U.S. crude production from hydraulic fracturing of shale formations has altered those circumstances. Domestic producers, finding a crude glut at home, have been clamoring for access to international markets where their product might fetch higher prices. Environmentalists and domestic refiners, however, wanted exports to remain off-limits.

U.S. refiners, who have been investing billions to increase state-side refining capacity for the lighter, sweeter domestic crude, say refining jobs will be lost in the United States. Environmentalists say that more crude on the world market means that more refining and producing will take place, thus feeding the world addiction to hydrocarbon fuel and upping carbon emissions, and that the increased refining will happen in countries with little or no environmental regulations.

The playing field is made even more uneven against domestic refiners by a piece of 95-year-old legislation called the Jones Act. The Jones Act mandates that cargo being moved between U.S. ports can only be carried by ships that were built in the United States and that are owned by U.S. companies flying U.S. flags. This means that refiners on the East Coast pay about three times the transportation costs to acquire ship-born U.S. crude than do their competitors in Canada, Europe, or Asia.

It’s worth noting that, just in the Southeastern Pennsylvania region, refineries that were on the brink of shuttering just a few years ago at the estimated cost of 24,000 jobs, today pump $2.5 billion in wages into the local economy and account for an economic impact of $15 to $20 billion.

Some very credible people are also warning that a major assumption in the equation to repeal the crude export ban, namely the low price of crude, is not going to stick for much longer. As they say, the cure for low prices is low prices. Rob Kaplan, the president of the Federal Reserve Bank of Dallas, gave everyone a dose of reality in his public remarks on November 18, 2015, at the University of Houston. Kaplan pointed out that it is expected that the current imbalance in oil production versus consumption, which is driving and keeping oil prices low, is expected to come more into balance by late 2016 or early 2017.

It’s a complicated issue with myriad implications, a fact outlined in a longer piece that I recently wrote with Blank Rome Partner Matthew J. Thomas for The Legal Intelligencer, where we dissected the case for both sides.

How will lifting of the ban affect this currently vibrant domestic refining sector of our economy? Will the ban do more harm than good? It can’t be said for sure right now. But we can only hope that Congress takes less than 40 years to course-correct if it turns out that the law of unintended consequences hoists us by our own petard.

 

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