Exporting oil is sound policy

OPINION:

Energy policy in the United States has been battered back and forth like a mistreated tennis ball for at least three presidential administrations. From an unleashed energy industry fueling a booming economy and high demand only a few years ago, we find ourselves now in a recession with energy prices spiking and the federal government tapping our strategic reserves.

With inflation and energy costs running rampant, many are outraged that some of the releases from the strategic petroleum reserve have been exported rather than fed into domestic circulation. The picture is muddled with politics and emotion, but the bottom line is that exporting oil is sound policy — even if it comes from the strategic reserves.

Ideally, we should not be drawing down our strategic petroleum reserves at the rate we are in the first place, and instead, the administration should promote exploration and production. Underlying high energy prices and looming energy insecurity are the actions of this administration to limit available leases and increase costs on producers. But the reality is that we are drawing on the strategic petroleum reserve and several million barrels have found themselves heading away from our coast. For a number of reasons, this is not a categorically wrong policy, but well within normal activity.

The three key factors to explain this are the global nature of oil markets, domestic refinery capacity and characteristics, and free trade. Legislation aimed at restricting exports without internalizing these factors may be ineffectual at best or cause inadvertent harm at worst.

First, crude oil is a global market. The price of a barrel of crude oil is determined by the global supply and demand for petroleum. This is why President Biden has repeatedly claimed that his drawdowns on the strategic petroleum reserve are in coordination with releases from other nations. When more oil is available, the price per barrel falls. It does not matter whether a new supply arises in the Eastern or Western hemisphere, so long as it is available to the market.

When oil is sold to domestic companies or international ones, it has the same effect. It would not meaningfully help lower energy prices to keep those barrels here. All else equal, the price of oil will decrease proportionately with oil released — anywhere.

Second, refineries in the United States are currently operating at 95% capacity. That means they virtually cannot take on new crude oil to refine into gasoline, diesel, jet fuel and other distillates. Making new releases available to refineries would mean the crude oil waits in a tank until the refinery has the capacity to process it. That is functionally equivalent to the oil remaining in the reserves, whereas by exporting it, the oil affects the global supply and can be processed into finished products in high demand now. Some of that may even be sold back to the U.S. once processed by refineries elsewhere with available capacity.

In fact, America has always exported oil. Long before we were a net exporter, we were still exporting. That is because most refineries in the United States are calibrated for heavier sour crude that lies beneath the gulf coast or California. When domestic producers pull up lighter sweet crude, it is often exported to nations with refining better suited for this type of petroleum. So, before we were a net exporter — when we still demanded more energy than we produced — the United States would still send out its lighter crude and import other nations’ heavier crude. Even today, we are importing high volumes of heavy crude.

Once all of that crude oil is refined into finished products, it is sold again. The United States still benefits from the importation of distillates and other energy products. And while gasoline is not dependent on a global market in the same way as crude oil, it is still economically more efficient to export some crude in order to refine it and reimport than to hold onto ill-suited barrels domestically.

Third, exporting allows us to bring in revenue while strengthening trade relationships. There are often legitimate reasons to insulate from foreign markets or bad actors, but the energy market relies on the free movement of crude oil. Limiting exports to companies or countries adverse to the United States or where political conflicts of interest exist is worth greater consideration, but broad limitations on export can harm allies and reverberate globally to harm U.S. citizens as well.

In Europe, energy insecurity is directly harming our key allies, while also threatening food security. These are issues we will face at home if free and fair trade is not maintained. The criticality of fossil fuels to virtually every activity from energy production to health care, agriculture to transportation, and clothing to technology means that cutting off oil from trading partners will harm them and us as energy insecurity, supply chain constraints, lack of raw materials and feedstocks, and more result from limited oil availability. If barrels are being released, they should go to the market.

At the end of the day, American energy policy has been shellacked by ideologues and bureaucrats along with a confluence of geopolitical issues. Real, valuable solutions would take the form of increasing domestic exploration and production, building new refineries to increase capacity, approving new pipeline projects and utilizing domestic mining reserves to reduce the need for reliance on adverse nations for other critical elements. These must be restored to reestablish the United States as energy independent, a net exporter and an unrivaled economic power.

Given where we are right now, exporting oil is still sound policy. The strategic petroleum reserves are critical and should not be viewed as a spigot to tap to get out of bad energy policy. But any oil entering the global market is good for lowering the price of crude oil, and downstream, the price of gasoline and diesel. Congress should allow the free market to operate and lower energy prices without undue interference.