Six Reasons Not To Ban Energy Exports*

by Marlo Lewis on April 19, 2012

in Features

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[* This column is a lightly edited version of my post earlier this week on National Journal’s Energy Experts Blog.]

You know we’re deep into the silly season when ‘progressives’ champion reverse protectionism – banning exports – as a solution to America’s economic woes. Congress should reject proposals to ban exports of petroleum products and natural gas for at least six reasons.

(1) Export bans are confiscatory, a form of legal plunder.

As economist Richard Stroup has often pointed out, property rights achieve their full value only when they are “3-D”: defined, defendable, and divestible (transferable). A total ban on the sale (transfer) of property rights in petroleum products or natural gas would reduce the asset’s value to zero (assuming no black market and no prospect of the ban’s repeal). To the owner, the injury would be the same as outright confiscation. A ban on sales to foreign customers would be similarly injurious, albeit to a lesser degree.

The foregoing is so obvious one is entitled to assume that harming oil and gas companies is the point. I would simply remind ‘progressives’ that the politics of plunder endangers the social compact on which civil government depends. Why should others respect your rights when you seek to deprive them of theirs? Every act of legal pillage is precedent for further abuses of power. Do you really think your team will always hold the reins of power in Washington, DC?

(2) The proposed bans would violate U.S. treaty obligations under the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA).

Let’s start with the proposals, sponsored by Rep. Ed Markey (D-Mass.) and Sen. Ron Wyden (D-Ore.), to prohibit the export of tar sands crude shipped via the Keystone XL Pipeline and petroleum products made from that oil. This policy violates the two most fundamental principles of the global trading system: national treatment (treat foreigners and locals equally) and most-favored-nation (treat all trading partners equally).

The national treatment principle prohibits importing nations from discriminating against a foreign commodity, service, or item of intellectual property once it has entered into domestic commerce. The moment Canadian crude crosses the border, whether via Keystone XL or any other mode of transport, it becomes part of U.S. commerce. Thus, under both GATT (Article III) and NAFTA (Articles 301, 606), it must be accorded national (equal) treatment. Since Congress does not ban petroleum product exports made from U.S. crude, the Markey-Wyden proposals are discriminatory and in conflict with U.S. treaty obligations.

The proposals also flout the most-favored-nation principle (GATT, Article I), which holds that if you grant a privilege to one trading partner, you must grant it to all. Markey and Wyden would not require OPEC crude and products made from it to “stay here.” The restriction would apply only to Canadian crude and the associated products. Wittingly or otherwise, Markey and Wyden would grant most-favored-nation status to OPEC but deny it to Canada! A more foolish way to treat our closest ally and biggest trading partner would be hard to imagine.

The rejoinder to this criticism is that Wyden and Markey don’t go far enough – Congress should ban all petroleum product exports (and natural gas exports, too). Democratic strategist John Podesta’s American Oil for American Soil proposal, for example, would ban exports of petroleum products made from oil produced on U.S. public lands and offshore.

Proposals of this sort would place domestic and national commerce and all trading partners on the same, non-discriminatory footing. Nonetheless, such policies would still be unlawful under GATT.

Article XI: 1 of the 1994 GATT states:

No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party . . . on the exportation or sale for export of any product destined for the territory of any other contracting party.

Although “duties, taxes or other charges” on exports are permissible, quantitative export restrictions such as quotas and bans are “prohibited,” argue Lode Van den Hende, Jennifer Paterson, and Herbert Smith in Bloomberg Law Reports.

There are exceptions. Under Article XI: 2, export “prohibitions or restrictions” may be “temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party.” However, America is not facing “critical shortages” of finished petroleum products or natural gas. Natural gas is cheap today because it is plentiful, and gasoline is pricey not because it is in short supply but because crude oil prices are high.

Article XX(g) permits export restrictions “relating to conservation of exhaustible natural resources.” However, note Hende, Paterson, and Smith, “if there is evidence that an export restriction is designed to protect or promote a domestic processing industry, then Article XX(g) cannot be used as a justification.” Promoting domestic manufacturers who use petroleum as a feedstock is Rep. Markey’s leading rationale: “I make the amendment because I want a low price for the oil for toothbrushes, for steel, for pantyhose, for anyone that makes that product here in the United States.” Similarly, Markey argues that DOE should reject license applications to export natural gas so that feedstock prices will be lower and domestic manufacturers more competitive.

(3) Banning exports will discourage production, investment, and job creation. This is too obvious to require elaboration. The smaller the market U.S. companies are allowed to compete in, the smaller their potential sales volume, revenues, and profits. An industry crippled by exclusion from the global marketplace will attract less investment, create fewer jobs, and generate smaller tax receipts. Banning exports restricts wealth creation and undermines U.S. prosperity. Not good!

(4) Banning exports will increase the U.S. trade deficit. Indeed, how could it not? Petroleum products are now America’s leading export, with sales abroad reaching about $88 billion last year. Economists disagree on whether (or why) trade imbalances matter (see e.g., here, here, here, here, and here). Be that as it may, Wyden and Markey decry the U.S. trade deficit with China and urge policymakers to do more to ‘level the playing field.’ Yet they want to kneecap America’s biggest, fastest-growing export sector. The only ‘logic’ operating here appears to be political (that which harms oil and gas companies is good).

(5) Banning energy exports would expose America to charges of rank hypocrisy. Rep. Markey is a leading critic of Beijing’s export restrictions on rare-earth elements. Rare earths are used to manufacture the ‘clean tech’ products of which he is so fond, including hybrid and electric vehicles, solar panels and wind turbines. In March, the U.S., Japan, and EU launched a WTO case against China’s restrictions on rare-earth exports. We cannot flout the same treaty obligations and trade principles we invoke without looking ridiculous and duplicitous in the eyes of the candid world.

(6) Banning energy exports would backfire, harming those the policy supposedly aims to help. Proponents claim banning energy exports will increase domestic supply, which will lower price, which will then ease pain at the pump and make U.S. manufacturers more competitive. But if this is such a great idea, why don’t we do it for agricultural products, automobiles, or any other product made in the USA? Or, as in the anti-Keystone legislation, why don’t we insist that if U.S. products (e.g. computers, confections, pharmaceuticals) are made with imported parts or materials, those products must “stay here” for the benefit of U.S. consumers? It’s because if we banned exports from those other industries, it would bankrupt them.

For the same reason, energy export bans would backfire, harming the very consumers and manufacturers such policies are ostensibly intended to help. In the short term, banning exports might lower prices by producing temporary gluts in domestic markets. But the policy’s adverse impacts would be severe and lasting.

Cut off from global demand for their products, producer and refiner profit margins would decline. Oil- and gas-related capital, production, and jobs would migrate to countries that do not wage political warfare on hydrocarbons. U.S.-based producers would drill and frack less; domestic refiners would idle capacity and invest less in efficiency upgrades. Domestic prices would rise as domestic output fell. Domestic prices would also rise because consumers would depend more on foreign suppliers who face less competition from U.S. producers.

Conclusion

Banning energy exports makes no sense except as a strategy to harm those who frack gas and refine oil for a living. The logic behind such policies is that of party and faction, not economics. Proponents seek to deprive fellow citizens of property rights essential to their survival and success in the global marketplace. It is a sign of how far America has strayed from the constitution of liberty envisioned by the founders that Congress is debating such policies today.

Paul Nielsen April 20, 2012 at 9:50 pm

We all know or should know most of this. However, I have not seen it set out in such a concise and compelling manner. We have all sorts of mass media. Where are these simple concepts publicly discussed? Many thanks, Paul Nielsen, Houston, TX

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