Banning the Export of American Oil

Posted in: Constitutional Law

Since 1974, federal law generally has prohibited the export of American oil. The law bans such exports even though the Export Clause of the U.S. Constitution provides that Congress can impose “No Tax or Duty” “on Articles exported from any State.” (Art. I, §9, cl. 5.) The higher a tariff is, the more it discourages exporting the good. A total ban on oil exports is equivalent to a tax of infinity.

The history of the Export Clause shows that Congress can no longer justify this ban. When the Framers drafted our Constitution in 1787, the South expressed concern that the North would tax the export of cotton, which was the South’s major cash crop. The South wanted to keep its markets open to the world. James Madison proposed that Congress could impose an export tax, if a super-majority in Congress approved. The South objected that such a restriction was insufficient protection because the more populous North might still be able to impose an export duty. The South did agree that a simple majority could impose a tax on imports but the North had to agree that there must be no tax on exports. While this constitutional restriction in the Export Clause initially favored the South, its principle applies without regard to geographic region. For example, in an effort to make aluminum or steel cheaper, Congress may not impose a tax on their export.

Even low export tariffs on the export of aluminum or steel would hurt the balance of trade, which Congress and the President constantly bemoan. Moreover, export tariffs would increase unemployment in the aluminum and steel industries because the tariff barrier would reduce demand. In the very short term, that lower demand would be equivalent to increasing the domestic supply (thus lowering prices) but that effect will be short-lived because producers of aluminum and steel will reduce supply to synchronize with the reduced demand.

A History of the Export Clause

Since 1974, Congress has imposed the functional equivalent of an absurdly high tax on oil exports by simply banning all exports. However, the Export Clause (Article I, §9) says Congress cannot do that. For example, the Court invalidated the Harbor Maintenance Tax as an invalid tax on exports, in United States v. U.S. Shoe Corp.. The law applied to goods loaded at United States ports for export, based directly on the value of the cargo itself, and not upon any services that the government rendered for the cargo.

Even though the government imposed this tax in a nondiscriminatory fashion, on exports, imports, and domestic commerce, U.S. Shoe Corp. held that the Export Clause prohibits even nondiscriminatory taxes on exports. As the Court explained in another case, the “proponents of the [Export] Clause fully intended the breadth of scope that is evident in the language.” Similarly, the Court later held that Export Clause does not permit nondiscriminatory federal taxes on goods in export transit. As it explained in United States v. International Business Machines Corp., quoting from the debates by the Framers, the hands of the Legislature were absolutely tied” by the Export Clause, and “It is best to prohibit the National legislature in all cases” from imposing export tariffs.

As in life, many issues in constitutional law can get complicated. The Court has allowed Congress, for national security purposes, to impose embargoes. The Court reasoned that the purpose of that export restriction is not to keep goods in the United States just so purchasers can buy them more cheaply. Instead, the congressional purpose is national security. Thus, Congress can prohibit arms manufacturers from exporting tanks to the enemy during times of war. Congress can also decide to limit or restrict exports to particular countries for national security purposes. That is how Congress justifies the trade embargo on Cuba or Iran, for example.

The Oil Export Ban

The oil export ban was a response to the Arab oil boycott of 1974. Congress relied on national security to justify the ban, and that rationale was legitimate at the time. As the Supreme Court explained in Regan v. Wald, the President, if authorized by Congress, “has broad authority to impose comprehensive embargoes on foreign countries as one means of dealing with both peacetime emergencies and times of war.”

While the embargo had obvious national security purposes in 1974, what was true then is not true four decades later. Energy Secretary Ernest Moniz recently urged Congress to reconsider the nation’s ban on exporting domestically produced crude oil. As Mr. Moniz said, “Those restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, on oil disruptions.” When the reason for the law changes, the law should change.

The federal oil embargo no longer deals with a peacetime emergency. The International Energy Agency (IEA), a Paris-based adviser to 28 energy-consuming nations, includes among its advisees the United States, Canada, and most of Europe. Late last year, the IEA concluded that by 2015, the United States would overtake Russia as an oil producer. By 2017, it will surpass Saudi Arabia. In 2012, U.S. oil production was 9.2 million barrels a day; by 2020, it will rise to 11.6 million barrels a day. Meanwhile, revenues for OPEC’s 12 members are at its lowest in several years. Many OPEC countries use their oil revenues to arm terrorism. Less profit means less money for countries like Russia or Iran to spend to spread mischief abroad.

The cause of this newfound abundance of oil is American technology. American producers can now tap rock and shale layers in North Dakota; Texas is using horizontal drilling and hydraulic fracturing. The result is that this finite resource is expanding, not contracting. Domestic oil production has increased by 66 percent since 2008. It will continue to increase.

Nonetheless, the oil export ban persists, although the reason no longer has anything to do with national security. Now, the purpose of the ban is to keep domestic prices artificially lower for domestic consumers. For example, Senator Edward J. Markey (D. Mass.) argues, “oil should be kept here in America, to benefit our consumers,” but that admitted goal is directly contrary to the very purpose of the Export Clause. Just as Congress cannot impose export restrictions on cotton to dampen consumer prices in the United States, it cannot impose export restrictions on oil exports when the country is awash in oil.

Granted, using oil affects carbon dioxide and that may affect global warming. However, the rest of the world will produce oil anyway; the only real issue is whether the United States should export oil to countries that are our friends, or keep those countries reliant on countries that are not friendly to us. Today, we are concerned that Ukraine and Western Europe feel under the Russian thumb because of their dependence on Russian energy exports. By exporting our energy, we reduce the power of Russia in a way that does not require flexing any military muscle.

Allowing oil exports will also increase the incentive to find more oil domestically. It will increase employment in the oil industry at a time when national unemployment is stubbornly high. The Commerce Department is taking notice. In late June, in private rulings that it did not publicly announce, it allowed some exports by defining some ultra-light oil as fuel once there has been a small amount of processing, which makes this oil eligible for sale outside the United States. This is a small exemption, but it could grow. The head of oil research at Societe Generale SA in New York, Mike Wittner, recently advised, In addition, it’s good for peace, because it will lower the worldwide price of oil and that serves to reduce the oil income of foreign dictatorships that sponsor violence. That should make the world safer for all of us.

Posted in: Constitutional Law

Tags: Legal