• Sunday, Jan 26, 2020
  • Last Update : 01:02 am

A ban that made no sense

  • Published at 09:49 pm June 15th, 2019
A ban that made no sense
A crucial industry Mahmud Hossain Opu/Dhaka Tribune

Is jute our oil?

It's not entirely obvious that the jute business, and that of the global oil industry, are the same in any particular manner. One is an agricultural crop(and thus renewable), the other is a natural resource -- and once it's gone, it's gone. 

Yet, economics is a set of general rules and models which can be applied to similar situations. The trick is in working out which model suits which situation.At which point we can say that the two businesses are the same in one respect -- the government’s decision to lift the export ban on certain types of raw jute. We really did see the same thing in the oil business, and the comparison is most useful as an illustration.

During the oil crises of the 1970s, the US government decided that no one would be allowed to export crude oil -- except where transport issues made it an obvious choice like from Alaska. They did, however, agree that the export of processed oil -- diesel, petrol, and so on -- would still be allowed. Not all that sensible an idea but that's what they did. The country depended upon imports after all, so what could be the harm?

That then changed when technology did, specifically the very recent idea of fracking for oil in oil shales. The result of this was that the US became awash with freshly produced crude oil. Again, transport issues meant that, logically, some of it at least should be exported. It’s also not quite true that “oil is oil,” types differ, different people and places benefit from slightly different types as the inputs to their local economy.

However, that oil couldn't be exported.

Things made from that oil -- petrol, diesel, lubricants -- could be exported without limit or licence. So, what happened? Well, the people who owned the refineries in the US started to make excellent profits, that’s what happened. The people with all this new crude oil couldn’t sell it to the foreigners who were eager to use it. So, the internal to the US price of US produced crude oil was below the world price.

It’s possible to check this by looking at the “WTI/Brent” spread. They’re roughly equivalent oils, but West Texas Intermediate is produced inside the US, Brent in the North Sea of Europe. We started to see $10 and $20 a barrel price differences. The people drilling for oil inside the US were getting less than the world price for it.That means those refineries were paying less for their oil of course. But they could export petrol, etc without limit. So, they were getting the world price for their products. 

Which is a great business to be in, if you can buy for an artificially depressed price below world and then sell at the higher world price. No wonder they were making those excellent profits.Finally, people woke up to this and the laws were changed. It is now legal to export crude oil from the US, the US internal crude price is now where it should be -- the world price minus transport costs -- and refinery profits have gone down.

Note what the effect of the export ban was, though. The people who drill for oil got lower than the world price. That means, given the way business and people work, less oil drilling was going on than if they’d been getting that world price. The consumer didn’t benefit from low petrol prices as the refineries could export at the world price -- so they did, rather than selling that excess locally. The people who benefited from the export ban were the people who owned the refineries, those extra profits they made.

Just the things that disappeared when the export ban was lifted.

Which brings us to the jute business. The government of Bangladesh has had export bans on raw jute. This is to ensure a constant and consistent supply to the jute processing industry in the country. But our economic rules and models are constant, they explain who benefits from the same situations. So, who does benefit from the export ban?

Jute farmers get less money. They must do, for it’s only if the world price is higher than the domestic that anyone would even think of export bans. But the jute factories don’t face an export ban, they can export anything they’ve made. They’re in that great position of having artificially lower input costs and yet gaining the world price for their output. Their profits are higher than they would be without the export ban. And the people paying for that in lost income are the jute farmers.

Making jute farmers poorer than they need be, making jute processors richer, this isn’t perhaps a good economic policy. Especially once we note the other thing exactly the same as the US oil example. There is no net gain or loss to the economy either way. Sure, the ban boosts the refinery, the processing part of the business. But at the full costs to the producers of the raw material. That is, export bans don’t increase the wealth of the people or economy at all, they just change who benefits.

Which is rather why we should welcome the lifting of the export ban. Not only should we not be using the government to determine who wins, but, if we are to do so, it’s odd to think that it should be the owners of the jute mills rather than the rather poorer farmers, isn’t it?

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.