Federal reserve tea-leaf reading and oil exports

A number of Fed watchers and economists expected that the Federal Reserve would raise its core interest rate at its September meeting. Their tea-leaf reading turned out to not even be close. Only one Federal Reserve Bank president supported a rate hike.

{mosads}Now, the tea-leaf readers are busy trying to dissect the Fed decision to figure out what it really means. After all, the conditions supporting an increase are clear: Reported unemployment is very low, there are no signs of inflation, home and auto sales are brisk, and the stock market has recovered a lot of its recent correction. One interpretation is that there is a heightened concern that the U.S. is about to go into recession.

Historically, recessions have occurred about every five years. It is now six years since the Great Recession, although the recovery has been tepid and there are many questions about what that means for future economic growth. Terming the economy to still be “fragile” sounds like a code word to many.

Financial analysts are beginning to flash warning signals about third-quarter earnings and it is unclear whether the Chinese economic dysfunction can be corrected in time to have a simulative effect globally. So, it looks like the Fed is being very risk adverse because of concerns that even a modest rate increase will tip the economy into recession. And being risk adverse, the governors want to avoid blame.

Thus it is inexplicable why the Obama administration has been slow-walking its decision on oil exports. Pandering to its green constituency instead of supporting action that would be economically beneficial is ideologically extreme. Nonetheless, congressional Democrats have also been complicit in slowing down legislation to remove the 1970s export ban. Economic pragmatism argues should be sufficient to overcome procrastination.

There is an abundance of economic evidence that removing the export ban will have positive economic benefits and perhaps help to forestall another recession. Last year, the Brookings Institution released its study of reasons for removing the export ban and reached the following conclusion: “In summation, increasing crude oil exports in any fashion will have positive economic effects both in the United States and in the world oil market. At the same time, world energy security will be enhanced by increasing the diversification of oil supply available globally, while also increasing U.S. energy security. Lifting the ban generates paramount foreign policy benefits, increases U.S. GDP [gross domestic product] and welfare and reduces unemployment.”

Increasing exports will stimulate domestic investment, help smaller producers who have been harmed by falling oil prices, and improve our balance of trade. According to the U.S. Department of Commerce, every $1 billion improvement in the trade deficit could mean 5,000 jobs. In 2013, we had a $400 billion import deficit in oil, so reducing that trade deficit through more exports would be a strong job creator. And the jobs related to the production and distribution of oil are good-paying ones.

IHS Energy, a well-respected consulting firm, also did a study on removing the export ban and concluded that “if the export ban were lifted, the resulting projected increase in domestic oil production — as much as an additional 1.1 million barrels per day — would result in 394,000 to 859,000 more U.S. jobs each year between 2016 and 2030. … [T]he crude supply chain would add $26 billion to the gross domestic product per year from 2016 to 2030.” IHS Vice Chairman Daniel Yergin said the economic benefits would be realized throughout the economy because of the crude oil supply chain.

Opponents, like Massachusetts Sen. Ed Markey (D), claim that exporting crude oil would harm consumers because it would cause gasoline prices to increase. Fear tactics like that were dealt a mortal blow by a recent U.S. Energy Information Administration analysis concluding that removing the ban could lead to a decrease in gasoline prices.

The export ban was a wrongheaded political overreaction 40 years ago and finally removing it should be a no-brainer. The fact that Congress can’t even do that helps explain the public anger with politicians.

O’Keefe is president of Solutions Consulting.