The Biden administration is trying to show the American people that they are doing all they can to stem rising gasoline prices, which are at levels not seen since 2014. A few weeks ago, Secretary of Energy Jennifer GranholmJennifer GranholmBiden: A good coach knows when to change up the team Overnight Energy & Environment — Biden announces green buildings initiative Overnight Energy & Environment — Earth records its hottest years ever MORE even suggested that the administration might reconsider a ban on crude oil exports as a means to lower prices at the pump. While the Department of Energy quickly recanted the idea, it seems the administration is getting desperate, and that’s never a good time for policymaking.
Forget for a moment that oil prices are higher than last year due in large part to lower supply as a consequence of reduced investment by the oil and gas industry due to a once-in-a-century pandemic that dramatically curbed demand. And that the administration’s anti-oil and gas policies and rhetoric has created uncertainty in the sector, further reducing investment. The fact is a ban on crude exports will not provide long-term relief for consumers at the pump.
By now most Americans know that prices at the pump are tied closely to the price of crude. This makes sense, as the cost of crude oil makes up over half the total cost of gasoline. So, what influences the price of crude? There are many factors, but it essentially boils down to global supply and demand. “Global” is the key word here because crude markets differ from some other commodities in that crude oil is truly traded and priced in a global market, with crude being shipped all over the world via tankers, pipelines and even rail cars.
So, what is likely to happen to global supply of crude if the U.S. reintroduces an export ban? Limiting U.S. crude to the domestic market means fewer potential buyers, and less demand, for that crude. That would likely be followed by a corresponding drop in American production. Since crude oil is traded globally, reduced U.S. production — regardless of where it is ultimately refined into fuels – lowers the global crude supply. Less supply on global markets puts upward pressure on price — not downward. Therefore, banning crude exports is more likely to raise prices than to lower them.
Another point to consider: All crude oil is not the same. There are many grades of crude, ranging from heavy sour (more dense oil with high-sulfur content) to light sweet (less dense and low-sulfur). Light sweet crude tends to be more expensive. While average crude slates are trending lighter, many U.S. refineries, especially in the major refining region in the Gulf, are still optimized to run heavy sour crudes. However, much of our domestic production is light sweet crude from shale plays. So, by forcing U.S. refineries to process domestic crude, rather than exporting, we are ensuring inefficiencies and additional costs in the refining process.
Lastly, let us not forget the economic benefits we have received from lifting the export ban. In 2015, the Obama-era Energy Information Administration (EIA), a part of the Department of Energy, forecast consumer benefits of lifting the export ban. And that study did not address the growth in GDP, employment, wages and other benefits identified by many others, like the Brookings Institute.
It is understandable for the administration to look for a way to demonstrate that it is fighting for the American people, but populist ideas like reinstating a crude export ban only sound like good ideas. The reality is that it would hurt the American economy and could even raise prices at the pump.
Kyle Isakower is senior vice president for regulatory and energy policy at the American Council for Capital Formation.