Here’s a letter to a Facebook commenter.
Mr. Edinger:
Commenting on my Facebook page, you ridicule me for criticizing Trump’s proposal to ban exports of diesel from the U.S. In your opinion, Trump is a brilliant strategist who understands that “limiting exports of US diesel will ultimately lower domestic prices by increasing our supply, which will ripple through prices for a wide variety of commodities and finished goods since diesel is extensively used in our trucking industry.”
Well.
The price of diesel has risen globally because of the war in Iran. Prohibiting U.S. exports of diesel will only further raise the global price of that fuel. Because the proposed export ban is only 90 days, U.S. oil companies – as Justin Wolfers points out – are not going to sell diesel today at prices in the U.S. lower than they can fetch in 90 days by selling that diesel abroad.
But let’s assume, contrary to fact, that this proposed export ban would indeed cause the price of diesel today in the U.S. to fall below the global market price. By shrinking the size of the market served by U.S.-based oil producers, the export ban – which raises the chances of future export bans – will likely cause these producers to allow the scale of their operations in the U.S. over time to shrink. Why optimize to produce to serve the global market an average of 365 days annually when your market in the future is likely to be the global market an average of only, say, 250 days annually?
As the scale of operations shrinks over time, the real long-run price of diesel (and, by the way, also the real prices of other fuels and products made from petroleum), will rise. At best, the export ban will achieve lower diesel prices today in exchange for higher energy prices tomorrow and long into the future.
If you doubt this analysis, answer me this: Suppose the State of California, in an attempt to lower the prices Californians pay for wine, prohibits the exportation of wine from that state. What effect would this export prohibition have on California winemakers’ incentives to produce wine and invest in additional vineyards and wineries? Do you really not see that shrinking the market available to California winemakers would discourage them from producing more wine and investing in wine production? And do you really not see that such a ban on wine exports would result in Californians paying a higher price of wine over the long run?
What’s true for wine is true for diesel.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
