Low-Energy Fridays: Would banning energy exports lower oil prices?

Whenever oil or energy prices rise, the same terrible idea is almost always discussed: banning energy exports. Prohibiting exports might seem like a good solution because it can reduce domestic commodity prices, but this perspective is myopic. It only makes sense if one believes that the entire economy hinges upon the price of one commodity while ignoring everything else. Going through with this would make Americans worse off overall, even if prices at the pump were lower.

Let’s use an extreme fictional example to better understand why export restrictions are bad for the economy. Suppose there’s a country that produces half of the world’s food, and everyone except one person in that country works in the food industry. We will call this country Tacoland.

Tacoland enjoys the economic benefits of exporting and selling food because it’s consumed globally and there is high inelastic demand for it. Tacoland also consumes a lot of food, but because it exports more than it consumes, it is a net exporter. Suddenly, supply disruptions hit distant Hamburgerland (which also produces much of the world’s food supply in our hypothetical), doubling the global price of food. Even though Tacoland residents are now paying twice as much for food, their food production revenue has also doubled. Capacity for the wages of Tacoland workers has increased considerably and—presumably under a competitive environment—all food production workers in Tacoland will see a wealth gain that outstrips their increased food expenditures.

Yet imagine that the country’s policymakers prohibit the export of food to combat the rise in prices, all for the sake of the one person in Tacoland who doesn’t work in the food industry. Is this person actually better off? One would assume so, as their expenditures have lessened relative to the counterfactual; however, recall that Tacoland’s economy is sustained primarily by food sales. The lost revenue from food exports affects not just the food industry, but all other industries that do business with Tacoland’s food production workers as well. For example, if this lone Tacoland resident is an artist who sells to his Tacoland peers, then the capacity of his customers to purchase his art has lessened—and so will his income.

Now, let’s go back to the real world. What would happen to a nation like Saudi Arabia if it stopped exporting oil when prices increased? Because the revenues from oil exports heavily underpin Saudi Arabia’s economy—and even though they could lower domestic gasoline prices by keeping all their oil within their borders—the lost economic output from reduced exports would far outweigh the benefits from reduced domestic energy expenditures.

Because the United States is a net exporter of petroleum products, higher petroleum prices do bring some economic benefit that offsets the downsides of higher costs. As noted in last week’s Low-Energy Fridays, more up-to-date research on the economic effects of high oil prices in the United States has found that net investment increases when oil prices increase. This means an oil export ban would be economically harmful on net. In our Tacoland example, we see that trying to reduce prices by restricting profits in an adjacent industry can harm workers in other economic sectors.

But even ignoring the trade dynamic that determines whether immediate gross domestic product (GDP) levels increase or decrease in response to a policy, there is a longer-term economic effect to consider. Exposure to prices, even when extraordinarily high, helps customers allocate capital more efficiently. While regular people hate the idea of “price gouging,” many economists note its value in stimulating market entry to alleviate scarcity. In other words, if people are suffering economically because of the high cost of one commodity, those same high prices encourage them to invest in other production sources or alternative products. Policies that artificially interfere with price formation keep the market from adjusting to more efficient consumption.

The United States did have an oil export ban in place for many years. When it was lifted in 2015 during a period of low oil prices, Americans did not face big price increases. Instead, production increased to meet foreign demand, thereby improving the allocation of capital to steer oil production toward efficient investments that helped keep costs low. Because export bans rob producers of the opportunity to sell to higher paying customers abroad, they weaken the economy by reducing the value of production—meaning that any lower price brings with it a greater lost economic opportunity.

The energy security dimension of export bans (i.e., the availability of energy resources in the economy) is also underappreciated. Our allies and trading partners without large domestic oil resources rely on the United States to supply them. Banning exports would diminish their energy resource availability, increase their prices (since the flip side of an export ban is reduced supply and higher prices abroad), and weaken their economies while making them vulnerable to the influence of foreign energy suppliers. The United States is more secure if it supplies energy to partner nations rather than ceding that market to rivals like Russia.

Although the idea of an oil export ban is bad for both the economy and national security, politicians’ preference for lower gasoline prices at any cost is causing the idea to rear its ugly head once again. While the tension between good economic policy and political desires necessitates consideration of these proposals, policymakers ought to focus on prioritizing policy over politics.