On Export Bans

In my last post, I infer from Sarah Palin’s blathering that she does in fact support an export ban on domestically drilled oil. Hilzoy does some analysis here, noting that all of our crude exports in 2007 went to Canada, who incidentally sells us 70 times as much as crude as we export up north. This begs the question, if we stop selling oil to Canada, will Canadians be so willing to sell to us? Of course, Canadian oil is pumped by private companies, just as it is in America, so it’s sort of irrelevant what the Canadian government thinks unless they decide to impose an export ban of their own. I have no idea of the likelihood of such a scenario (and I doubt Sarah Palin does either), but it seems that the ratio of trade provides the Canadians with far more leverage. It goes without saying that were this scenario manifest, we’d be even more dependent on oil from Russia, Latin America, and the Middle East than we currently are now. 

This sort of hypothesizing relies heavily on speculation, so of more pertinence perhaps, would be to consider the consequences if reflective export bans weren’t placed on shipments to U.S. This paper, published in 2001 in The Energy Journal, examined the impact of lifting the Alaskan Oil Ban in 1996 on oil prices on the West Coast. The result, it would seem, was nothing.

The results indicate that Alaskan crude oil prices increased between $0.98 and $1.30 on the West Coast spot market relative to prices of comparable crude oils as a result of removing the export ban. However, we find no evidence that West Coast prices for refined oil products–regular unleaded gasoline, diesel fuel, and jet fuel–increased as a result of lifting the ban.

It’s sort of complicted, but the result has a lot to do with the specifics of the oil market. You see, it’s cheapest for oil drilled in Alaska to be shipped to Asian countries, with the next cheapest option being the West Coast. The problem, during the time of the ban, was that California refineries largely used California crude, and thus there was less California demand for Alaskan oil than there was supply. Because of this, much of the Alaskan oil was sold to the Gulf Coast despite transportation costs that increased price of $2.00 to $4.50 per barrel (GAO,1999). Anyway, as Sarah Palin points out, oil is a “fungible” commodity, and given the availablity of world oil in Gulf Coast markets, Alaskan sellers were able to set price equal to world oil price in Gulf Coast markets, and accoringly, oil’s marginal cost was commensurate with world price. I’m not sure how relevant the diversion of Alaskan oil to Gulf Coast refineries would be to a current ban in light of the increased price of world oil, but it highlights an important point that would still be relevant today.

The reason that prices at the pump were not affected by the removal of the ban was because consumer prices are based on the highest cost of inputs (i.e., world oil prices). Because enhanced domestic drilling will not significantly reduce the amount of imported oil, the highest input cost will still be set according to oil’s world price. An export ban then, would have three primary impacts:

  1. Americans would have the satisfaction of pumping American oil, but the cost would be the same. Far be it for me to speak for everyone, but I don’t particularly care where my oil is pumped.
  2. By banning export markets, profits of oil companies would decrease due to extra transportation costs.
  3. Unilateral export bans, might, as Hilzoy points out, result in retaliatory trade barriers by other countries, increase reliance on “unstable” markets, and further frost relationships with allies.

Ask yourself, is the satisfaction of pumping Alaskan oil worth the consequences? Is this solution that an “energy expert” might propose?


One Response to “On Export Bans”

  1. mike Says:

    I think, given the obvious lunacy of setting up export bans, we would just end up with a situation where oil companies could eke out a bit more money with domestic drilling and sales on the global market. The problem we have is that people don’t realize that for the GOP it’s about appeasing a constituency rather than lowering prices at the pump. The reason we have this problem is because the rank and file can’t do math. The rest of it is rhetoric designed to confuse the issue enough so that said rank and file don’t know what the hell any of it means anyway, and they just go ahead and vote with their parties.

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