Energy economist explains why banning OPEC protects American consumers

“…we [the USA] are more exposed to high prices than we are to low prices.” – Hirs

Last week I wrote about a Texas-based oil producers group that is calling for a ban on crude oil imports in order to support domestic producers and disentangle the USA from its costly military commitments in the Middle East.

President Dwight Eisenhower imposed crude oil import quotas in 1959 that lasted until 1974, when they were rescinded by Richard Nixon.

University of Houston energy economist Ed Hirs has been promoting the return of Eisenhower-era oil import quotas for a long time. I interviewed him about quotas and the idea of the USA, Canada, and Mexico a North American version of OPEC.

Hirs has written a number of scholarly papers and media op-eds explaining why the United States needs to say adios to global oil markets and focus on the domestic market, which would include Canada and Mexico.

The following is my interview with Hirs, edited and augmented by excerpts from his published work on import quotas.

MH: What you’re advocating would create a North American alternative to OPEC using crude oil import quotas without actually creating a cartel, have I got that right?

Hirs: Exactly.

MH: And quotas could be imposed by the President using executive authority, without Congress passing legislation?

Hirs: It was an executive order by Eisenhower [in 1959] and it stayed in place until his vice-president – then known as Tricky Dick to some of us – in 1974. He was trying to find a way to fight domestic inflation, which was attributed to the Vietnam War and very loose monetary policy.

Ed Hirs, energy economist, University of Houston.

MH: How would prices be set under import quotas?

Hirs: Supply and demand in the US market will set the prices.  In our paper, Crude Oil Imports and National Security, we presented a scenario whereby price would rise depending up the amount of the quota and the price elasticity of demand each year.

From 1959 to 1974, the Texas Railroad Commission set the allowable production for each oil well in Texas.  This, in effect, stabilized the US oil market and the domestic price of crude.  I doubt that the Railroad Commission would try to exert that amount of control today, but it is conceivable.

MH: Wall Street makes a lot of money on oil futures. Are those kind of entrenched interests likely to support the idea of crude oil import limits?

Hirs: We are at most 20 million barrels a day in the domestic market. There are another 74 million barrels a day in the world market. It would just be a bifurcation of markets, that wouldn’t bother Wall Street at all. In fact, with a higher domestic price of crude, there would be a lot more financing of domestic economic activity.

We’ve lost at least $200 billion in annual GDP and we’ve had one hundred billion-plus of investment capital wiped out here in the US just due to the oil price collapse and the effect on domestic production. Every investment bank in Houston is down to one or two people from 10.

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MH: What about the diplomatic implications of withdrawing from the Middle East?

Hirs: I don’t think there are any. The cycle we got into in the 1970s was

MH: What do you think is the political appetite today for oil import quotas?

Hirs: Zero, because elected political leaders are too focused on their re-election and not focused on the strategic best interests of the country. We’ve taken our proposal to the different advisors, Energy Secretary Steven Chu [2009 to 2013], I know our proposal’s been presented to Energy Secretary Ernest Moniz [2013 to present]. When Henry Waxman chaired the [House Energy and Commerce] Committee, his comment was, “This makes brilliant sense, but it would raise the price of gasoline at the pump and if that happens, none of us get re-elected.”

What I point out in my work is that we’re actually paying that increased price with our involvement in the Middle East. Everybody knows that’s why we’re there. Until France started bombing ISIS oil terminals, that oil was getting into the world market, and if we’re allowing it to get to the market, then we’re buying ISIS oil.

MH: Your argument is that it’s cheaper to pay a bit more at the gas pump than to spend huge sums being militarily involved in the Middle East?

Hirs: Precisely. I’ve done that math. It works out to be about $1.19 a gallon the US consumer has consumed since 9/11. That expense has gone on the national credit card, the national debt, and the consumer doesn’t see that. If the consumer were paying for that [military involvement in the Middle East] day in and day out at the pump, how many folks would have voted to -re-elect W. or President Obama? This analysis is apolitical.

And it’s not just military spending. We have almost 6,000 dead and 60,000 wounded. There are 200,000 family members who would be much more interested in cleaning up a piddly pipeline spill in Nebraska than they would be putting flowers on graves.

There’s a cost to this. I have no problem spilling a little oil locally versus spilling blood overseas.

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MH: Are you a little surprised Republican presidential candidates Donald Trump and Ted Cruz haven’t jumped on the idea of banning OPEC and implementing crude oil import quotas?

Hirs: I’m not sure why they haven’t picked up on it. Sen. Cruz’s staffers saw my presentation at TiPro [Texas Independent Producers & Royalty Owners Association] last year. I know his domestic advisors are aware of it. I just an analysis of domestic public opinion and ranking, and I think climate comes out to number 35 on the public agenda for presidential candidates. And energy, especially oil and gas, is nowhere to be seen in the top 50. [The topic] just isn’t garnering any attention from the electorate right now.

MH: Are there any issues we should have talked about that we haven’t?

Hirs: In Crude Oil Imports and National Security we called for the import quota because we were very concerned about supply disruption. Global supply disruption at that time would have kicked prices up over $400/b and we were already dealing with prices over $100/b. The US military has a huge presence in the Strait of Hormuz. It was coincidence that the Chinese navy was conducting exercises with the Iranian navy 18 months ago. The supply lines for crude oil are strategically important.

If those are interrupted by bad actors, and there is every expectation that that can happen…we [the USA] are more exposed to high prices than we are to low prices.

Now would be a good time to impose an import quota, raise the domestic price [of oil], protect consumers from price spikes, help the industry recover, and get out of this boom and bust cycle.

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