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Time to Slap a Tariff on Oil Imports?

This is no time to deny that the Russians and Saudis want to undercut the U.S. energy industry.

Oil industry consultant Monty Besler discusses the state of the oil fracking industry on the Bakken Shale Formation on September 6, 2016, near Williston, North Dakota. (ROBYN BECK/AFP via Getty Images)

Expectations of a Saudi deal with Russia to cut oil production have collapsed. On Thursday, Russia announced that it wanted no part of such an arrangement. On Saturday, Saudi Arabia pledged to abandon any quotas itself and commenced a full-blown price war. While sharply cutting prices, the Saudis also threatened to increase oil production to 12 million barrels a day (from 9.7 mbd today). When markets opened on Sunday, oil futures fell nearly 30 percent to around $30 a barrel for U.S. crude, half the level at which they started the year.  

How low the oil price will go, and for how long, is a pressing question for speculators. The answer is probably low and long enough to shatter the American shale industry, itself loaded up on debt and short on profit. 

The United States should act to prevent this. We need an oil import tariff to protect domestic industry.

It is a key Russian and Saudi purpose—though not, perhaps, their only purpose—to drive the U.S. oil patch out of business. That is not a sinister motive on their part, as the rise of American shale production has badly compromised their own prospects. By the same token, key U.S. interests would be imperiled if Washington does nothing to frustrate that purpose. 

To understand the case for a tariff, one has to assess the costs and benefits over time. If low prices now mean high prices five years from now, as I think very likely, the refusal to consider a tariff doesn’t look so good. If the washout of domestic industry leads to much greater dependence on foreign sources in the future, the policy looks even worse. Even the short-term costs of allowing “market forces” to work unhindered are substantial, as the bankruptcy of the domestic industry (7.6 percent of GDP for the energy sector overall) would exacerbate the oncoming recession. With travel gutted by the coronavirus pandemic, the demand boost from lower gas prices would be greatly muted. Credit distress from the oil patch will gravely aggravate the intensifying financial contagion. Why feed it? 

A well-conceived variable tariff would tax oil imports steeply while prices are low, but would disappear if prices rose past a certain level. What that level should be is a tough question. $50 to $55 a barrel—around the current average cost of shale production—seems about right to me, but I’m open to argument on that score. However that question is answered, the principle of the thing should be clear. It is to obstruct short-term predatory pricing raids by others and to ensure greater energy security for the United States. The greater the wash-out today, the greater the peril of upward price explosions in the future.

If the industry is protected when oil prices are low, the public ought to be protected when oil prices are high. If in the future the oil price were to rise above a specified level, the public should share in the proceeds through the progressive taxation of those profits. Call it a public-private partnership, with advantages for both parties.  

The Saudis and the Russians will suffer from a prolonged price collapse but may be able to hang on long enough to cut U.S. oil production sharply. What is the compensation for them for such suffering in the present? It’s that they may enjoy in the future a greater power to raise prices and keep them up. 

President Trump should be attracted to this plan. It seeks to protect American industry from a classic predatory business raid. It would not raise prices for consumers, but simply keep them from falling further. It would help contain the consequences of impending bankruptcy in the oil patch. 

The shale boom was one of the great surprises of the last decade. It boosted U.S. production from 5 to 13 million barrels a day from 2011 to 2019, confounding the peak-oilers. Yet incredibly the industry in aggregate never turned a profit during this time. The costs proved greater than the returns. The whole enterprise was floated by the delusive expectations of investors on Wall Street, who funded it all. The success of the frackers then yielded the increased supplies that helped collapse the price. It was less an empire than the project of an empire, one that cost over $1 trillion in capital to develop. 

All in all, the shale boom worked a lot better for the interests of the United States than it did for its investors and the producers, many of whom are now on the cusp of bankruptcy. Back in 2007 and 2008, oil imports cut a $400 billion annual hole in the balance of payments. The escalation of the oil price in the summer of 2008 was a key though now forgotten contributor to the financial crisis of that year. The closure of this deficit by the shale revolution was a big deal. Why should we court a return of such insecurity? 

The oil industry is particularly subject to booms and busts. The purpose of the policy suggested here is to moderate those extremes and the bad consequences they bring. In effect, the United States would be giving protection to one part of its domestic industry in exchange for greater energy security thereafter. Even with a variable tariff, many domestic companies may go bust. But energy and economic security requires that we look beyond the current bust to the vulnerabilities that would accrue if the market, dancing to the tune of Saudi Arabia and Russia, is allowed to do unhindered its work of uncreative destruction. 

Such whimsical dreams of a grand concordat may strike the reader as impossible, practically speaking, given who we are and what we have become. I have no answer to this objection, as it is almost certainly correct. The unavoidable conclusion, one supposes, is that we should wash our hands of the whole thing. Every hour on the hour, as they say. Even if you object to certain things in the foregoing essay, I’m sure that that advice is looking pretty good to you right now.  

David C. Hendrickson is professor of political science at Colorado College and the author of Republic in Peril: American Empire and the Liberal Tradition (2018).

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