Lifting the crude oil export ban would enable American producers to take advantage of huge opportunities for significant world-market share. Domestic petroleum companies would prosper even at current oil prices. In turn, this would power substantial economic growth—including a manufacturing renaissance—and help reestablish U.S. geopolitical influence. Thousands and eventually millions of jobs would be created throughout the economy.
Oddly (or some would say, predictably) President Barack Obama opposes lifting the export ban for U.S. companies yet supports lifting the same ban on Iran, which is part of the nuclear deal. Bipartisan support for banning the ban, however, might put legislation on the president’s desk before the new year. Is there an overriding reason to keep the ban in place?
In the 1970s, the U.S. imposed a crude oil export ban in reaction to several factors, including the Arab oil embargo in retaliation for our support of Israel, rising energy prices, and peaking domestic production. For the last 40 years, the ban has stayed in place ostensibly to achieve energy independence.
Has this worked? After the ban, oil imports increased by 664 percent to 3.7 billion barrels per year from 1970 to 2005. Since then, imports have declined steadily by 28 percent. It would be fair to say the oil export ban has proven somewhat successful, because much more oil would have been imported prior to 2005. Can energy independence be achieved? The shale revolution precipitated the 74-percent increase in crude oil production since 2008, which accounts for the decline in imports. Oil production would have to increase by another 85 percent to eliminate imports. Given fracking’s potential, this is possible.
However, it’s not as simple as increasing production. Shale oil is sweet, light crude and most U.S. refineries are configured to process heavy, sour crude. While some domestic refineries are being upgraded to also process sweet crude, shale oil production will still exceed refinery capacity as early as 2018. As well, no plans have been announced to build new large-scale refineries, which would be enormously expensive.
The first domestic refinery to be built since 1976 opened in May near Dickinson, North Dakota. Dakota Prairie Refinery (DPR) processes 20,000 barrels of sweet crude per day, which is less than 2 percent of Bakken production. (The Bakken is the geologic shale formation targeted by fracking and horizontal drilling, the most productive part of which lies under northwestern North Dakota.) Still, DPR cost $400 million. What would a refinery capable of processing a half-million barrels per day cost? What would ten of them cost? Too much, especially given today’s low prices.
The Big Opportunity
Lifting the ban would position American oil producers to gain significant market share at refineries in Europe and even South America, which are configured for sweet crude. Production has stagnated or is declining among their traditional suppliers in the North Sea, Africa and Latin America. According to a recent report by Turner, Mason & Company, consulting engineers, U.S. producers could profitably export “as much as 1.7 [million barrels per day] … to European and Latin American refineries.”
This opportunity offers huge benefits at a most opportune time. Petroleum revenue has been cut by more than half to about $45 million a day, as Bakken production declined to 1 million barrels per day (BPD) from a high point 1.2 million BPD earlier this year.
Not surprisingly, many petroleum companies, large and small, have been posting losses. There have also been significant layoffs as the number of drilling rigs punching new wells has fallen from 214 in 2012 to 75 today. On the upside, technological and organizational innovations have increased rig efficiencies and lowered production costs into the mid-$30s on average in the Bakken’s most productive areas.
U.S. producers can outcompete international rivals—if given the same freedom as Iran, the world’s top sponsor of international terrorism that vows to obliterate Israel. This might be considered more egregious than flare gas in the Bakken.
Since American companies produce oil at three to four times less cost than Iran, which has a breakeven price of $131 per barrel, the private sector can help curtail Iran’s evil ambitions by securing the customers who might otherwise buy Iranian oil. The same is true regarding how to help limit Russia’s aggressive international aspirations. In the long run, low oil—and therefore, gasoline—prices will be maintained only if American producers are allowed access to international markets.
Made in the USA, Again
A report by the Boston Consulting Group (BCG) in 2011 reached the astonishing conclusion that “[w]ithin five years… the cost gap between the U.S. and China for many goods consumed in North America” will close. Manufacturing costs are now 10 to 20 percent less than in major European countries, and many products will soon become cheaper to make than in China. The “U.S. can look forward to a manufacturing renaissance.”
In 2014, the International Monetary Fund (IMF) released a working paper titled, “The U.S. Manufacturing Recovery: Uptick or Renaissance?” The IMF praised the resilience of American manufacturing since the Great Recession, but a renaissance has not arrived quite yet. Both China’s and the U.S.’s shares of global manufacturing output have stabilized at 20 percent.
Essential to U.S. manufacturing’s future resurgence is the “significant reduction in domestic energy prices following technological breakthroughs in the exploitation of shale gas; in particular, recent advancements in drilling technology (including shale gas fracking) resulted in a significant increase in natural gas production in the U.S. and led to a reduction of domestic prices, which are currently about one fourth of those in Asia and Europe.”
No doubt a manufacturing boom would require political leadership, which the next president might provide. It’s critical to maintain a healthy energy sector in the meantime.
Jobs as Job One
Even without a manufacturing renaissance, estimates of job growth resulting from lifting the oil ban range from 300,000 to one million new jobs nationwide. Given the likelihood of sustained low prices, however, job growth might be slow in the short term. Meanwhile, letting producers, who are major job creators, create—and save—as many jobs as they can via competition is the best bet.
In the long term, the Bakken will be producing for decades. EOG Resources, Inc., for example, just increased its estimate of potential resources on its assets by 2.5 times to 1 billion BOE (barrel of oil equivalent, which includes all petroleum products).
Energy Demand, Poverty & the Environment
Below is an illuminating graph, showing that the demand for oil will increase greatly as the economies of developing countries become robust. Keeping up with demand will become a far greater challenge than the current oil glut.
A massive increase in world demand will happen only because hundreds of millions of the world’s poor are finally enabled to achieve a decent standard of living. This moral imperative will become more urgent as the world’s population is projected to increase by 2.4 billion people by 2050, overwhelmingly in impoverished countries. Absolutely essential is the availability of affordable petroleum products.
Neither natural gas nor oil will be replaced by alternative fuels to a significant extent in the foreseeable future, as shown in “Oil: The Once & Future Fuel?” by Mark Mills, recently published in 360 Review magazine.
Nor will climate challenges be addressed by the U.S. unilaterally reducing carbon emissions, which will have a negligible effect. Similarly, in killing the Keystone XL pipeline last Friday, President Obama achieved a mere symbolic victory for irresponsible green extremism. The pipeline would have created thousands of badly needed jobs, strengthened our ties to Canada, and contributed to energy security, with little environmental risk.
The real challenge is to lower carbon emissions and other contaminant levels at the same time as hydrocarbon use increases—and poverty is overcome. Often overlooked is how much environmental progress American industry has been made in recent decades. Balanced and robust government-business collaboration is the only viable way forward. Let’s start with lifting the export ban on U.S. crude oil, which can soon become a reality if enough members of Congress vote to support legislation such that a presidential veto would be overcome.
(A longer version of the article is available in the inaugural issue of 360 Review — which covers energy, agriculture, finance, culture and faith on the Northern Great Plains.)