The debate has raged for some time over whether the U.S. should allow exports of crude oil. Instead, the focus should be on the potential benefits of restricting crude imports.

Limiting crude oil imports would insulate the U.S. oil market from massive price swings caused by the actions of monopolistic foreign governments—primarily OPEC nations. More stable prices for crude will help eliminate the wild swings in capital formation and exploration for crude that now typify the market and cause periodic disruptions to the U.S. economy as a whole. Lest oil industry and federal policymakers forget, wild price swings upward that were destructive for consumers occurred in 1974, 1980 and 2008; wild price swings downward that were destructive for producers occurred in 1982, 1986, 1998, 2008 and now, 2014.

The U.S. uses import prohibitions, quotas or tariffs to limit the importation of workers, light trucks, steel, tubulars, grain, coffee, sugar, cigars, cheese, alcohol, health care, pharmaceuticals, semiconductors and national defense. U.S. patents also protect domestic innovation from foreign competition.

Why does the U.S. not limit the importation of crude oil? It has not always been this way. During President Eisenhower’s oil import quota—in effect from 1959 until 1974—the domestic price of crude oil was roughly double the world price, was remarkably stable, and the effects were sanguine. A return to this environment would be equally beneficial today, when it is in the national interest to reduce carbon emissions, lessen reliance upon foreign supplies of crude oil, and maintain economic stability.

Progress toward these goals has been spurred by the high oil prices of the past six years. In “The Import-Control Solution” (Oil and Gas Investor, November 2010), Bob Ames, Anthony Corridore, Paul MacAvoy and I showed that the U.S. would eliminate wild upward price swings by reinstating President Eisenhower’s strategic oil import quota. We demonstrated that a world supply interruption of 10 million barrels per day (MMbbl/d)—even less than the 18 MMbbl/d that pass through the Straits of Hormuz—could lead to a price of more than $400/bbl, which would be devastating to U.S. consumers.

The U.S. can also use import restrictions to eliminate the exposure to wild downward price swings. We found that on average, a 1% increase in supply results in a 25% decrease in price. For 2014, world supply increased more rapidly than demand by approximately 2%, with 1 MMbbl/d in new supply from the U. S. and 1MMbbl/d combined in new supply from Libya, Iraq, Russia and Iran. Unexpected inventory builds occurred as demand failed to keep pace over 2014 and, as anticipated by our economic analysis, the price of crude has fallen by 50%.

Since 2008, the U.S. has increased daily oil production from 5 MMbbl/d to more than 9 MMbbl/d. Most of this new production comes from the highest cost and fastest declining wells in the world—the wells drilled with new technology in the shale plays of the U.S. The fast production declines of the existing wells in these shale plays will erode that 4 MMbbl/d gain in a matter of weeks as producers lay down rigs and lay off workers.

The Dollar’s Role

What many domestic producers failed to see was that the higher price of crude was due in part to the diminished purchasing power of the dollar since 9/11. The Fed’s very easy monetary policy cut the purchasing power of the dollar by more than 30%. Oil is traded exclusively in dollars, and OPEC members raised prices to maintain their own standards of living. The higher price of crude oil imposed by the low-cost producers in OPEC since 2010 made it profitable to develop higher-cost crude oils.

However, since the beginning of the end of the Fed’s quantitative easing policy was announced in mid-summer 2013, the dollar has strengthened against world currencies. The demand for oil began to slide worldwide, and OPEC allowed the price of crude to slide from mid-2013 to mid-2014 as the value of the dollar strengthened against the value of crude oil. OPEC members discounted crude oil sales to weaker economies until, finally, the price fell dramatically.

U.S. oil producers are worried, but not nearly as worried as their school districts, local governments, homebuilders and lenders. The gain to the U.S. from the boom in shale oil has been hundreds of billions of dollars invested in thousands of new jobs and new infrastructure. Versus 2008, the simple gain of 4 MMbbl/d at $100/bbl is an annual gain in gross domestic product of $146 billion.

By reinstating the oil import quota, the U.S. can protect jobs, economic development and new oil production technologies while moving to lower emissions and increasing the use of alternative transportation fuels. Allowing the flood of cheaper oil from abroad disrupts this path and opens the door to another sharp increase in the price of crude when OPEC decides to exercise market control and once again cut production.

Domestic oil producers without refining capacity have campaigned to lift the export ban on domestic crude. The very limited analyses they proffer suggest that if OPEC does not respond, lifting the export ban would reduce the price of fuel at the pump for domestic consumers. Nonsense. As long as the U. S. is still a net importer of crude, lifting the export ban will only rearrange the domestic market. The U.S. already exports approximately 3 MMbbl/d of refined products. The refinery manager on the Gulf Coast can buy oil either from foreign suppliers or domestic suppliers, but the price of fuel at the pump in Houston is set by demand for fuel from Asia—not by cheap supply from the Bakken.

The U.S. already pursues a protectionist strategy that has cost the nation $50/bbl for every barrel of crude oil consumed since 9/11. As Alan Greenspan stated in The Age of Turbulence, “I am saddened … to acknowledge what everyone knows: the Iraq war is largely about oil.” The Costs of Wars Project by the Watson Institute at Brown University has placed the cost of U.S. wars in the Middle East at $4.4 trillion, or approximately $50/bbl for every barrel of oil consumed in the U.S. since 9/11. To date, these costs are buried in the national debt and future obligations, but had it been pay-as-you-go at the pump, the electorate would have been spending almost $1.25 more per gallon over the past 13 years.

The number of U.S. military dead from these wars is more than 5,000. The number of wounded is more than 50,000. The cost to these women and men, and their hundreds of thousands of family members, is not a cost that shows up at the pump, in the national debt, or in the ballot box.

President Eisenhower’s policy was not popular. But as Supreme Allied Commander, General Eisenhower spent much of World War II fighting to cut off the Axis powers’ access to crude oil. In 1956, President Eisenhower refused to join Britain and France in their war to retain the Suez Canal through which passed 80% of Europe’s crude oil supply. He told Britain and France to “boil in their own oil.” He knew that for whoever owned the oil in the Middle East, there would always be a buyer, but as his newly opened papers demonstrate, he did not want to commit the military to an intractable region of the world, and he did not want the U.S. to be strategically dependent upon foreign suppliers. We can and should return to President Eisenhower’s policy and impose quotas on crude oil imports.

Ed Hirs is managing director of Hillhouse Resources LLP, an E&P pursuing conventional plays, and he teaches energy economics at the University of Houston.

Comments