Making the case for an oil import fee

There is a growing consensus that the United States and the world face an increasing problem with respect to both the price and the availability of energy, particularly oil and natural gas. However, that consensus breaks down quickly when we consider the appropriate U.S. public policy response.

 

Many advocate stimulating additional supply by reducing environmental regulations, opening up the Arctic National Wildlife Refuge to drilling and offering tax incentives for additional domestic oil and gas production. An alternative school of thought supports demand reductions through tough mileage standards and financial incentives for conservation. A third approach suggests the federal government invest in a massive research and development program to develop alternative fuels.

 

In reality, it is not necessary to choose between these strategies because they are complementary, and we need all of them to reduce our dependence on oil imports. The risks to the U.S. domestic economy of a “do-nothing” strategy are significant because of our high dependence on oil imports and the fact that the oil-exporting countries are concentrated in the Middle East, which continues to be a politically unstable part of the world. This is to say nothing about the major U.S. balance-of-payment problem, which is exacerbated by our oil dependence, and the fact that there is now a huge reallocation of wealth from oil-importing to oil-exporting countries.

 

One approach that would encompass all three strategies would be to enact a fluctuating tax on oil imports that not only sets the price of oil imports at a level that includes a “risk premium,” but also maintains that level over several years to stabilize the marketplace. For example, if it is assumed the long-run price of oil should be $80 per barrel, and the current price is $63, then there would be a tax on oil imports of $17 per barrel. If the price of oil imports went to $59 per barrel the tax would increase to $21. Similarly, the tax would go down if the price of imports went up.

 

The volatility in the price of oil has historically been a major impediment to investment.  While the higher oil price is important, the most critical component is the long-run price stability that creates the certainty in the marketplace to stimulate private investment. A policy relying on the fluctuating tax would have the following impacts:

Such an approach would be easy to administer as the number of oil importers is limited, and they are easy to track. Furthermore, it would minimize the need to regulate industries and would not require investment in alternative fuels by either the federal or state governments. Essentially, this policy would depend on the market to create the appropriate incentives, and in time, it also would eventually lower the long-run price of oil.

 

Some of the revenues from this tax would be placed in the Highway Trust Fund since the gasoline tax revenues no longer are sufficient to even pay for the outlays authorized in the most recent highway bill. A special set-aside could be created within the trust for rehabilitation and reconstruction efforts in Alabama, Louisiana, Mississippi and Texas. Finally, some of the funds could be utilized to create an emergency storage for refined products, i.e., gasoline, jet fuel and home heating oil. This additional capacity would be developed privately, but paid from the revenues of the oil import tax.

 

This approach is good energy policy and would effectively fund both the short-run rebuilding effort in the four states affected by the recent hurricanes, as well as the long-run infrastructure needs of all states.