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An Oil Import Fee?

by Michael Levi
November 9, 2010

I’m skeptical about the potential for significant progress on energy policy over the next two years. One dark horse, though, is a fee on imported oil. The politics could work: climate hawks could back it because it would cut greenhouse gas emissions; security hawks could back it because it would cut oil imports; deficit hawks could back it because it would raise revenues without raising taxes. It was particularly intruiging to see Mitch Daniels, whom some are trying to draft for a (long shot) bid for the Republican presidential nomination, float the idea a few weeks ago.

I’m ambivalent on the matter, mainly because I haven’t seen a good analysis of it. Here are the questions I think need to be answered:

  1. How much revenue could a realistic fee raise? This one is relatively simple.
  2. What impact would a fee have on U.S. oil consumption? How would that split between transportation (which is the least flexible and hence matters most for economic security) and other sectors?
  3. What impact would a fee have on U.S. oil production? A fee on imports will raise the price of oil seen by U.S. consumers but will not raise the cost of producing oil for U.S. producers. This means that an oil import fee would increase U.S. production.  How big would this effect be?
  4. How would these changes in U.S. consumption and production affect U.S. imports from key producers? How would those producers react?
  5. What net impact would a fee have on U.S. GDP? It would presumably help GDP growth by reducing U.S. exposure to high prices and volatility while hurting GDP growth because of economic distortions.
  6. How would the effects of a fee differ depending on whether it was applied only to oil or also to refined products like gasoline and diesel?
  7. Could an oil import fee be squared with U.S. obligations under the WTO and NAFTA? How?
  8. What would the distributional impacts of a fee be? Regional and income variations could both matter.
  9. What might the politics look like? I presented a simple argument above, but there are complications. Environmentalists would have mixed reactions because of a fee’s impact on U.S. production. Free trade supporters might blanch depending on the WTO and NAFTA implications. Refiners might oppose a fee; so might auto manufacturers. Economic purists might insist that a broad-based tax applied to all oil consumption would be better. Anyone could demagogue the policy, if they wanted to, by pointing out that it would raise the pump price for gasoline.

These are all answerable. Anyone interested in taking a shot?

Post a Comment 4 Comments

  • Posted by James Bambino

    Re: #3. This leaves out US companies operating oversees. To my knowledge, many oil-rich states and their respective NOCs view a consumption tax in the US on gasoline as punative, and likely will raise the cost of production to US oil companies operating in these countries. A direct import tax would not only result in the same scenario, it may hurt bilateral relations between such a state and the USG.

    [ML: Good point It would be interesting to look at the impact on a firm-by-firm basis.]

  • Posted by Mike

    I don’t think this will fly regarding the import of Mexican and Canadian oil but it would certainly be interesting to see if we could levy such a tax on Venezuelan oil. Might we also do the same on Nigerian oil and then use those revenues to sustain our foreign assistance in sub-saharn Africa. If Nigeria’s not willing to use it’s oil wealth to improve the lives if it’s citizens and if we have legitimate interests in improving conditions in Nigeria then why not use an oil tax to achieve these ends?

  • Posted by abarrelfull

    Apart from the fact that it is subterfuge, what is the advantage over just putting a tax on oil products consumption? It would habve all the same effects (except the implicit subsidy to US oil production) without the international political problems.

    [ML: The advantage is that it may be (at least remotely) politically possible in the near term. A product tax is not.]

  • Posted by Jesse Jenkins

    All great questions Michael. And I agree this may be a good ‘dark horse’ route to clean energy progress.

    Our thinking on an imports fee — like most efforts to raise fossil energy prices — is that we will make more headway if we see it primarily as a tool to raise revenues for key investments in clean technology, rather than as a way to raise fossil fuel prices to discourage their use.

    If you want to get a price high enough to change consumer behavior, you’re going to run into consumer backlash.

    But a small fee, $5 per barrel, for example, would be less than 15 cents per gallon of gas at the pump, yet raise roughly $24 billion annually (all back of the envelope numbers).

    That’s only a modest impact at the gas pump and unlikely to change consumer behavior much. But that represents a major source of stable, long-term revenue for clean technology investment. In this case, probably focus on vehicle electrification, advanced biofuels, DOD clean energy procurement, etc., which all have associated energy security arguments that tie them to the idea of an oil import surcharge.

    The investments can have a far greater impact on U.S. oil dependency and vulnerability to volatile oil markets than any politically palatable fee itself is likely to have…

    Jesse Jenkins
    Breakthrough Institute

    [ML: Interesting. I’m all for investment in innovation, but what makes you think that the politics of raising money for more government spending works better than the politics of raising money for deficit reduction? I mean this as a serious question, not just a rhetorical one.]

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