The Islamic insurgency in Iraq and the Russian decision to restrict Ukraine’s natural gas supplies highlights the problems with the 40-year federal export ban on nearly all U.S.-produced crude oil and natural gas. By limiting the market for those products, the government keeps energy prices artificially high, increases the political and economic influence of several bad actors, and destabilizes many of our allies. It’s time to end that export ban.
So far, the insurgency in Iraq, the seventh largest oil producer, has not had a major impact on the country’s production. But it has helped push crude oil prices above $116 a barrel, and could go much higher as markets worry that the conflict could reduce supplies.
That’s an unwelcome departure from the past four years, where crude oil prices have been relatively stable, even in the midst of a Syrian civil war, political chaos in Libya and economic chaos in Venezuela. That stability is a direct result of the dramatic increase in U.S. crude oil production.
Ending the U.S. crude oil and natural gas export ban would create a global market for U.S. energy; and when demand is high, oil and gas companies will produce more.
Opponents of ending the ban claim the action would increase the cost of energy in the U.S., and it might temporarily. But producer efforts to increase supply would bring the prices down quickly.
What export-ban supporters don’t seem to understand is that restricted markets lead to higher prices, not lower. And we have seen it recently in natural gas.
Innovative drilling techniques have created a glut of natural gas. Without more markets to soak up the surplus, gas prices started falling. But those low prices encouraged drillers to reduce output from their wells, or shut them down altogether, which reduced supply and pushed prices up again. Simply put, producers won’t drill unless they can make a profit.
Those export limitations also allow bad actors with large reserves like Russia to hold U.S. allies hostage over access to gas, which is what it’s doing to Ukraine. Removing the export ban likely wouldn’t fix that problem immediately, but it would start the market forces rolling—and begin limiting those countries’ ability to use energy as a foreign policy bludgeon.
Crude oil and natural gas are global commodities and the U.S. needs to treat them as such. The U.S. and the world will be better off when oil and gas are driven by a free market rather than counterproductive government policies.
June 17, 2014