Across the country, oil and gas production is gaining momentum, thanks to innovative technologies and practices that have led to ongoing reductions in costs, dramatic improvements in productivity — and a resurgence in U.S. manufacturing.
Yet oil and gas producers are encumbered by some long-running legal roadblocks that, by many measures, have barely changed over the last century, if at all. Examples of these outdated regulatory barriers include a ban on exports of crude oil, regulatory constraints on access to federally controlled lands, and the 1920 Merchant Marine Act's absurd restrictions on transporting domestic products by ship.
The maritime law — known as the Jones Act — puts the scope of the regulatory problems into clear focus. It nonsensically mandates that any products, including oil, shipped between U.S. ports must be transported on a U.S.-built, U.S.-flagged, and at least 75%-U.S.-crewed vessel.
The Jones Act keeps otherwise uncompetitive elements of the American shipping industry afloat, but it carries a stiff price. The Jones Act harms the U.S. economy by driving up shipping costs, stifles competition, and hampers energy production by making it more difficult and costly for producers to send crude oil to refineries.
The Trump administration can do something about this archaic statute. Its focus on regulatory reform — resurrecting the Keystone pipeline, allowing the Dakota Access pipeline to continue, and repealing Obama's rules for hydraulic fracturing on federal land — is an opportunity for the administration to take further significant steps to ensure the U.S. derives full benefit from its enormous oil and natural gas resources.
The Jones Act is the epitome of an outdated protectionist measure. Originally legislated to sustain the Merchant Marine fleet after World War I, the Jones Act has become the support system for domestic commercial shipping.
Repealing the statute would reduce the cost of transporting oil by vessel because foreign-flagged ships can currently transport oil for an estimated one-third of the cost of U.S.-flagged vessels. Open competition is a critical component of any efficient marketplace. By being denied access to competitive shipping, American consumers pay higher prices for many goods, including gasoline.
Next, lifting the ban on U.S. exports of crude oil is long overdue. The Energy Policy and Conservation Act of 1975 signed by President Ford blocked exports of U.S. crude oil at a time when the country was becoming increasingly dependent on imported oil.
But with the continuing surge in domestic oil production resulting from the shale revolution (daily crude production is now back above 9 million barrels and will reach 10 million barrels by the end of next year), the export ban is no longer in our national interest. The ban is a vestige from a price-controls system that ended in 1981.
In contrast, there are no limits on U.S. exports of refined energy products such as gasoline and diesel fuel that are made from crude oil, so a ban on crude oil exports makes no sense.
With such deregulation and changes in policy, there would be an opportunity for U.S. oil and gas production to reach its full potential. There would be greater incentives for more domestic exploration and production. Some studies say that allowing U.S. crude oil exports could generate up to $15 billion in annual revenue for oil producers.
And if conducted in tandem with increased investments in infrastructure and the repeal of the Jones Act, unrestricted exports would provide a boon for domestic oil development, generating economic growth, income, jobs and revenue along the production chain.
- Perry is a scholar at The American Enterprise Institute and a professor of economics at the Flint campus of The University of Michigan.
