Tuesday, November 20, 2012

It's Time to Lift Restrictions on US Oil Exports

Chart taken from WSJ.com
The big news in energy last week was that the International Energy Agency projected the United States will overtake Saudi Arabia as the world's leading oil producer by 2020.  If accurate, the significance of this information is hard to overstate, and its ramifications for the economic, military, and political future of the world are myriad and complex.   In theory, at its most basic, this means cheap oil and an end to foreign energy dependence, but, as you'd expect from so multiplex a commodity, it's not that straightforward; indeed, the forthcoming US oil production boom is nothing short of a geo-eco-political imbroglio.

From a market point of view, the first consequence one would expect would be for crude to become a demand-driven market; if we have all the oil we need from sea to shining sea, supply would play less of a factor on the price of a barrel then would the demand to burn it up.  Unfortunately, it's not that easy.  For the price of a good to accurately reflect the pressures of supply and demand, the market has to be open to all participants - a market can't operate (or at least maintain liquidity) without scores of individuals buying and selling.  However, it turns out the oil market is much more constraint-laden than other global commodity markets (rice, lumber, coffee, etc).  There are a few reasons for this.  The first, which I didn't know until after this story broke (and which became the impetus for my writing this piece), is that the United States generally prohibits exports of crude oil.  That's right, America, bastion of free markets and free men, generally disallows the exportation of one of the planet's most basic economic inputs.  (This, I have to assume, is one of the many reasons why Brent Crude, a somewhat inferior British grade of oil has for the last couple years been trading at a price significantly higher than its American counterpart, but that's a topic for another day.)  While it isn't technically illegal to ship crude offshore, regulators certainly don't make it easy; as far as I understand (and someone please correct me if I'm wrong), any exporter of American crude is required to get dispensation from the Department of Commerce, and even then the exporter is highly restricted in his or her trade.

The other major piece of the puzzle is the US military presence in the Persian Gulf.  NPR had a good story last week explaining the situation.  The gist is, for decades now, the US has kept several aircraft carriers permanently stationed in the Persian Gulf specifically for the purpose of keeping oil shipping lanes open, protected, and safe.  Not coincidentally, the US and her allies get a ton of their oil from countries whose continued exports rely on open, protected, safe shipping lanes.  Heretofore it's been a win-win, but if the US no longer needs foreign oil, then what interest would we have in protecting the shipping lanes of other nations, especially when every other oil consumer (China, India, Brasil, etc.) directly benefits from the US military presence in the Persian Gulf.  (Anyone planning to run for President in the next four elections: I've just given you the sort of military policy that would likely resonate with about half the population.)

Okay, you might think, so the Middle East would become more unstable (if that's possible) without a permanent US military presence, what has that got to do with the price of oil if we're extracting all we need domestically?  Consider a world in 2025 where US oil exports remain strictly regulated, nations in the Persian Gulf must allocate tremendous expense to secure shipping lanes, and the Peoples' Republic of China has a fully modern economy with a healthy appetite for petroleum products. You've now created two entirely distinct international markets for oil, nurtured a hidden economy built on piracy and black markets, and functionally turned the United States into a global oil cartel.  In this fertile breeding ground for militarism, the newly modern navies of the world would swell to protect oil access, conflicts in crude producing nations would flare up like oil fires, and all the while the US (whose oil consumption has incidentally been falling and will likely continue to fall) sits on an ocean of oil, unwilling to share and unable to profit from its export.

On the other hand, the US could lift entirely its restrictions on crude exports (treating crude the same way we treat almost every other commodity on the planet).  In so doing, American crude would compete with Middle Eastern and other geographic varieties of oil; nations would have less incentive toward militarization as crude is more readily available; the global economy would grow as more countries are able to modernize on the back of readily accessible, transparently priced energy; and, most important to any commodities investor, the price of oil would reflect, simply, the price of oil.

I realize that in the course of this piece I have not addressed the very real need to switch to renewables.   This is obviously tremendously important for the future of our planet, our environment, and our continued existence as a species, but the US won't hasten a fully green economy by extorting other countries and forcing them into war-mongering.  As America moves forward, she should not cling to cold-war ideas about resource protection and paranoia; this is the land of the free, after all.  Our markets should be likewise.

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