Lift the Ban on US Oil Exports

The last time serious talk about exporting oil was heard in Washington, the Soviet Union still loomed, the Reagan Revolution had yet to take place and the National Basketball Association had an equitable distribution of talent.

It was the 1970s, and with the Arab oil embargo a fresh memory and fears that domestic drilling had peaked, Congress instituted fuel-economy standards for cars, an energy-conservation program for consumer products and the Strategic Petroleum Reserve. It also banned all exports of U.S. oil except for small amounts to Canada.

Four decades later, that ban is threatening to put a damper on the shale-oil boom in the U.S., and Congress or the president should find a way to reverse, or at least temporarily suspend, it.

Consider how drastically the U.S. oil picture has changed. Production has increased to 7.4 million barrels a day from 5 million in 2008, thanks to new methods of extracting oil from deep rock using horizontal drilling and hydraulic fracturing, or fracking. In the past year alone, these techniques have boosted output by a million barrels a day.

At the same time, the U.S. has been consuming less gasoline, jet fuel and other oil products. So, naturally, imports have been falling. In 2012, net crude imports averaged 8.4 million barrels a day, down from 9.8 million in 2008, and by next year, the U.S. Energy Information Administration expects them to decline to 6.9 million. Much of this reduction has comprised light, low-sulphur crude from the Middle East and Nigeria.

Here’s how the oil calculus has changed: Light, high-quality oil is precisely the sort of oil that is being harvested via fracking in North Dakota and Texas. In fact, within a couple of years, U.S. production is expected to outstrip the domestic industry’s capacity to refine it.

Why? Many facilities on the U.S. Gulf Coast are configured to process heavy crude from Venezuela, Mexico and Canada. They could switch to refining light crude, but then they would not operate at full capacity.

Build new refineries, you say? Well, it’s prohibitively expensive and difficult. Each costs billions of dollars and takes several years to build.

The point is, unless some of the shale oil is exported, it will be stranded, or simply left in the ground. And though to some environmentalists that may sound like a tempting prospect, it would not reduce global consumption of oil — just the consumption of U.S. oil. Lessening total use will take efforts more directly targeted to that end, including programs to develop renewable energy and efficiency and to put a price on carbon emissions.

By increasing exports even as it continues importing oil, the U.S. can exercise maximum flexibility in world oil markets. It can keep U.S. oil flowing, encouraging further exploration and drilling. And it can help maintain relatively stable gasoline prices, because these are largely determined by world markets.

Under the restrictions passed in the 1970s, most U.S. crude can be exported only if the U.S. Commerce Department grants an export license based on a finding that it would be in the “national interest.” Congress should invert this concept: Allow exports without licenses, except in times of shortages or other national emergencies.

If Congress seems inclined to sit on its hands, President Barack Obama would do well to look into the possibility of issuing a temporary blanket license, or licenses, to export oil to nations with which the U.S. has free-trade agreements — and maybe even to nations that agree to cooperate with trade sanctions against Iran. The Commerce Department would still be able to restrict exports in the event oil once again comes into short supply.

As the oil industry anticipates reaching the limits of its refining capacity, the possibility of exports is back in the conversation in Washington. This time, the new market reality should persuade policy makers to lift the ban.

Bloomberg