Don’t ban oil exports to China
Benjamin Zycher
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Beltway silliness is as unavoidable as the summer humidity because rent-seeking groups, both economic and ideological, have powerful incentives to advocate legislation that would advance their interests at the expense of the economy in the aggregate. Nor is it difficult to find officeholders to make their arguments for them, even though, or perhaps because, they know better.
The rationales are almost always spurious. The latest example is the China Oil Export Prohibition Act of 2023, proposed by Sen. Marco Rubio (R-FL), which would “amend the Energy Policy and Conservation Act to prohibit exports of crude and refined oil and certain petroleum products to the People’s Republic of China.”
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Rubio’s rationale is preposterous: “While gas prices soar across the country, the Biden Administration is allowing half a million barrels of American oil to go to China every day,” Rubio said. “This is unacceptable. We need to increase American oil production and give priority to domestic consumers, not send oil to a genocidal regime half a world away.”
Where to begin? A ban on oil exports to only one buyer would have trivial effects at most, in that market forces would reallocate all supplies globally, including those from the United States, so that prices would be equal across markets (adjusting for such minor factors as different transportation costs). Accordingly, U.S. exports would go to other countries, some of which then would sell the U.S. (or other) oil to China. What’s the point?
Rubio apparently believes simultaneously that banning oil exports to China would give “domestic consumers” price relief while also “increas[ing] American oil production.” Huh? Lower prices will lead to more production? In reality, his proposal would yield no price relief, as the reduction in U.S. exports would result in a reduction in U.S. output and/or a reduction in foreign exports to the U.S. But a longer-term decline in U.S. production would be likely, as the enactment of Rubio’s proposal would signal an increasingly hostile economic and policy environment for U.S. oil producers, with less investment a near-certainty. Can that outcome possibly be what Rubio wants?
Exports of liquefied natural gas to China are not constrained under the Rubio proposal, but there is no particular reason why they might not be included as the legislation evolves. After all, Rubio’s stated rationale above for a ban on oil exports to China could easily be expanded: Do we not want “to increase American [natural gas] production and give priority to domestic [natural gas] consumers?”
Many of those domestic consumers certainly want such a priority, as they believe, mistakenly, except perhaps in the short run, that such a ban would reduce the natural gas prices that they pay and thus yield an artificial competitive advantage for them in international competition. A good example is the Industrial Energy Consumers of America, a classic special-interest lobby seeking congressional favors for itself in the form of reductions in LNG exports at the expense of everyone else. IECA was preceded in this quest some years ago by America’s Energy Advantage, a group of petrochemical producers seeking reductions in LNG exports and also oblivious to the longer-term effects such policies would have on domestic investment, production, and prices. Some things in the Beltway truly are eternal.
Should Rubio’s bill gain traction, it is certain that a ban on LNG exports, whether to China alone or one more general, will be added. That is the nature of coalition politics, and with the division of Congress between the parties, some substantial Democratic buy-in will be needed. Rapidan Energy Group notes that “Democrats … could back a bill restricting LNG because … it would keep U.S. natural gas prices from rising compared to prices around the world, [and] it would hurt investment in the U.S. natural gas sector, supporting their decarbonization priorities.”
Rubio’s bill would entangle the Beltway more in the oil and gas sector. It would weaken the fundamental free-market argument that the government stay out of private-sector investment and contracting decisions except on the strongest national security grounds. And about the contracts that U.S. LNG companies have with Chinese buyers: Is it Rubio’s position that the federal government should simply abrogate them? Has he thought through the implications of this? Hint: What principle remains to oppose, say, a similar abrogation of existing permits for fossil-fuel production, even on private property?
Put aside the adverse impacts of Rubio’s bill, even as it would fail in its direct objectives. As a matter of principle and in terms of its larger implications, it is a monstrosity in the making. It should be defeated.
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Benjamin Zycher is a senior fellow at the American Enterprise Institute.