Oil Export Regulation: 1970s History (Part II)

“The time has come to end the long debate over national energy policy in the United States and to put ourselves solidly on the road to energy independence. … This bill is only the beginning.”

– President Gerald Ford, December 22, 1975, upon signing the Energy Policy and Conservation Act of 1975 into law.

With oil shortages in the 1970s, exports of domestic oil became of acute political interest. Regulation was accomplished under two laws: the Export Administration Act of 1973 and the Energy Policy and Conservation Act of 1975. The rise of Alaskan North Slope Oil, in addition, inspired specific export regulation that not only reflected concerns about domestic supply but special privilege for United States shipping interests. [1]

Export Administration Act

With first sales of crude and product transactions in U.S. commerce subject to price regulation, a potential escape was to export petroleum to receive the unregulated world price.  To seal this off, the Federal Energy Office in late 1973 placed crude, crude products, and natural-gas liquids on the Commodity Control List established by the Export Administration Act of 1969. [2] Administration was by the Office of Export Administration within the Department of Commerce.  Beginning in 1974, quarterly quotas were set for each covered item based on pre-EPAA amounts to prevent major export increases during the regulated period. [3] Regarding the quota, five percent was set aside for “hardship” distribution to exporters.

Amendments in 1977 to the Export Administration Act, the year the Trans-Alaska Pipeline was completed, placed strict provisions on exports of Alaskan North Slope (ANS) oil. A presidential decision to relax restrictions was subject to veto by either house of Congress. [4]

Further amendments two years later tightened the requirements. To permit exports, the president had to expressly find that such exports would not reduce the domestic supply of oil, would reduce refiner acquisition cost with 75 percent or more of the savings passed on at the marketing level, and was required by the national interest. Permitted exports had to be under interruptible contracts.  Finally, both houses of Congress had to affirm the president’s finding. [5] The reasons for this stringency and the implications of the ban are discussed in the next section.

Trans-Alaska Pipeline Authorization Act

On November 16, 1973, this act amended the Mineral Leasing Act of 1920 by incorporating a new section to limit exports of domestic crude oil transported over federal domain. [6] Oil exchanges made “for convenience or increased efficiency” with a nearby country were not covered. Exports could be considered only if domestic supply was not diminished, the national interest was served, and the Export Administration Act requirements were upheld.

This law, although overshadowed by the EPAA and the Export Administration Act, was a potential weapon against exports in other areas of the country.

Energy Policy and Conservation Act

Passed on December 22, 1975, this act gave the President authority to “restrict exports of . . . petroleum products, natural gas, or petrochemical feedstocks” when in the national interest. [7] On the other hand, a person engaged in petroleum activity could be required to allocate supply in international markets pursuant to an agreement by the United States with another country. The U.S. would subsequently enter into the International Energy Program Agreement with 21 other nations to share oil during an emergency.

Alaskan Oil Controversy

The export prohibition with Alaskan North Slope (ANS) supply, which began before oil first reached the shipping port of Valdez and has continued to the present, is as much an economic perversity as it is a special-interest coup.  Transportation economics dictate that the most logical market for ANS oil are the Pacific Rim countries such as Japan, with the West Coast serving as a residual market.  With the export ban, however, surplus oil must either go to California or travel through the Panama Canal to the Gulf Coast or around Cape Horn to Caribbean refineries.

Because of greater distance and more competitive foreign shipping rates, the transportation cost differential is astounding.  With 1982 transportation costs from Valdez to Japan estimated at $0.50 per barrel, and Valdez to the Gulf Coast at around $5.00 per barrel, and from the Persian Gulf to Japan and the Gulf Coast at $1.00 and $2.00 per barrel respectively, the free-market scenario (ANS oil to Japan; Persian Gulf oil to the Gulf Coast) totals $2.50 per barrel compared to export-ban transportation of $6.00 per barrel (ANS oil to the Gulf Coast and Persian Gulf oil to Japan). [8]  With over 500,000 barrels per day shipped to the Gulf and other distant locals instead of Japan, the estimated yearly cost of the export ban is over $600 million.

The infamous export ban has resulted from two major sources of political pressure.  The original 1973 prohibition was passed several weeks after the Arab embargo was announced by congressmen concerned that ANS supply would bypass supply-short domestic markets.  A second political force was United States shipping interests, which under the Jones Act (Section 27 of the Merchant Marine Act of 1920) enjoyed a monopoly on cargoes shipped between U.S. ports. [9]  Labor-union construction and operation made the  domestic fleet uncompetitive with foreign-flag vessels.  The export ban, by bringing the Jones Act into play, guaranteed the lucrative tanker business to the high-cost home fleet.

The 1979 amendments, which strengthened the ban, was inspired by the Iran cutoff and a desire to domesticate oil to maximize supply.  Heavy lobbying by Jones Act interests, represented by such trade groups as the American Maritime Association, the National Maritime Union, the Maritime Trades Council, and the American Bulk Ship Owners Committee, also was instrumental in preserving and tightening the ban.  Their interest reflects the fact that over 90 percent of U.S.-flag shipping capacity or 10 million deadweight tons is dedicated to the ANS oil trade. [10]

With changed supply conditions in the 1980s, the export prohibition has been targeted by critics for reform.  In fact, with increased California production, reduced product demand from conservation, and a preference of area refineries for lighter crude, ANS oil dumped in California has depressed the oil economics of PADD V.  Depressed prices have also adversely affected ANS owners Sohio, Arco, and Exxon.  Production has been much less than if exports were allowed, and wellhead prices have been artificially depressed by over $2.00 per barrel by artificially high tanker rates. [11]

Lower prices and lower production have meant less severance tax revenue for Alaska and less WPT for the federal treasury.  Resource misallocations from the ban includes the construction of the Northville Pipeline across Panama (built to eliminate oil transfers from tankers to canal boats).  Another publicized problem, although more imagined than real, has been negative trade balance with Japan that could be eliminated almost overnight with a deregulated Alaskan oil export market.

An attempt in 1981 to lift the export ban (H.R. 4346) was defeated as was a more determined challenge in 1984 (S. 979) introduced by Senator Frank Murkowski (R-Alaska).  Without active support from the Reagan Administration because of opposition from the 15-million member AFL-CIO in an election year, the amendment to lift the ban was defeated.  Quite the opposite, Reagan  extended the prohibition by executive order until House and Senate conferences could complete amendments to the Export Administration Act. [12]

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[1] Several export-related issues are briefly examined in chapter 10: the oil equipment ban against the Soviet Union and Import/Export Bank subsidies used for equipment exports from the United States.

[2] Public Law 91-184, 83 Stat. 841 (1969).  38 Fed. Reg. 34442 (December 13, 1973).

[3] For example, see the first quarter allocation in 39 Fed. Reg. 3661 (January 29, 1974); 39 Fed. Reg. 5311 (February 12, 1974).

[4] Public Law 95-52, 91 Stat. 235 (1977).

[5] Public Law 96-72, 93 Stat. 503 (1979).

[6] Public Law 93-153, 97 Stat. 584 (1973).  Another similar law was the Naval Petroleum Reserves Production Act, Public Law 94-258, 90 Stat. 303 (1976).

[7] Public Law 94-163, 89 Stat. 871 (1975).

[8] Estimates taken from the California Energy Commission, Export Restrictions on Domestic Oil (November 1982), p. 3. Similar estimates can be found in Putnam, Hayes, and Bartlett, Inc., The Export of Alaskan Oil (May 1983).

[9] Public Law 261, 41 Stat. 988 (1920).  For discussion of the Jones Act, see Bradley, Oil, Gas, and Government: The U.S. Experience (1996), pp. 1000–1001.

[10] Stephen Eule and S. Fred Singer, “Export of Alaskan Oil and Gas,” in Free Market Energy, ed., S. Fred Singer (New York: Universe Books, 1984), p. 123.

[11] Heritage Foundation, “Exporting Alaska’s Oil and Gas,” February 22, 1983, p. 9.

[12] 48 Fed. Reg. 48215 (October 18, 1983); 49 Fed. Reg. 13099 (April 3, 1984).

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Note: This post is adapted from Robert Bradley, Oil, Gas, and Government: The U.S. Experience (1996), pp. 770–774.