Wolfram: Ending the oil export ban would benefit U.S. economically and strategically
Imagine that American farmers invented a new way of raising corn that increased yields by 150 percent. Would we expect Congress to enact a law that prohibited the exportation of corn? Most people would argue that exporting the extra corn would improve our trade balance, improve farm income, lower the price of corn for people around the world, and give farmers an incentive to continue innovating.
Yet we have effectively banned the exportation of crude oil since the Energy Policy and Conservation Act of 1975. This has resulted in an inefficient production of oil both in the U.S. and the world ever since. It is an attempt by government to better allocate resources in the oil industry than what the market would do and instead it dampened the incentive to find new ways to produce oil, delaying for decades the discovery of the techniques known as horizontal drilling, for example.
Congress is taking up the issue and the House recently passed a bill lifting the embargo. However, the president appears opposed to the measure. Evidently he would prefer that OPEC countries, ISIS and Iran sell oil to the rest of the world at an artificially high price. A July report by NBC News noted that ISIS makes millions of dollars selling oil. It is “a key source of income for ISIS.” If U.S. producers were able to export their oil, this would lower the world price of oil and put a damper on a main source of revenue for ISIS.
Recent innovations in horizontal drilling in response to increasing oil prices have made the U.S. the world’s largest oil producer. This should give us the ability to strategically respond to problems in the Middle East. In 1967 the U.S. was able to respond to an oil embargo against Western countries due to the Six Day War by exporting our oil. Today, we cannot assist our European allies should there be an interruption in oil from Russia or other oil-producing nations.
If there were a ban on the exportation of corn, farmers would figure out a way around it by exporting corn syrup or corn flake cereal. Farmers would sell to U.S. corn syrup manufactured at artificially low prices and we would produce corn syrup even though it would be more efficient to have someone else produce the syrup and we grow more corn.
This is, of course, what we see happening today in the case of oil. Oil is sold to refiners at artificially low prices and the refiners then export the refined product. This is but one of the unintended consequences of government not allowing producers to sell to a willing buyer.
Aside from the strategic value and the economic efficiency of eliminating the ban on exporting oil, there would be greater employment and high incomes for the U.S. as a whole. When the government decides who can purchase a product and who can’t, and to whom you can sell your product, then resources aren’t used in the most efficient manner. The Nobel Laureate of economics, Friedrich Hayek, pointed this out 70 years ago in a famous paper, “The Use of Knowledge in Society.” Centrally planned states have always failed to produce wealth for their societies for this very reason.
The president should remove this decades-old impediment to making the most out of our resources. Our economy will be improved as will our strategic response to geopolitical challenges emanating from the Middle East and Russia.
Gary Wolfram is a professor of economics at Hillsdale College.