In a recent speech at the Brookings Institute, Larry Summers made a concise but convincing case to remove the U.S. government’s ban on crude oil exports. Here at IER, we have already made many of these points (see Rob Bradley’s post and my follow-up), but it is refreshing when Summers, the former Secretary of the Treasury in the Clinton Administration and former top economic advisor to President Obama, makes points that echo what we have previously said. Furthermore, I’ll show that Summers supplements the foundational points with some additional observations showing that the case for allowing the free export of crude oil is a no-brainer.
The Original Rationale No Longer True
Summers first asks why the ban on crude oil exports was originally enacted, and points out that the rationale no longer makes sense (if it did even at the time):
The reason we have a ban on crude oil exports in the United States is that in the 1970s when the price of oil spiked due to the formation and effective implementation of the OPEC cartel, we found ourselves dangerously vulnerable and much more importantly we responded to that vulnerability rightly or wrongly with a system of price controls on oil and a system in particular of price controls on old oil.
Now, if you are one country in a free world and you wish to control the price of a quantity you have no choice but to associate that control with an export ban because if you don’t everything you produce will be exported. So we put this in place, this export regime, in place for a good reason. That good reason was that we had price controls. Price controls might or might not have been a good idea. I doubt they were a good idea but it’s not relevant for the purpose of this argument. What is relevant is that those price controls were eliminated 34 years ago. [Bold added.]
As Summers explains, given that the U.S. government in the 1970s placed an elaborate system of price controls on crude oil produced domestically, the only way to keep oil available for Americans was to forbid its export to foreign buyers. Obviously, if American oil producers were allowed to sell on the world market at a higher price than what they could fetch domestically, they would export their barrels of crude leaving nothing for Americans. To be clear, this wasn’t a coherent set of policies; Summers himself hints at the fact that the whole thing was crazy. But his point was, if the U.S. government is going to enact a domestic price ceiling on crude oil, then a ban on crude oil exports was also necessary to prevent all of the oil being shipped out of the country.
The ban on exports became anachronistic once the domestic price controls were lifted. (Note that Summers implies that Jimmy Carter should be given credit for removing the controls, but David R. Henderson points out that actually Reagan should be thanked for accelerating the phase-out.) So there is clearly no reason to keep it in force now.
Why Is This Such an Issue All of a Sudden?
Summers does a humorous job explaining why the issue is suddenly a hot topic:
Now, for most of those 34 years, did this ban matter? No. We were a large-scale importer of all kinds of crude oil. It would have been goofy for us to have exported the oil. The ship would have come to our port, and then the ship would’ve left our port. It wouldn’t have made any sense. So, this restriction was like the PGA Tour passing a restriction that said that Larry Summers was ineligible to play. It didn’t really matter given the realities of the situation. The feared outcome would not materialize even in the absence of the restriction. So, we have, for the first time, a situation today that we have not had in at least two generations, namely that the market is sending signals that it is desirable on free market grounds to export U.S. oil. [Bold added.]
To rephrase, Summers is saying that even though the original rationale for the crude oil export ban evaporated with the decontrol of oil prices in 1981, in practice the ban hasn’t been very relevant until recently. This is because even without the ban, the market wouldn’t have sent barrels out of the U.S., for most of this time.
However, in recent years the situation has changed. The free market outcome would involve the production and export of U.S. crude oil, and therefore the government’s ban on exports is taking a larger and larger toll.
The Ban on Crude Oil Exports Is Hypocritical
Summers then goes on to explain that the U.S. ban on crude oil exports is inconsistent with the government’s posture regarding other countries:
[E]very President of the United States since the Second World War has professed our allegiance to the concept of free trade….This is not just some hypothetical economic theory stuff. On dozens if not hundreds of occasions the United States at the World Bank and at the IMF has voted in favor of programs that included conditionality where the conditionality stopped export controls with respect to raw materials that were motivated by helping domestic producers.
Just to make that more concrete, some country in Africa had lumber and in order to help them develop a domestic furniture industry they limited the export of lumber so that there would be low cost wood available to their furniture industry so that they could develop one. What was the position of the United States? Against free trade, inappropriate, must be removed as a condition for IMF and World Bank support. It’s not a position we’ve taken once, it’s not a position we’ve taken five times, it’s a position we’ve taken dozens to hundreds of times as part of a general commitment to an open world economy. We have a long history of believing that export restrictions are not an appropriate policy tool. [Bold added.]
To be clear, the U.S. government’s position vis-à-vis these other governments made economic sense. It was an inefficient interference with international trade when these other governments restricted the export of commodities in order to favor their domestic use. Yet by the same token, it is an inefficient interference with international trade when the U.S. government restricts the export of crude oil, in order to help American motorists.
Surprise! Crude Oil Export Ban RAISES Gas Prices
Ironically, however, the ban on crude oil exports doesn’t even succeed in one of its ostensible goals of keeping gasoline prices down for Americans. Here’s how Summers explains the point:
If you allowed oil to be exported people would ship it from West Texas to Brent or to someplace that would otherwise receive it from Brent. They would make a profit. There would be a larger supply of Brent oil. The same demand and a larger supply means a lower price and so in fact the price of gasoline would be lower. How much lower? There have been three large scale econometric evaluations that I’m aware of…They all agree that the price of gasoline will be lower. They differ on the amounts with a range of estimates from about two cents a gallon to about twelve cents a gallon.
But the crucial point is that the price of gasoline will be lower and will not be higher and so if you want to help American consumers consume gasoline at lower costs or for that matter American heating oil consumers in New England consume heating oil at lower cost, you want there to be more oil exports. [Bold added.]
I actually think Summers’ explanation here is a bit opaque; I humbly suggest that I explained the matter more clearly in my IER post. (To summarize the argument, gasoline can be freely exported, and so there must be one world price, disregarding taxes and other frictions. Therefore allowing crude oil exports reduces the price of gasoline for foreign drivers, meaning it also reduces the price for American motorists.) Even though Summers’ explanation of the mechanism is a bit unclear, I wanted to emphasize that Summers agrees—and cites three empirical studies backing up his intuition—that the current ban on U.S. crude oil exports makes gasoline more expensive than it otherwise would be.
Conclusion
Larry Summers is not known as a rabid free-market ideologue. After all, he was President Obama’s chief economic advisor. Even so, he recognizes the absurdity of the current ban on U.S. crude oil exports. The ban only exists because of the Nixon-era price controls on oil, and even though the price controls have been removed, the ban on exports remains. Lifting the ban would not only increase domestic production (thereby creating jobs in the oil sector), but it would actually lower gasoline prices for U.S. motorists. Finally, as Summers points out, lifting the ban would move the U.S. government closer to the free trade rhetoric with which it lectures other governments: wouldn’t it be nice if such consistency were a prerequisite for all government policies?
