David R. Henderson  

My 1983 CEA Memo on the Ban on Alaskan Oil Exports

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Last week, I posted here and here about Larry Summers's excellent talk in which he advocated removing the ban on U.S. oil exports. I then remembered that when I was the Senior Economist for Energy Policy with President Reagan's Council of Economic Advisers, I had written a memo on the issue of relaxing the constraint on exporting Alaskan oil. I found the memo and I reproduce it here. Notes in [ ] are ones I've added today. You'll notice that the reasoning on economics is pretty succinct. There's a good reason: the main two people I was writing for were Marty Feldstein (chairman) and Bill Niskanen (member). They didn't need a lot of hand holding on the economics.

MEMORANDUM
COUNCIL OF ECONOMIC ADVISERS
October 19, 1983
TO: Marty Feldstein
FROM: David Henderson
SUBJECT: Alaskan Oil Ban: Background for Cabinet Council on Commerce and Trade with the President
NOTE: IF YOU NEED TO TALK TO ME ABOUT THIS, WE HAVE TO DO IT TODAY. I'll BE OUT THURSDAY AND FRIDAY.

The major purpose of tomorrow's meeting on Alaskan oil is to give the President the background information he requested. He is not expected to decide immediately. Most of the agencies agree that freeing up Alaskan oil for export would be a Good Thing. [DRH note: Those familiar with 1066 and All That--and I think Marty was--will appreciate the reference.] All are aware, however, of the concerns of the maritime industry.

Law

Exports of almost all Alaskan oil are now banned under a number of laws, the most stringent of which is Section 7/d of the Export Administration Act (EAA). Although the EAA expired at midnight Friday, its provisions are being kept in force by a Presidential declaration of an international emergency. The House and Senate are putting a new EAA together which would continue the ban.

Eliminating Section 7/d would not in itself be enough to allow exports, but it would go far. The Mineral Lands Leasing Act also bans exports of crude transported by pipeline over rights-of-way on federal lands unless the President finds that exports won't diminish supplies to the U.S. and are in the "national interest". Congress could override the President by passing a concurrent resolution of disapproval. But the issue before the Cabinet Council is the Alaskan oil ban generally, not just Section 7/d.

The Issue

The basic question to be discussed is whether the Administration should spend the political capital to loosen the ban. DOE, NSC, and State all believe strongly that it should. DOT is the only strong proponent of the status quo. Various options will be discussed but the realistic option is to allow limited exports (about 200,000 barrels per day).

The Economics

Because of the ban, oil companies have to ship about 800,000 barrels per day of Alaskan oil to the Gulf Coast. The shipping cost per barrel is about $5.25 versus $0.50 to Japan. (One of the reasons for the high cost is that the Jones Act requires the oil to be shipped on U.S. flag tankers which have higher capital and labor costs). It is estimated that eliminating the ban would cause the companies to ship about 500,000 barrels per day. (I don't understand why that number isn't more like 800,000. The reason given by both sides is that long-term contracts with the trans-Panama pipeline prevent that, but it seems to me that the companies would have an incentive to breach the contracts. However, this point isn't worth raising for two reasons: (1) the feasible liberalization option is to allow only 200,000 barrels per day anyway, and (2) it's better to let sleeping dogs lie).

The main cost of the ban is to the Federal Govt. The higher transport costs reduce the net price the producers receive and therefore reduce the federal income tax they pay. The second biggest loser is the State of Alaska, because their royalties and severance taxes are reduced. The third biggest losers are the producers. The estimates are that if the ban is preventing exports of 500,000 barrels per day (rather than the 800,000 that I consider more realistic) then the present values of losses are:
U.S. Govt. $3.6 billion
Alaska Govt. $1.5 billion
Oil Companies. $0.6 billion

The net gain to the maritime industry (assuming the displaced ships and seamen have no alternative uses), is $3.3 billion. Therefore the net present value loss is at least $2.4 billion. Incidentally, the average annual pay of maritime employees is $72,000 per year. This ban is clearly not a transfer to the poor.

There is a further (small) loss from the oil not produced because of the lower net price. Of course there is very little impact on the overall U.S. trade balance because if the Alaskan oil were exported to Japan, the Gulf Coast would simply replace it with imports from the Persian Gulf.

Energy Security

One of the arguments made against allowing exports is that it would increase our dependence on the Persian Gulf. This is false. It would increase our imports from the Persian Gulf, not our dependence. The oil market is a world market. The only impact of a reduction in Persian Gulf oil supplies would be on the price. But it would have that impact whether or not we buy directly from the Persian Gulf. We can respond to a reduction in Persian Gulf supplies by buying elsewhere. The world market clears.

Moreover, the International Energy Agency (lEA) sharing plan would be used in a true emergency to allocate supplies. If the allocation is done at market prices, then the lEA is essentially not allocating. If it allocates at below-market prices, then it does so according to each country's oil consumption in a base period. Eliminating the ban wouldn't affect this consumption.

DOT argues that we wouldn't have tankers available to divert Alaskan oil from Japan back to the U.S. in the event of a large supply reduction. But DOE points out that a world oil supply reduction would make numerous tankers available.

An Opportunity

We have an opportunity here to make some good economic policy. The maritime unions are small. They have only 14,400 members. Moreover 53% of these workers are over 50 years old. So there is a window of opportunity here to reduce the demand for them before their younger counterparts replace them. The number of votes at stake is minimal. Only 4,800 seamen and 80 U.S. flag tankers are engaged in the Alaskan oil trade. Allowing 200,000 barrels per day in exports would cost only about 1000 jobs. The main thing the maritime unions have to withhold is campaign contributions. But these aren't important to the President because he can use such funds only in the primaries. The government pays for campaign expenses for the election.

If the Administration stays out of things, then the ban will surely remain. But Congress is willing to deal. Roger Majak, Staff Director of the House Subcommittee on International Economic Policy and Trade (of the House Foreign Affairs Committee) stated last week that if the WH changed its signal, [Don] Bonker (chairman of the subcommittee) would discuss "leaving the door open for a reasonable amount of oil exports" (Majak's words). Also, Jake Garn, chairman of the Senate Banking Committee, says he is waiting for marching orders from the WH. Although the WH hasn't given a clear signal, it has something to gain and nothing to lose by pushing for liberalized export restrictions.

A Caution

One option that could be kicked around at the Cabinet Council is to allow more exports but to require that they be shipped on U.S. tankers to satisfy the maritime interests. It might be thought that this would be no worse than allowing fewer exports but allowing them to be shipped in any tankers. But it is much worse: it would set a dangerous precedent by extending the Jones Act to purely commercial transport between the U.S. and other countries. The loss from setting this precedent would be very large,

cc: BN [Bill Niskanen], BP [Bill Poole], GC [Geoff Carliner], AW [Alice Williams]


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COMMENTS (2 to date)

Good analysis, David. Get the benefits out there, acknowledge the political costs.

Got any more of these memos lying around?

David R. Henderson writes:

@Patrick R. Sullivan,
Thanks. Yes I do. I’ll post them occasionally. I have a follow-up memo on Alaskan oil that I’ll post this week.
BTW, you asked a really good question a week or so ago about what crime Nixon should have been charged with. I took it as obvious but now I’m not so sure. Still looking into it, but have been busy with other projects.

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