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The Case for a Variable Import Fee on Oil
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13681 |
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Section : |
CURRENT ISSUES
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8 / 1988 |
2,523 Words |
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S. Fred Singer
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In the controversy over how best to stabilize oil prices, I oppose any kind of fixed tariff or import quota. A (permanent) fixed tariff simply adds x dollars to the price of imported oil (and thereby drives up the price of domestically produced oil as well) without providing any price stability whatsoever.
On the other hand, a variable import fee (VIF) goes into effect only when the world price drops below a certain target price (set in the range of, say, $15 to $20 per barrel). The VIF then adds the right amount to the world price to bring the market price up to the target value. The VIF thus stabilizes the price in the United States since the domestic price cannot fall below the target value. The VIF provides a price floor and removes the risk to the U.S. oil industry that comes from possible price manipulations by Middle East producers. The VIF is a standby measure, a "safety net," that would normally operate for only a short time while the world price is below the target price.
The debate about the desirability of a VIF is linked to a key difference in outlook relating to the future of world oil prices. One school of economists holds that OPEC's back has been broken and that prices will tend to a long-term marginal cost of below $10 per barrel. Another view is that periods of price wars and reconstituted cartels will alternate for some years to come, producing unstable prices that can be manipulated by the Gulf OPEC producers to discipline the cartel and to make illicit profits by bankrupting competitors.
A properly constituted VIF can help overcome these problems, maintain the ongoing conservation effort and interfuel competition, cut oil imports, and exert downward pressure on the world price. Keep in mind that delaying a world price rise of $5 by even one year saves world consumers nearly $100 billion a year.
Tariffs vs. VIF
A straight tariff, such as the $5 or $10 fee frequently suggested for imported crude and/or its products, has a number of problems:
· It goes against the principle of free trade.
· It does nothing to stabilize the price of oil.
· It produces a clear transfer of money from consumers to domestic producers (unless taxed away in some manner).
· It is a tax, designed to increase Treasury revenues.
A VIF, on the other hand, is not a tax or a revenue-raising device, but a means for stabilizing the domestic price of oil--and indeed of other energy fuels, like gas and coal--in the face of disruptive predatory pricing. This predatory pricing may not be specifically directed against the United States; indeed, the openly proclaimed 1985-86 Saudi price war was ostensibly directed against major non-OPEC producers--to make them share in production cutbacks and, in effect, join OPEC in cartelizing oil prices.
But the effects of a price war are most serious for the United States, because U.S. producers are high-cost producers
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