case_studies - Case Studies Oil Levies: The Economic...

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Oil Levies: The Economic Implications B ACKGROUND The combination of weakening oil prices and the failure of Congress to deal with the budget deficit by cutting spending led some to see the possibility of achieving two objectives at once: (1) protecting U.S. oil producers from “cheap” foreign competition and (2) reducing the budget deficit. The solution was an oil-import fee or tariff. A tax on imported crude and refined products that matched a world oil-price decline, for example, would leave oil and refined- product prices in the United States unchanged. Thus, it was argued, such a tax would have little effect on U.S. economic activity. It merely represents a transfer of funds from foreign oil producers to the U.S. Treasury. Moreover, it would provide some price relief to struggling U.S. refineries and encourage the production of U.S. oil. Finally, at the current level of imports, a $5/barrel tariff on foreign crude oil and a separate tariff of $10/barrel-equivalent on refined products would raise more than $11.5 billion a year. Q UESTIONS 1. Suppose the tariff were levied solely on imported crude. In an integrated world econ- omy, who will bear the burden of the import tariff? Who will benefit? Why? What will be the longer-term consequences? 2. If a $10/barrel tariff were levied on imported refined products (but no tariff were levied on crude oil), who would bear the burden of such a tariff? Who would benefit? Why? What would be the longer-term consequences? 3. What would be the economic consequences of the combined $5/barrel tariff on imported crude and a $10/barrel tariff on refined oil products? How would these tariffs affect domestic con- sumers, oil producers, refiners, companies com- peting against imports, and exporters? 4. How would these proposed import levies affect foreign suppliers to the United States of crude oil and refined products? 5. During the 1970s, price controls on crude oil— but not on refined products—were in effect in the United States. On the basis of your previous analysis, what differences would you expect to see between heating oil and gasoline prices in New York and in Rotterdam (the major refining center in northwestern Europe)? President Carter Lectures the Foreign Exchange Markets At a press conference in March 1978, President Jimmy Carter—responding to a falling dollar—lec- tured the international financial markets as follows: I’ve spent a lot of time studying about the American dollar, its value in international monetary markets, the causes of its recent deterioration as it relates to other major currencies. I can say with complete assurance that the basic principles of monetary val- ues are not being adequately addressed on the cur- rent international monetary market. * President Carter then offered three reasons why the dollar should improve: (1) the “rapidly increas- ing” attractiveness of investment in the U.S. econ- omy due to high nominal interest rates, (2) an end to growth in oil imports, and (3) a decline in the
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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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case_studies - Case Studies Oil Levies: The Economic...

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