Donald Trump has proposed banning the export of US diesel. Supposedly, this could bring down the price for American consumers ahead of the midterms.
This is, in a word, a very dumb idea. I say that purely economically, not politically.
To understand just how bad an idea it is—let’s go back in history… and look at another case where the government tried to control the price of something…
Summer—1973. Bad, Bad Leroy Brown tops the Billboard Hot 100. Live and Let Die, Roger Moore’s first outing as 007, hits theaters. And across dinner tables throughout America, husbands and wives are livid that grocery prices are rising at an annualized rate of nearly 30%.
In the Oval Office, an embattled president buried under the Watergate investigation is looking to pull any lever that might hand him a political victory. So… thinking he’s helping American families with the affordability crisis that’s raging, he orders price controls on chicken.
Instead, his executive order, number 11723, set off one of the most bizarre and darkly comical events in modern US economic history.
The freeze capped what a grocery store could charge for chicken. But it exempted raw farm products, including the corn and soybeans that chickens eat. And that summer, feed prices went vertical.
Growers of yard-birds were caught in a vise.
They were spending 49 cents to raise a pound of chicken that Nixon’s law said could sell for just 40 cents.
Not much math involved in realizing it’s stupid to pay more to raise a chicken than you’re going to get when you sell it.
Thus was born the slogan of that summer’s season: “Cheaper to drown ’em than raise ’em.”
Indeed, on June 23 of that summer, on a national TV news show, viewers watched—stunned—as a poultry farmer in Joaquin, Texas, systematically drowned 43,000 baby chicks in large barrels of water.
Nixon promised Americans cheaper chicken, but at the supermarket and butcher shops, all Americans found were empty cases. Not just the chicken was missing. So, too, were eggs and pork.
A black market in chicken emerged, as did “broiler laundering.” Some poultry growers began circumventing Nixon’s price caps by exporting their chickens to Canada, only to then immediately buy them back at international market rates so that the birds would be re-imported legally as “foreign” chicken.
The price cap was an unmitigated disaster, and within weeks, Washington relented… and watched as prices jumped to $0.71 a pound, nearly 45% higher than before the price cap.
There is a lesson in that for Donald Trump: When government tells producers they can’t earn what the market will pay for a product, the producers do not decide that selling at a loss is a great idea to Make America Affordable Again.
They simply stop producing.
Which is exactly what’s going to happen if a diesel ban becomes reality.
Clearly, Trump is just trying drive down national diesel prices so he can crow about it before voters pull the red or blue lever in the Nov. 3 midterms.
Never mind the facts:
- America does not have a diesel shortage. We’re the #1 producer and exporter of diesel in the world. It’s just that America doesn’t have the pipeline capacity and/or infrastructure necessary to get diesel from Gulf Coast refineries to the big demand centers in California and New England.
- Diesel, like oil, is priced globally. Banning exports reduces global supply, which drives up diesel prices. And in the world of “I’m made of rubber, you’re made of glue,” the higher global diesel prices bounce back and stick to America. We import as much as 200,000 barrels of diesel every day, despite exporting as much as 1.5 million barrels.
- A diesel ban will ultimately drive domestic diesel prices higher—and gasoline and jet fuel too.
Trump’s betting that a ban will help him on Nov. 3. The price increases that come after that are not important. He can blame that on… Biden? Obama? Zelensky bombing Russian refineries? Who knows?
Something to remember, though are the unintended consequences.
India and Nigeria have been ramping up diesel refining capacity for years, and Europe is increasingly a big buyer in those markets. In a ban, that becomes sticky demand that doesn’t return to the US once the ban is gone.
So, you have to wonder…
If Trump bans diesel exports and American refiners start drowning their chickens, who steps up to permanently steal some of America’s export market share?
Not signed up to Jeff’s Field Notes?
Sign up for FREE by entering your email in the box below and you’ll get his latest insights and analysis delivered direct to your inbox every day (you can unsubscribe at any time). Plus, when you sign up now, you’ll receive a FREE report and bonus video on how to get a second passport. Simply enter your email below to get started.
