Energy outlook: The economic case for U.S. oil exports
THE REAL ECONOMY |
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The positive supply shock to the economy created by the increase in U. S. oil production implies that exporting domestically-produced oil would benefit both producers and consumers and increase overall efficiencies in the domestic energy market. Improving intra-industry efficiencies would result in reduced production and storage costs as well as lower domestic retail gasoline prices. Seizing opportunities to export crude oil would stimulate greater investment opportunity, improve household disposable income and reduce unemployment.
U.S. oil production has increased 243 percent during the past seven years, far outpacing production increases by the closest competitors. The mismatches in supply and demand and refining capacity have resulted in a domestic oversupply of oil. Storage facilities in Cushing, Oklahoma are bursting at the seams with near-record capacity utilization.
The light sweet crude produced in the Bakken and Eagle Ford Shale formations is not well matched with domestic oil refineries that are equipped to handle heavier crude produced in older oil fields. Think of it this way: Domestic refineries are well equipped to process the type of oil that is akin to refining a jar of molasses. Meanwhile, the oil produced in the shale formations is closer to refining a product that more closely resembles a jar of honey. This oil would be better refined in Europe where their energy infrastructure is more closely aligned with that type of oil. These new U.S. production areas present tremendous economic opportunities for domestic producers.
MIDDLE MARKET INSIGHT: Middle market firms with links to oil extraction, energy, transportation and construction will disproportionately benefit if the U.S. exports domestically produced oil.
Moreover, exports of heavier crude would allow domestic producers to gain market share from hemispheric competitors such as Venezuela, which suffers from chronic economic and industry mismanagement.
According to Daniel Yergin, the dean of oil and energy scholars, lifting the U.S. export bank would create close to 400,000 new jobs, which dwarfs the 60,000 jobs lost since the collapse in oil prices from June 2014.
One counterargument against exporting oil is that selling oil abroad will result in higher domestic gasoline prices and make the United States more dependent on external suppliers. The economic logic of this does not hold. Exports of crude would instead better align the production of oil in the economy with the current infrastructure and result in lower lift and storage costs. This would allow for the production of more, not less oil, which would result in a further reduction in domestic gasoline prices thus helping bolster disposable household income.
A simple regression implies that lifting the oil export ban would add an additional 10 million barrels of oil per month and lower gasoline prices by about 11 cents per gallon. This in turn would boost disposable income by about $425 per household.
The past decade’s rising oil production has reduced the real dollar goods balance on trade by about 23 percent. Allowing oil-producing firms to export oil would cause the real dollar goods balance to narrow further and reduce the current account deficit below its present level of minus 2.3 percent of gross domestic product. A lower current account deficit, or even a surplus, would result in lower interest rates charged for government borrowing than would otherwise occur during the medium to longer term. This would simultaneously improve the U.S. fiscal outlook as well.
While the private sector is already moving to build an energy infrastructure that is aligned with the long-term implications of the oil supply shock and the increase in production and demand for natural gas, it will take further liberalization of energy infrastructure policy to institutionalize efficiency gains.
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