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The ABC’s of the Crude Oil Export Ban and Gasoline Prices
At first blush, the idea that exporting U.S.-produced crude oil will lower the price of gasoline at the pump sounds counterintuitive. We understand, and want to take a minute to walk you through how allowing U.S. crude oil exports will lower gasoline and other refined product prices. In short, it’s a matter of supply and demand economics and requires a basic understanding of oil markets along with a little history. Don’t worry, it’s not as complicated as it may seem.
Here’s how it works:
- In 1975, Congress passed the Energy Policy and Conservation Act. This legislation included a ban on crude oil exports from the United States. Because of this ban, U.S. oil producers are not permitted to sell domestically produced crude oil on the global market. As a result, there are two primary pricing benchmarks for crude oil: the U.S. benchmark which is called WTI and the international benchmark which is called Brent. Remember these names, we’ll come back to them in a minute.
- Because the U.S. does not allow the export of crude oil, oil produced here is “trapped” in the lower 48 states (there are a few exceptions – the U.S. exports some crude oil to Canada). With “new” sources of oil being developed in the U.S., a supply glut is occurring which pushes down the price of U.S. crude oil (WTI). We know this probably sounds like it would be good for consumers, but keep reading…
- Conversely, on the global market, where crude oil from the Middle East, North Sea, Africa and other countries is for sale, the price (Brent) is higher.
- According to economists and the U.S. Department of Energy, the price consumers pay at the pump in the U.S. is determined by the international, or Brent, crude oil price. Not the lower U.S. or WTI price. This means the new supplies of crude oil being produced in the U.S. are not translating into consumer savings since we are stuck paying gasoline prices that are linked to the higher international oil price.
- Repealing the ban on U.S. crude oil exports would allow domestically produced crude oil to enter the global marketplace. This increase in the global supply of oil would cause the international price of crude oil to fall. Since U.S. gasoline prices are linked to the international price for crude oil, as we explained above, the falling global price of oil would also result in a reduction in the cost of gasoline and other transportation fuels. To put it very simply: allowing U.S. exports would increase the global oil supply, which would lower international oil prices, which would lower U.S. gasoline prices, which would mean more money left in your pocket each time you fill up your gas tank.
We understand that it is counterintuitive, but it’s how the global energy market works. There a number of studies from government agencies, academia and think tanks from across the political spectrum that support this conclusion. Excerpts from these studies are listed below, along with an infographic.
Click HERE to download infographic.
Excerpts from recent studies:
- Energy Information Administration: “Gasoline is a globally traded commodity and, as a result, prices and changes in prices are highly correlated across global spot markets… The effect that a relaxation of current limitations on U.S. crude oil exports would have on U.S. gasoline prices would likely depend on its effect on international crude oil prices, such as Brent, rather than its effect on domestic crude prices.”
- IHS Energy: “Since US gasoline is priced off global gasoline prices, not domestic crude prices, the reduction will flow back into lower prices at the pump – reducing the gasoline price 8 cents a gallon. The savings for motorists is $265 billion over the 2016 – 2030 period.”
- Columbia University: “[W]e estimate lifting current crude export restrictions could …reduce domestic gasoline prices by between 0 and 12 cents per gallon.”
- Harvard Business School: “Instead of raising domestic prices, then, the overall effect of lifting the oil export ban could actually reduce global prices for gasoline by increasing the global availability of crude oil.”
- ICF International: Lowered prices as a result of the crude export ban “could save American consumers up to $5.8 billion per year, on average, over the 2015 – 2035 period.”
- Congressional Budget Office: “U.S. consumers of gasoline, diesel fuel, and other oil products would probably benefit along with domestic oil producers, if the ban was repealed…”
- Government Accountability Office: “A decrease in consumer fuel prices could occur because they tend to follow international crude oil prices rather than domestic crude oil prices, according to the studies and most of the stakeholders. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well.”
- Brookings Institute: “The increase in U.S. oil production makes world oil prices fall. Accordingly, so do U.S. gasoline and diesel prices, at least temporarily. This lowers the costs of production for all kinds of businesses and makes households better off.”
- Rice University, Baker Institute for Public Policy. “Some have argued that crude oil exports would increase gasoline prices in the US. However, because refined products, such as gasoline, can be freely exported, the prices of refined products sold in the US are in a parity relationship with international prices for refined products. Thus, the discounted prices of oil produced in the US are not reflected in US gasoline and refined product prices. Thus, removing the crude export ban, although it would raise the price of domestic crude oil, would not increase the price of gasoline in the US.”