EMF OP 26: Energy and National Security: Should GNP Impacts Preclude Oil Tariffs?

The oil security issue has been pushed once again to the forefront of energy policy deliberations. While a number of different policy options are being considered and discussed, none has generated as much heated debate as the imposition of an oil import tariff in the United States (see Broadman and Hogan, 1986; U.S. Department of Energy, 1987).

The recent Energy Security report (U.S. Department of Energy, 1987) has challenged the wisdom of a tariff on the grounds that it would impose substantial macroeconomic penalties on the U.S. economy. While acknowledging the benefits of extracting increased wealth from oil producers, the DOE analysis concluded that the losses in real gross national product (GNP) will dramatically dwarf these wealth gains. For example, if oil prices remain on a relatively low path, rising by about $1 per year in real terms, the wealth gains from a $10 per barrel tariff would be $45 billion (1985 $) compared to the real GNP losses of some $190 billion. Thus, it comes as no surprise that the DOE study argues strongly against the tariff as insurance against future oil disruptions. A study conducted by Data Resources Inc. supports the argument that GNP losses from a $55 per barrel tariff would be sizable.

As a result, the economic analysis behind this policy debate is tied to a single issue. Estimates of the oil wealth gains from oil tariffs or of the macroeconomic impacts if future disruptions are not being contested. Instead, the focus has shifted to a new issue that lies outside the realm in which many energy analysts feel comfortable. What are the macroeconomic consequences of a large consuming country’s decision to increase its oil price in an effort to reduce that damage of future oil price shocks? Note that this issue is more general than the oil tariff issue and applies to other energy security measures as well. For example, the filling of oil stockpiles for release during future disruptions places upward pressure on oil prices when the oil is being purchased (Teisberg, 1981). Given the huge economic impacts, shouldn’t countries refrain from any policy that raises their oil price in the near term?

The emphasis on the GNP losses of oil tariffs appears to be overstated and misplaced. This condition should hold regardless of one’s view or fallacy of an oil tariff. While higher U.S. oil prices resulting from an oil tariff would reduce real GNP in this country, the DOE analysis underlying the Energy Security has overstated these impacts because the GNP reductions were represented as permanent losses from a one-time increase in oil prices. Using the basic DOE analytical framework, I show in the next section that substantially smaller GNP losses than those estimated by the DOE would result from oil tariffs if these reductions in output are purely transitory in nature. Since the distinction between permanent and temporary reductions on SNP is critical, we then show how the DOE estimates would have changed if their loss function has incorporated the transitory as well as long-lasting impressions of aggregate output. Moreover the GNP effects can be ameliorated through other policies, which would be easier to implement with a tariff than with a disruption. Conclusions and some general reservations about the current state of oil tariff analysis are discussed in the final section.

Reprinted in 1988 from The Energy Journal, Vol 9, No 2, April 1988