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?

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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!

Sources:

[1] – Maltby E. “Massive job losses: What’s left to cut?” CNNMoney.com. http://money.cnn.com/2009/02/04/smallbusiness/layoffs_continue.smb/index.htm?postversion=2009020413. February 4, 2009.

[2] – Bonin R, Liu K. “The Oil Kingdom: Part One.” 60 Minutes. http://www.cbsnews.com/video/watch/?id=4653109n. December 8, 2008.

[3] – Bonin R, Liu K. “The Oil Kingdom: Part Two.” 60 Minutes. http://www.cbsnews.com/video/watch/?id=4653129n. December 8, 2008.

[4] – “Saudi Arabia Bullish on Oil’s Future.” 60 Minutes. http://www.cbsnews.com/stories/2008/12/05/60minutes/main4650223. December 7, 2008.

[5] – “Tax History Museum.” http://www.tax.org/Museum/default.htm. See 1790s, 1820s.

[6] – “The Agenda: Energy & Environment.” The White House. http://www.whitehouse.gov/agenda/energy_and_environment/. January 20, 2009.

[7] – “Speculations on an oil tariff.” The Rational Post. http://www.freedom24.org/rationalpost/2008/03/25/speculations-on-an-oil-tariff/. March 25, 2008.