Flowing Crude: The effects of lifting the ban on U.S. oil exports
Fall 2017 | A look at the effects of lifting the 40-year ban on U.S. oil exports in 2015.
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Energy
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by:
Kevin Wright, Editor
The introduction of hydraulic fracturing and horizontal drilling has led to a dramatic increase in shale oil production that has ushered the United States from an era of oil scarcity into an era of oil abundance. As oil production increased, domestic oil producers began to look for export opportunities. However, until recently, these producers faced export restrictions due to a longstanding federal ban on most crude oil exports. The ban was lifted in 2015, causing distortions in the oil market. Kansas City Fed Economist Nida Çakir Melek and Research Associate Elena Ojeda have looked at the effects on oil production and distribution since the ban was lifted.
Ban limits U.S. exports
In the 1970s, U.S. consumption of oil was growing as production was declining. Net imports rose significantly to meet the demand; however, the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo against the United States, leading to dramatic changes in the oil market and a domestic energy crisis. In response, the United States enacted several measures, including the Energy Policy and Conservation Act of 1975—commonly known as the crude oil export ban.
Change in U.S. oil production causes changes in policy
The recent shale boom put a spotlight on the export ban, as it contributed to an oil glut depressing domestic crude oil prices relative to international prices. Fears of persistent oil price discounts led to calls to lift the oil export ban. In December 2015, the 40-year ban was lifted.
Market distortions
The shale boom dramatically increased U.S. oil production, but transportation constraints and refinery mismatch weighed on domestic prices, creating market distortions.
Growing U.S. exports
Although U.S. oil exports were increasing before the ban was lifted, they were flowing mainly to Canada, which was exempt from the ban. As a result, Canada reduced its imports from the rest of the world significantly. Once the ban was lifted, U.S. oil exports rose despite declining U.S. oil production and small oil price differentials, causing U.S. oil exports to go to a variety of new destinations, and Canada’s oil imports from the rest of the world increased.
Conclusion
Future implications of the removal of the ban will depend on the path of oil prices, domestic oil production and consumption, and technological advances. Recent forecasts suggest oil prices will increase steadily through 2020 but remain below $80 per barrel.
