Saturday, February 7, 2009

Should the U.S. Federal Government Levy Tariffs on Foreign Oil?

In these tough economic times, people are overly concerned for their financial welfare and the outlook in the months and years to come. Many businesses are being forced to scale down operations, causing hundreds of thousands of people to lose their jobs. Some business owners are even foregoing their own salaries in order to avoid laying off employees [1].

Our federal government’s newly transformed administration is seeking ways to work with Congress to mitigate this fiscal pain felt by middle-class, working Americans—namely, with the passage of a second stimulus package. One of the central features of this package is a proposal for tax cuts to individuals and small businesses.

The federal government is making these exorbitant spending plans to inject trillions of dollars into the economy in hopes of lifting us out of a recession. Whether or not the size of the stimulus is warranted may be left elsewhere for debate. The general question of how our government is to afford this kind of spending, however, is still relevant.

Recently, our dedicated Teaching Assistant, David Wogan, sent out an email to the class containing a two-part segment from CBS’ 60 Minutes entitled “The Oil Kingdom” in which Lesley Stahl interviews Saudi Arabian officials about their petroleum industry and efforts to keep oil relevant [2, 3].

Mrs. Stahl interviews both the Saudi oil minister, Ali Al-Naimi, and the president and CEO of Saudi Aramco, Abdallah Jum’ah. In short, these officials basically said (1) they have intentions to keep oil relevant in order to stay afloat in the world economy and (2) that oil will continue to be the predominant source of energy in the world for many years to come [4]. They admitted, to nobody’s surprise, that the Kingdom of Saud heavily depends on the oil industry. In doing so, though, they publicly acknowledged their willingness to do whatever is necessary and in the best interests of Saudi Arabia. Jum’ah even put forth the challenge, in the 60 Minutes interview, with the following invitation [4]: "If there are [energy] alternatives, be my guest and come and bring them in. They are not there."

In that spirit, I stumbled upon the following question: would it be in America’s best interests to levy tariffs on foreign oil?

At present, the quest for viable alternative energy sources has presented its share of challenges—scientific, economic, and political. The greatest challenge, however, arises when the cost-effectiveness of such technologies comes into question. This, of course, is affected by the ever-fluctuating price of oil. In short, when oil prices are high these technologies seem worthwhile to pursue; when the price of oil is low they don’t. So, the thought of arbitrarily keeping the price of oil high—in the form of foreign oil tariffs—is particularly intriguing.

Tariffs have a tumultuous history in American public policy. They have been both the tool used for strengthening a fledgling US federal government, as well as the dividing force between states favorably and adversely affected by their enactment [5]. Tariffs have two fundamental purposes: (1) to raise revenue for a governmental body and (2) to protect the interests of producers of the levying nation (known as “protectionism”).

Now that our federal government is seeking to reduce what has come to be popularly known as our “addiction to foreign oil,” as enumerated in President Obama’s Agenda for the Energy & Environment [6], does levying such tariffs seem justifiable?

I am not privy to the intricacies of taxation. My simple figuring, though, is that the federal government could recoup whatever revenue it stands to lose in cutting taxes with this stimulus plan, at least partially, by implementing/increasing tariffs on foreign oil. Moreover, levying these tariffs would drive prices for oil upward—making the markets for alternative energy sources more potentially viable.

Foreign oil tariffs would probably not greatly affect volumes of oil imported, on an immediate timescale, as the product is so inelastic. Over time, however, there may be a shift to other viable energy sources as alternatives become more economically feasible. This is highly dependent, of course, on the increasing oil demand from burgeoning economies like those of China and India; higher demand from those two countries, and others, would only serve to offset US efforts to ramp down its own demand [7]. Other conventional sources of energy, such as coal and natural gas, could potentially see increased consumption as well. Potential governmental legislation—in the form of carbon emissions caps, which seem likely—would affect this.

So, in essence, in seeing a Western push to move away from conventional crude oil Saudi Arabia (and other OPEC countries) aims to keep prices low. In return, America, in its drive to be greener, may be able to counter that move by levying foreign oil tariffs. …would this be a smart move on our part?


Here’s an article written by retired professor emeritus Larry Marsh (of U. Notre Dame) containing a simple, quantitative example that introduces an interesting idea of an “energy allowance.”

These posits are intended to be contemplative and evocative, so any enlightening responses would be greatly appreciated!


[1] – Maltby E. “Massive job losses: What’s left to cut?” February 4, 2009.

[2] – Bonin R, Liu K. “The Oil Kingdom: Part One.” 60 Minutes. December 8, 2008.

[3] – Bonin R, Liu K. “The Oil Kingdom: Part Two.” 60 Minutes. December 8, 2008.

[4] – “Saudi Arabia Bullish on Oil’s Future.” 60 Minutes. December 7, 2008.

[5] – “Tax History Museum.” See 1790s, 1820s.

[6] – “The Agenda: Energy & Environment.” The White House. January 20, 2009.

[7] – “Speculations on an oil tariff.” The Rational Post. March 25, 2008.


Travis said...

I have to say I agree that "tariffs have a tumultuous history in American public policy", however the first historical event I thought of was that little wrinkle known as the American Revolution. Perhaps a tariff makes sense then: In the 1770's the public was upset that they were being taxed by a country that gave them no voice in the government, and for this reason (and many others) they went to war to gain that freedom. At that time there were significant taxes on tea, sugar, and tobacco. Well now we pay ridiculous amounts for coffee (which is like tea), are already in a war, and have a government that does not seem to listen to the things that we desire as a public; so maybe a tax is exactly what we need to act as a reverse catalyst that will release us back to the golden age of American independence.

No? On a more serious note, I actually think that an oil tariff is an interesting point to seriously discuss. As the author of the blog rightfully questions, where is the government going to come up with the massive amount of money for the stimulus package? Probably borrowing from China. However we can use a few recent historical facts that could save us from that fate: fact - people will buy gas for $4 a gallon. I rode the city bus to work everyday for 7 months last year, and saw very little increase in the number of riders, even when my wallet drained faster than the gasoline I was pumping into my truck. I use that as evidence that most people continued to drive, even with the large expense. Rush hours definitely did not disappear. Fact - oil's dynamic fluctuations in cost hurt many people and businesses because predicting expenditures is like predicting the weather in central Texas. Meteorologists might as well spin a wheel with little colored rain clouds/sun/wind icons on them, and we could do the same with graphs of future net worth colored with crayons.

We need to raise an absurd amount of money, we are still going to buy gas, and we want a little stability in oil prices, so placing a tariff on gas is not such a bad idea. I suggest a floating price: The government will make gas cost the consumer $3.25/gallon, and then subtract whatever the actual cost is; the government can use the excess money for a stimulating the economy (which would currently be about $1.40/gallon sold in central Texas). The blogger's idea that the alternative energy development would perhaps be boosted by higher gas prices would be, in my opinion, an excellent byproduct. The only pitfall I can see is that the tariff would make using domestic reserves more appealing as well, and I disagree with expanding drilling at the expense of our natural resources (i.e. the Alaskan wilderness). So how about we just replace the government with individuals from our class? Who is on board? Travis for President '24.

David Wogan said...

One thing that shouldn't be ignored is the time scale of any price increase. When gas hit $4/gallon it was inconvenient to a lot of us, but not necessarily disruptive. To some individuals and families $4 was the difference between making it to work or not. If we do artificially raise prices, there will most likely have to be some safeguards or rebates to protect against those problems.

vik said...

I agree with the above post that there is a need to protect alternative energy during the era of low oil prices as it literally washes all the investments made in alternative energy down the drain like for example, the blog about the shutting down of ethanol plants during the downturn due to falling oil prices or the shutting down of several heavy oil projects in Canada in recent months.

Hence, it makes sense to impose tariffs on imported oil during the era of low oil prices which invariably follows a downturn like the one we are experiencing at present, perhaps at an optimal amount that would make alternative energy competitive. This would also fund a part of the stimulus money which would also be required during the downturn years, besides supporting the use of domestic oil (thereby preventing the closure of domestic oil fields during the days of low oil prices and sparing us of some of the job cuts during the recession).

However, during times of high oil prices, these tariffs need not be imposed as the price of gas at the gas station is already high, which itself acts as a deterrent to the increased use of oil and further increase in gas prices due to the tariffs may be too hard on the consumer, especially the lower income ones.

Such a policy will fulfill America's long term goals of reduced dependence on imported conventional oil and encourage the development of domestic sources of oil as well as alternative energy during both the low and high oil price regimes while at the same time reducing the impact of oil price shocks on the common man.