Monday, November 07, 2005

Gas Tax Redux

A few months ago, I posted a couple of times on my preference for a gas tax compared to the CAFE standards. Today, I happened across two papers by Professor Jayanta Sen that are, at the very least, quite provocative. They focus on ways that the U.S. could make itself better off by (in the first paper) taxing an imported good that has a relatively inelastic supply and by (in the second paper) forming an international cartel of importing countries, to offset the market power of OPEC. Here are the abstracts, with links to the full papers at SSRN:

A Tax to Save the US $100 billion a Year and Solve Global Warming?

The position of the current US administration is that moves to reduce consumption of gas (like the Kyoto Treaty), will harm the US economy. On the contrary I show that a tax on crude would transfer wealth of $100+ billion a year from foreign governments to the US consumers, thus providing a major economic stimulus to the economy while at the same time reducing consumption of gas. Over the past decade crude oil prices have increased from $12 (1998) to over $65 a barrel. The amount of net oil exported to [by] importing countries is about 28 million barrels a day. With 1998 prices as a reference, this translates to an additional wealth transfer of $1.32 billion a day, or $480 billion a year. If the supply of oil is inelastic, then an increase in tax by the governments of importing countries would push up oil prices and decrease the wealth transfer. For a range of demand and supply elasticities that I study, the wealth transfer savings for the United States (which has about one-third of global oil imports) should be in the range of $108 to $152 billion a year. The new tax revenues to the US government from tax on imported oil should be $160 billion to $250 billion a year. This money can be returned to the US consumers as a lump sum, thus providing the economic stimulus. The reduction in crude oil consumption ranges from 7.13% to 10.30% while providing a stimulus (defined as additional purchasing power to consumers) to the economy of $95 billion to $133 billion a year.

Oil at $10 a Barrel and $200 Billion Savings a Year for the U.S.: Benefits to the U.S. from a Buyer's Cartel

In the international oil market, the producers are cartelized, whereas the buyers are fragmented. As standard economic analysis suggests, this results in a greater share of the surplus for the producers. The cost of production for a barrel of oil to the producers is approximately $8, whereas the recent price is $65. A buyer's cartel could be formed by the governments of the major oil importing countries like the U.S., Japan, Germany, China, India etc. All oil sold in these countries would have to pass through the buyer's cartel. The buyer's cartel could negotiate a price with the oil exporting countries, say $10 a barrel (which should be a sufficient markup over production costs). After purchasing oil from the producing countries, the buyer's cartel would release the oil in the market and let demand determine the price. If current demand conditions remain unchanged then the price would still remain at $65. However, this would reduce the effective price to the citizens of the importing countries to $10 a barrel as their governments would earn a profit of $55, which could be used to reduce taxes or pay for programs like Social Security. For the U.S. (which imports 10 million barrels a day) the savings would be $55 x 10 million x 365 = $200.75 billion a year.

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spencer said...

I find it hard to think of any reason why a tax at the pump would be superior to a tariff. A tax at the pump would dampen consumption but would do nothing for supply. A tariff would raise the domestic price of crude and induce greater domestic supply as well as dampen consumption.

why do you advocate a tx at the pump?

PGL said...

Spencer - imagine an inelastic short-run supply curve as I just did over at Angrybear. Hint, hint, I'm disagreeing with something Milton Friedman just signed on this topic.

Anonymous said...

A tax at the pump would build in a "cushion". In the event of a rare emergency where oil prices skyrocket, the tax could be temporarily relaxed until normalcy is restored.

does this seem a legitimate way of thinking?

Anonymous said...


enjoy your postings. great work on your blog.

i have a technical grammar point. it is "an" when you before words that start with vowels (a,e,i,o,u). it is "a" for words that start with consonants (everything except the 5 vowels, y may be a wild card).

"an oil" not "a oil"

Arun Khanna said... oil buyer's block.

Andrew Samwick said...


I prefer the gas tax to the tariff because I want to tax all of the oil, not just the imports. I don't want to retreat from free trade principles if I don't have to (even with OPEC), and I want to do as much as possible to reduce the externalities (congestion, pollution) associated with gasoline use.


miguel said...


Buying from OPEC isn't what I would call free trade.

LowTax said...

It seems to me that almost everything in life has costs and consequences. Why is it that people can't simply accept life for what it is rather than trying to manipulate it into some other form that is SUBJECTIVELY better?

If wealth transfer and subjective externalities are what we should be concerned about because consumers like (read: choose) imports, then why not tax all cars as well? While we're at it, let's tax clothing, food, alcohol, raw materials and anything else that might involve 'wealth transfer' to other nations or which may have 'externalities.' We can tax ourselves into richness!

Why is it that economists are so loathe to simply let the market work rather than trying to come up with yet another 'solution' to some perceived problem?

Air pollution is no longer a problem in this country since the invention of the catalytic converter and other smog limiting devices/techniques. Traffic is an externality that affects drivers who CHOOSE to drive. Can't we simply learn to live with our choices and value freedom and responsibility over fancy schemes from above that are 'good for us'?

LowTax said...

Tom, I think you misread me. What I am advocating is that we let oil prices do what they naturally do in a free market rather than manipulating them for some subjective greater good. With regards to the externality of air pollution, I am fully in favor of using a tax to offset any readily quantifiable damages like air pollution. My comments about the catalytic converter should have clued you into this - I am not against trying to make sure that the price of gas reflects its actual costs. But raising the price for the primary reason of stemming imports is what is being presented here, not a proposal to fix some social ill being caused by oil. We have already paid for the invention of the catalytic converted and today's air pollution levels are not harmful (and are continuing to go down). With regards to traffic, those who drive already face that cost in terms of having to pay for roads and waiting for traffic to move, it does not need to be further reflected in the price of oil.

With regards to mandating efficiency through these types of taxes, it is again an imposition of one set of people's will over another. It could be argued that efficiency is always good for business and nations as a whole, but that argument is less appealing to normal people in their daily lives. I do not necessarily wish to be efficient with many things in my life and having the government force me into it through taxes is tyrannical.

It dismays me that economists have moved so far into the realm of believing they know what is best for everybody else.

Tom C said...

Anacolici - Thanks for the clarification. The issue of public vs. private good is very difficult. I would stipulate that many societies (see Diamond's "Collapse") have suffered because individuals saw immediate short-term value in actions that had long term negatives for their societies. But, unfortuantely, once you organize a government and give it power, it will use that power constantly.

In this case, I think the use is justified by the need to starve the outflow of cash to people who will use it to harm us. But this power is not absolute, and there are certainly many who would use it for every pet issue that comes along.

Joe Rotger said...

Why does this taxing sound to me like a new attempt at the perpetual machine...

First, we tax consumers, then we give'm back their money ...they end up ahead??

Ok, Ok ... so oil prices (including new taxes ) come down somewhat, b/c the economy is stalling (demand is pretty inelastic too, as we've seen), and let's hope this doesn't break the camel's back of the US economy...
It's a risky proposition at the moment.
But, we have this fund with the government to build nuclear plants, or such ...with all the inefficiencies involved...
And, the reality is the consumer's standard of living deteriorates, --pays more for gas, pays more for almost all other items which have an oil cost component (transportation, chemicals, electricity...).
So it isn't as good as portrayed, but, I agree, we need to pay for some sort of energy insurance policy, and yes, oil producers are helping us foot the bill...
But, no perpetual machine ...there is a price to pay!

In regards to buying cartels... good luck to them!
But, wasn't oil demand pretty inelastic too? Weren't gas stocks pretty low, -and this the reason prices peaked? What about the refinery under capacity issue? It takes a few years to get a new one running.
...I guess we can tell those poor needy Arabs that they can keep their oil, that we'll just fire up our cars with coal and some manure that is in plenty supply coming out of some peoples ears!

OHenry said...

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