June 24, 2014 at 1:00 am


Oil export policy multiplies Middle East troubles

Recent developments in Iraq, Iran and Syria point to the importance of a strong oil and gas sector in the United States. It should be clear that the oil-rich regions of the Middle East are subject to grave political uncertainties. As this is written, Iraq’s largest oil refinery is under siege by ISIS rebels.

The major pipeline that carries Russian natural gas to Europe runs through Ukraine, which is itself beset by its own political problems. Fortunately, the Unites States is becoming less reliant on oil and gas from unstable areas around the world and if our federal government would eliminate its restrictions on exporting oil and the ability of foreign ships to carry oil our allies around the world would be able to rely on us to offset energy disruptions caused by world political turmoil.

According the U.S. Energy Information Administration, U.S. crude oil production rose from 5 million barrels per day in 2008 to 7.443 million barrels per day in 2013, a 49 percent increase. The International Energy Agency predicts that the U.S. will become the world’s top oil producer by 2015, primarily because of new developments in shale oil recovery. This has allowed the U.S. to replace Iraqi production and remove our reliance on imports from places such as Libya and Nigeria.

Unfortunately, all oil exports from the U.S. require a license from the Bureau of Industry and Security in the Department of Commerce due to an act passed in 1975 as a response to the Arab oil embargo.

This constraint has made it very difficult to export American crude oil.

One of the unintended consequences of this is that the U.S. is not able to stabilize the world oil market and disrupt the ability of Russia to and other exporters to use oil to influence political affairs in Europe.

As The Economist pointed out in its Feb. 15 issue, when Arab states placed an embargo on the Western allies of Israel after the Six Days War of 1967, the U.S. was able to offset by increasing production and shipping oil into the world market. We need to repeal the restrictions on U.S. exports of crude oil and allow the U.S. to once again become a swing producer that can offset disruptions in world supply because of political instability in oil-exporting regions.

A second but less obvious impediment to the U.S. using its new-found oil production capacity is known as the Jones Act, a section of the 1920 Merchant Marine Act. The Jones Act requires that any ship that carries goods in U.S. waters be built and registered in the U.S., and owned and crewed by U.S. citizens or permanent residents. The problem is, our oil refineries in the Gulf are designed to process heavier crude and our Northeast refineries light crude. There is, as a consequence, an oversupply of light crude in the Gulf that should be shipped to the Northeast population center and refineries.

The Jones Act makes it economically infeasible to do this, so instead we import light crude into the Northeast rather than moving our domestically-produced oil north. If the Jones Act were repealed, then this would further reduce U.S. imports and eliminate the economic inefficiency caused by a misguided and outdated piece of legislation.

The relationship between Russia and our NATO allies is likely to be strained for some time and the Middle East will be an uncertain place for some time.

America’s position in a volatile world should not be needlessly limited.

It cannot be more timely for Congress to repeal two laws that constrain our ability to respond to political instability throughout the world and weaken our economy.

Gary Wolfram is William Simon Professor of Economics at Hillsdale College.