In the wake of tumbling crude-oil prices, the latest panacea being examined by government officials and debated in corporate boardrooms is a tax on oil imports--maybe $5 to $10 a barrel. This presumably would stimulate domestic output, encourage conservation and further reduce dependence on imports, especially from OPEC.
It is a half-baked idea based on faulty reasoning. Milton Russell of Resources for the Future put it succinctly: "The idea that these oil prices going down is bad for us is perverse."
Fear is the basic rationale behind the proposal. We are warned that lower oil prices will reverse the healthy trend of the past couple of years toward sharply reduced consumption: car buyers will go back to gas-guzzlers, wasteful practices will be resumed by industry, the search for alternatives to oil will be slowed and dependence on OPEC will be increased, rather than weakened.
None of these reasons stands up under close scrutiny. OPEC's influence on oil prices is already on the way down, its notorious oil "weapon" disarmed, thanks to its greed, which stimulated conservation and led to discovery and exploitation of other oil sources and alternative fuels.
A $5- or $10-per-barrel oil import fee not only is unnecessary to de-fang OPEC, but would reverse the only visible healthy economic trend in the United States--reduced inflationary pressures stemming in good part from lower oil prices. For those looking for an anti-OPEC weapon, a better strategy is to fill the strategic petroleum reserve while oil is cheap.
As economist Alan Greenspan says: "The trend to reduced consumption is irreversible. Lower prices aren't going to trigger a massive increase in fuel consumption. Sure, there will be some increase (as prices drop). And there will be some increases as economic recovery gets under way. But we are seeing a semi-permanent response (to the earlier big jump in oil prices)."
For example, homeowners aren't going to pull the insulation out of their houses if fuel oil prices go down. In industry, Greenspan adds, the major research-and-development effort launched to cut fuel consumption costs, beginning with the first oil shock, is leading to permanent changes.
Russell agrees with Greenspan. "People are not dumb," he said in an interview. He expects them to "accept the short-term benefits" of soft oil prices. For example, they may opt this summer for a cross-country trip instead of nearby resorts with cheaper prices at the gas pump. But the small car is here to stay (high sticker prices and interest rates buttress the trend). Moreover, it's hard to find gas-guzzlers; even larger cars today are relatively fuel-efficient.
But the import-oil fee backers have other motivations. In part, the proposal reflects a panicky feeling in the domestic energy industry -- oil and other fuels--that the soaring price joy- ride they've enjoyed in the 1970s is coming to an end too fast. They fear it jeopardizes investments in new energy ventures based on the expectation of high-priced oil. It may well stall some projects (that's already happening). But as Greenspan suggests, that could be a good thing, saving the investors and the nation "from construction of a long series of white elephants."
Russell believes that capital investment decisions are based on long-term probabilities, which down the road still point to expensive energy, compared to the 1960s. "But it may be that it's economically wise to delay some investments that industry thought would pay off earlier--and I think that's both publicly and privately wise."
When you get right down to it, the only "benefit" of an import duty would be the yield to the Treasury of about $40 billion in new revenues from the import duty directly, and from the windfall profits tax on domestic oil--which would be allowed to rise to the duty-fattened import price.
But the costs of such a benefit to the budget deficit would be enormous in other directions. Higher oil prices would have a serious inflationary impact. Because oil costs would be higher here than in the rest of the world, one more noncompetitive element would be added to American exports, already struggling in world markets.
Worst of all, the oil import fee would deliver a wholly unjustified bonanza to domestic oil producers whose profits would swell, even after the windfall profits tax. Such a multi-billion- dollar gift to the domestic oil industry would fatten its purse for an additional burst of questionable industrial takeovers.