Lifting the U.S. Crude Oil Export Ban: Prospects for Increasing Oil Market Efficiency

Over the past decade, U.S. shale oil has substantially changed the nation's energy landscape. 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 relative oil scarcity into an era of relative 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 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-old ban was lifted.In this article, we use aggregated and disaggregated oil market data to explore distortions highlighted by the export ban and potential efficiency gains from the lifting of the ban. We find that together, the shale oil boom and the oil export ban interacted to distort oil trade flows and prices, leading to an inefficient oil market. 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.We also find that repealing the export ban created opportunities for increased trade and efficiency in the oil market. Once the ban was lifted, U.S. oil exports rose despite declining U.S. oil production and small oil price differentials. In addition, U.S. oil exports shifted from Canada to a variety of new destinations, and Canada's oil imports from the rest of the world increased.Section I describes key features of global oil markets. Section II briefly reviews government restrictions on U.S. oil markets with particular attention to the introduction of the export ban and its exemptions. Section III examines market distortions created by the shale oil boom and the export ban. Section IV investigates efficiency gains resulting from the removal of the ban.