Thomas Friedman Is Wrong; Lifting The US Crude Export Ban Would Not Drop World Prices By $25 A Barrel

That Thomas Friedman over in the New York Times is wrong in one of his prognostications is not exactly a great surprise to anyone. That the paper contains an error on matters economic is also not something that is going to have maiden aunts shocked by the way their world has been usurped. But this specific argument being advanced is still nonsense. For Friedman seems to think that lifting the US ban on crude oil exports will drop the global price for oil by $15 to $25 a barrel. At which pointVladimir Putin’s government goes bust and the Ukraine and Eastern Europe is saved or something.

The problem with this is that dropping that export ban isn’t going to mean a fall in global oil prices at all: it’s going to lead to an increase in the domestic US price of crude oil. Here’s Friedman:

And the necessary impactful thing that America should do at home now is for the president and Congress to lift our self-imposed ban on U.S. oil exports, which would significantly dent the global high price of crude oil.

No Tom, sorry, it won’t.

If the price of oil plummets to just $75 to $85 a barrel from $100 by lifting the ban,

Nope, it just won’t.

Now I agree that reducing the price of oil would be a good way of reducing the power of both Putin and ISIS. I also agree with Friedman that a decent carbon tax is a very good thing to do, especially with his insistence that we offset that with tax reductions elsewhere. Taxing bads like pollution and emissions is obviously better than taxing goods like incomes and profits. However, lifting the crude export ban just isn’t going to have the effect posited here.

For a technical discussion of elasticities of supply and demand and so on gohere. But even that’s missing the major point at issue here. Sure, there’s the crude export ban meaning that the US market for crude oil is cut off from the pricing in the rest of the world. It is, after all, arbitrage between markets that leads us to Ricardo’s law of one price, that the same good will cost the same amount (minus transport costs) in different places. However, there’s no ban on the export from the US of refined oil products produced from US crude. Meaning that the market for refined products is integrated into that global pricing system.

It’s also true that refined products are what people actually use, crude is simply the intermediate that leads to them. So, global demand is set by the prices of the refined products. And despite the crude export ban the US market for refined products is also (minus those transport costs) set by the balance of global supply and demand for them. Another way to put this same point is that since refined products can be exported the US supply of crude oil is already integrated into the global pricing of oil. So, lifting the ban will have no effect at all on the global pricing of oil.

This is not to say that there would be no effects of a lifting of the ban. Currently those who produce crude in the US get less than the global price for that crude. The refiners, the people who export the final products, gain the world price for them. Obviously then the effect of the ban is to increase US refiners’ margins and depress those of US crude producers. A lifting of the ban would reverse this process. US oil refiners would earn less on each barrel and US crude producers more: that is, the domestic price of US crude would rise while the prices of refined products would not shift.

OK, markets are more than a tad more complex than this but that is still the basic analysis of what is going on here. The removal of the US crude export ban ain’t going to move the global crude price but it is going to redistribute profit margins inside the oil industry in the US.

Thomas Friedman wrong on matters economic eh? Who would have thought it?