Suppressing a product’s price won’t end well if the cost of its essential input stays elevated.
Amid record-high U.S. diesel prices, the proximate cause of which is the war in the Middle East, some policymakers are considering an intervention to block exports of the fuel. Senate Majority Leader John Thune, from the heavily rural state of South Dakota, says he is “open to exploring” such an export ban. The idea is that it would reduce domestic prices by cutting off international demand. In truth, basic market mechanics would ensure that the intervention backfires.
Since the war began, diesel prices have increased at a slightly higher rate than regular gasoline. Since diesel was more expensive to begin with, however, the price hike is even more painful for those who depend on it. Whereas gas prices are still below their 2022 highs, diesel prices have now surpassed their previous peak.
Virtually none of the price change has anything to do with American fuel production or consumption. Instead, it reflects a global crude-oil supply crunch caused by Iran closing the Strait of Hormuz, along with other wartime disruptions. The acquisition cost of crude oil traditionally accounts for half of diesel prices, and a constrained supply of diesel’s essential input reduces supply of the output, driving up the price further.
Even as a net exporter of petroleum, the United States is exposed to global prices and supply shocks because it participates in the international oil market. Oil produced in Texas can be consumed in the Netherlands, just as oil drilled by Saudi Arabia can end up in New York taxicabs. Similarly, America freely imports and exports its refined petroleum products, such as gasoline and diesel, so the prices of those goods are also largely determined by global markets.
Hence, the proposal to ban diesel exports. Domestic refiners currently export around a fourth of the diesel they produce to other countries — far more than the nation imports. By trapping all that excess diesel in America, the theory goes, refiners would need to slash prices to sell all their product at home, ultimately forcing costs down for drivers.
As our friends at Reason would say: “Sounds like a great idea! With the best of intentions! What could possibly go wrong?”
The first problem is that refiners do not have anywhere near the infrastructure to physically deliver almost 3o percent more diesel to consumers across the country instantaneously, so endpoint supply would expand only in the near vicinity of refineries. The Gulf Coast would very likely see depressed prices, but South Dakotans would be out of luck.
A second and far greater problem is that, insofar as an export ban does depress prices, it would do nothing to change the cost of crude oil that refiners must pay to produce the fuel. Diesel prices did not jump on their own; they were led by surging oil prices. A sudden fall in the former but no decrease in the latter would compress refiners’ margins on diesel production, and potentially render it unprofitable. Refiners would naturally respond by cutting production and shifting their capacity to other fuels. Supply would decline until diesel prices are realigned with input costs.
The result would be diesel prices returning to approximately current levels, but with much lower U.S. production and tens of billions of dollars in lost export revenue. Momentary, selective relief would give way to long-term impoverishment with no benefit.
Of course, the United States could also ban crude oil exports in a vain attempt to lower that price. Indeed, that is what the government already did from 1975 to 2015, responding first to an energy crisis and then to political inertia. Because gasoline and diesel could still be traded internationally, though, the ban had little effect on fuel prices. It served mostly to pad refiners’ margins by suppressing what U.S. oil drillers could charge them. In 2015, the government estimated that repeal could modestly reduce consumer fuel prices by growing the global crude supply and putting downward pressure on prices. Inflation-adjusted gas prices turned out to be lower in 2016 — the first full year the ban was lifted — than in any of the previous twelve years.
As Hayek’s Road to Serfdom anticipated, the only way to achieve price independence would be to follow one intervention with another, completely isolating America’s petroleum market from the rest of the world. Until the refineries and oil wells start closing, that is, when prices revert to the baseline and Americans start calling again for open trade.