NEW YORK: Government policies virtually without exception create economic distortions, so that policy reform can yield results highly counterintuitive. That is the case with the emerging effort to end the current U.S. ban on the export of crude oil, enacted as part of the 1975 Energy Policy and Conservation Act. The ban was justified as a tool with which to insulate the U.S. economy from the effects of international supply disruptions and to reduce the prices of such refined products as gasoline.
Both of those justifications were and remain fallacious. In the absence of policy distortions, domestic prices (net of international transport costs) must equal international prices. If domestic prices were lower, foreign suppliers would shift sales to other economies, reducing the overall supply of crude oil or refined products to the U.S. market until domestic and international prices were equalized. The most obvious policy distortions in this context would be import limitations (quotas), which would raise domestic crude prices artificially, as they did from 1959 through 1973; and export limitations, which have the opposite effect.
Just as the past limitations on imports increased domestic crude prices above international prices, so does the current export ban suppress domestic prices below international levels. The current price difference between domestic (West Texas Intermediate) and foreign (Brent) crudes is about $5 per barrel. A repeal of the export ban would increase domestic prices modestly, by an amount around $2 to $3 per barrel. This would be a straightforward supply-and-demand effect reducing the difference between the spot prices for crudes produced domestically and overseas, a difference that has been increased artificially by the export ban.
One might assume that an end to the export ban, by increasing the domestic price of crude oil, would yield a rise in the prices of such refined products as gasoline and diesel fuel. Counterintuitively, that is not correct, because ending the export ban would remove an important market distortion. The crucial factor to bear in mind is the fact that refined products are not included in the export ban; they are traded freely in the international market. That means that the domestic and international prices of gasoline must be equalized by market competition, abstracting from transport costs and taxes and the like.
Accordingly, ending the export ban on crude oil cannot increase product prices; if it did, foreign refiners would sell more gasoline in the U.S. market, thus driving prices down until U.S. and international prices were equalized.
Moreover, ending the export ban on crude actually would put downward pressure on product prices, for two reasons. Firstly, the increase in the international supply of crude oil created by increased U.S. exports would reduce both crude and product prices overseas. Accordingly, product prices in the U.S. would decline because, again, products are traded more-or-less freely in the world market, creating the one-price outcome described above.
`Secondly, Both internationally and domestically, the export ban has distorted the allocation of various types of crude oil among refineries, which are designed in various ways to refine particular crude oil types more efficiently than others. An end to the export ban would improve the alignment of refinery and crude oil characteristics, particularly in the U.S., thus reducing the cost of refining crude oil generally, and therefore of producing refined products.
