Limit Crude Oil Imports: Perhaps Eisenhower Was On To Something

I never know Dwight Eisenhower said this…very prescient and profound. He was a man who could see it all very clearly and how the US was being sold out even six decades ago. I am really beginning to revere the man

[B]COLUMN: Limit Crude Imports: Perhaps Eisenhower Was On To Something[/B]

by Deon Daugherty Rigzone Staff

Monday, January 25, 2016

Geopolitical analysis suggests keeping crude in North America – rather than shipping it around the world – might be more meaningful to domestic energy and economic security.

Just in time for Christmas, the U.S. government made the decision – long championed by oil and gas producers – to lift the ban on exporting crude oil. Presumably, it would open the nation’s oil industry to new markets, reduce the excess oil currently stranded in storage and perhaps even raise the price of oil to numbers that make it more economic to produce. Instead, as U.S. oil reserves remained parked at an 85-year high, and oil prices per barrel fell close to $36.

What’s more is that decline hasn’t let up. A month later, and since the departure of the first tankers to export U.S. oil to foreign locales, the price of domestic oil has remained volatile and settled even lower. A barrel of WTI oil closed trading Jan. 22 with a 10 percent bump that only took it to $32.19 per barrel.

Despite the urging of producer powerhouses such as Harold Hamm, CEO of Continental Resources Inc., was the move a step in the wrong direction?

Not a mistake, said Ed Hirs, an energy fellow at the University of Houston, but certainly not a panacea.

“It was just a whole bunch of political capital expended on something that’s not going to have any impact or in any way really benefit the economy,” he told me. “How are [producers] going to sell their shale oil, which costs them (on average) $75 a barrel to produce for $30 and make a profit. It was, is and remains a fool’s errand.”

The dynamic itself doesn’t move the needle on “free market” principles in the United States for a variety of reasons. As Hirs explained, the United States currently imports between 7 and 8 million barrels of oil a day – mostly from the United States’ closest ally, Canada. Say the experts decide to export a million barrels of oil per day, then they have to import another million to break even. In short, the balance doesn’t change.

“We have lots of import restrictions,” Hirs said. “We have them on the labor market. We have them on ships. We have them on light trucks. We have them on cigars. We have them on sugar. We have them on cattle, oranges and ethanol. We’ve got import restrictions in every part of the economy you can imagine,” he said.

So what makes crude oil different?

Citing a recent column in The New York Times, Hirs noted the “hand-in-glove” relationship the United States appears to have with Saudi Arabia.

“For the cheap oil and military intelligence, we basically go and fight their wars for them. So the U.S. basically is a mercenary,” he said. “[The Times] didn’t say that, but I will.”

But back in 1956, before the widespread panic of the Saudi’s oil embargo and gasoline lines that stretched for miles, President Dwight “Ike” Eisenhower imposed by executive order a restriction on importing crude oil.

“He knew that we would buy that oil from anyone, and so he looked at the strategic importance of maintaining our own oil supply,” Hirs said. “That was not popular with Congress or the public, but who’s going to argue with Eisenhower? It’s not like Obama, Bush I, Bush II, Trump, Reagan, Carter or Nixon knew better than Eisenhower. These import restrictions raised the price of domestic crude to roughly double the world price.”

Consequently, the Organization of Petroleum Exporting Countries (OPEC) was created to figure out how to deal with the United States’ crude independence.

Including Canada as a 51st state of sorts, the United States could exist indefinitely on refusing crude imports, he said. In drafting a paper on the subject with fellow Yale University graduates, Hirs discussed the proposal with politicians of both red and blue stripes, each of whom agreed with their analysis and strategy. The hold-up? Public reaction to an inevitable increase in prices at the pump.

So what would happen if a modern-day president took the Eisenhower model and ceased crude imports by executive order?

“Well, of course, he wouldn’t be re-elected, but Eisenhower was on his way out of the office, [but] it’s just a strategic structure. Somebody in the [modern] campaign should talk about it,” he said. “Instead, they talk about import restrictions on the labor market – they’ve got all these concerns about immigration – that’s the labor market.”

The price shock to the energy markets would take current oil prices from the $30 to $40 per barrel range to around $140 before it found a balance, he said. Restricting crude imports – and relying more exclusively on North American hydrocarbons – would put more pressure on consumers, he said. But in the long run, it’s a matter of maintaining the nation’s security: both in energy and its economy.

“We’re just looking out for our own national interest. Believe me, the Saudis are looking out for their own national interests. And the same with the Russians. Keep in mind 80-odd percent of the world’s oil reserves are owned by national oil companies by governments, and these guys are looking out for their own national interests,” Hirs said. “We seem to be the only county that’s not.”

That’s a good article.

As I said here a year ago, we need a $10 / bbl import duty on non-North American oil imports.

Low oil prices are good for the overall economy in general, but it’s possible to get too much of a good thing. From an energy security, national security, and economic perspective we must protect the viability of the domestic oil production industry. We cannot afford to let 40% of the domestic oil producers to go bankrupt. We cannot afford to bailout the pension funds, hedge funds, and Wall Street banks again after the collapse of domestic oil production. We cannot afford to pay $150/bbl for oil again immediately after the collapse of 40% of domestic producers.

We are going to have taxes and they have to come from somewhere. I cannot think of better place than imported oil.

A beneficial side effect of a $10/bbl tax on imported oil is that it would drive international prices even lower and squeeze our enemies Iran and Russia.