assessing the impact of an oil import fee

Energy Vol. 14, No. 1, pp. 29-44, 1989 0360-5442/89 $3.00 + 0.00 Printed in Great Britain. All rights reserved Copyright @ 1989 Pergamon Press plc

ASSESSING THE IMPACT OF AN OIL IMPORT FEE

ROY BOYD~ and NOEL D. U& t Department of Economics, Ohio University, Athens, OH 45701 and $ U.S. Department of

Agriculture, 1301 New York Avenue, NW, Washington, DC 20005, U.S.A.

(Received 11 March 1988)

Abstract-We examine the impact of an oil-import fee on the United States economy. For a general equilibrium model, we estimate the effect that a $5.00 per barrel import fee would have on producing sectors, consuming sectors, households, and the government. Over the period 1984-1990 with such an import fee (as compared to the absence of a crude oil import fee), the results suggest that there will be a reduction in output by all producing sectors (except the crude oil industry) by about $8.6 billion, there will be a fall in the consumption of goods and services by about $318 million and there will be a decline in aggregate social welfare (measured as utility) by about $208 million. The government will realize an increase in revenue of about $3.41 billion.

INTRODUCTION

Recently, there has been renewed interest in imposing a fee on crude oil imported into the U.S. It should be noted that during each of the energy crises in the 1970s (i.e., 1973-1974 and 1979) there was considerable discussion concerning whether it was optimal from a policy perspective to impose such an oil-import fee. Since these considerations are not central to the discussion at hand, they will not be reviewed. Rather, the interested reader is referred to some of the literature generated during these periods. Good references include the Federal Energy Administration (FEA) ,r Hitch,2 Jorgenson3 Schurr et al4 and Webb and Ricketts.5 Under the guise of energy security, it has been argued by the proponents of such a plan that an oil-import fee (either a variable or a fixed fee) will significantly bolster the domestic (crude) oil industry while at the same time imposing small or immeasurable costs on the rest of the economy. With regard to a variable fee, the suggestion is that some floor be established (e.g., $22 per barrel) with a fee being levied equal to the difference between this value and the actual acquisition cost of imported oil. As the acquisition cost varies, so would the amount collected. The fixed fee (e.g., $5 or $10 per barrel) is an amount levied irrespective of the acquisition cost of the imported oil. Thus, those arguing in favor of an oil-import fee conclude that an oil-import fee would reduce price uncertainty in the oil producing industry, attract investment into the industry, restore exploratory activity, help reduce the federal deficit, encourage energy conservation, etc. The federal deficit reduction would be accomplished by giving the federal government the revenue collected from the fee. For more of the potential benefits of an oil-import fee see, e.g., Barton6 Petzrick,7 Thompson et al,* and World Oil.9

Opponents of such a fee, on the other hand, have argued that, while the oil industry itself will benefit (e.g., in terms of higher domestic prices and expanded drilling activities), an oil-import fee will fall unevenly on various regions of the U.S. and on different industries in the U.S. Additionally, it is argued, the fee would be regressive. For more on these arguments, see, e.g., Griffin and Crumbly,” Murphy” and Yanchar and Caton.r2

One of the difficulties associated with assessing the veracity of the arguments proffered in favor of and opposed to the imposition of an oil-import fee is the emotional content of many of the justifications. In particular, contrary to the views of some of the participants in the debate, there will be clear winners and clear losers. Rather than becoming involved in the histrionics of the deliberations, in what follows a more objective course will be pursued. Specifically, the aggregate effects on both consumers and producers (including those in the oil industry) associated with the imposition of an oil-import fee will be assessed. This will be done in the context of a computable general equilibrium model. From this effort will follow explicit measures of the benefits and costs of an oil-import fee. Before doing this, however, it will be

29

30 ROY BOYD and NOEL D. URI

useful to review the considerations that have given rise to the latest round of concerns over energy security as well as detailing briefly the structure of the computable general equilibrium model that serves as the analytical vehicle.

BACKGROUND

During the decade of the 197Os, the Organization of Petroleum Exporting Countries (OPEC) increased the real price of its crude oil. Thus, for example, the price of crude oil imported into the U.S. from OPEC countries increased by more than 200% between 1974 and 1985. Note that by 1980 this increase was more than 400% but the real price fell between 1980 and 1985. The comparison looks at 1974 vs 1985 and not the intervening years. This increase in price resulted in, among other things, an absolute reduction in the quantity of crude oil demanded as well as the development of new sources of supply. This sequence of events is discussed in, e.g., Council of Economic Advisors13 and Department of Energy.14 Consequently, the OPEC share of world oil production fell from 64% of the free-world oil production in 1974 to 38% in 1985 while the aggregate (total free-world) quantity demanded over this period increase only slightly (-3%). The Energy Information Administration (EIA)” is the source for these data. In response to this market share loss, OPEC decided to cut its prices in 1986. Thus, the price of crude oil traded in the international market fell from $25 per barrel in January 1986 to about $10 per barrel in July 1986. Coincident with the price fall, OPEC increased its production. More recently, the price of crude oil has edged back up as production restraints by OPEC on its members have been partially successful. Thus, towards the end of 1986, the price was in the $13-$15 per barrel range. It fluctuated around this range through 1987.

Even though the world market for crude oil is not competitive in the neoclassical microeconomic sense, l6 the domestic (U.S.) price for crude oil fell by about the same amount as the OPEC price precipitating the call for the oil-import fee alluded to earlier.

In conjunction with these events, the President of the U.S. in September 1986 asked the Department of Energy (DOE) to examine the nature and extent of any energy security problems that were associated with the fall in the price of oil (both domestically and internationally). The resulting study, entitled Energy Security,17 drew the rather amorphous conclusion that “the challenge for policymakers is to find the proper balance between relying on free and competitive markets, where they can exist, and taking appropriate, cost-effective action to ensure the Nation’s economic health and national security.”

As part of the analysis that was used to support the conclusions, the DOE considered the imposition of an oil-import fee (both a fixed and a variable fee were considered) and determined that such a fee would raise the cost of oil and oil substitutes in the U.S., reduce economic growth and increase, on a one-time basis, the general level of prices. The complete impact is reported in Appendix D of Energy Security and Ref. 18. The advantage of the DOE’s analysis is that it was conducted in the framework of an objective model (in fact, several models are linked together but for the purpose of discussion here, they will be looked upon as an integrated whole) and consequently, unlike many of the discussions surrounding the oil-import fee question, it is ostensibly devoid of subjective biases.

There have been critics of the DOE’s conclusions. For example, Hogan and Mossavar- Rahmani” point out what they contend are fatal flaws in the DOE’s analysis in terms of the structure of the model used and in terms of the assumptions employed with the result, especially with regard to the imposition of an oil-import fee, that they argue the DOE’s conclusions should be totally discounted. While there are certainly problems with the DOE’s analysis, it is not clear that the other analyses that exist on the question of the imposition of an oil-import fee are superior. There are several reasons for this contention. These will be detailed later, after the discussion of the modeling framework to be employed in this study.

A COMPUTABLE GENERAL EQUILIBRIUM MODEL

Introduction

The use of a general equilibrium approach to modeling energy impacts is a logical decision. Note that general equilibrium models in general are not going to be reviewed here. The

Impact of an oil import fee 31

interested reader is referred to Refs. 20-23. The interactions between supply and demand, both within the energy markets as well as between these markets and the rest of the economy, are quite significant. Thus, for example, interfuel substitution is a widely recognized phenomenon24 and the various energy interruptions and price increases have been shown to have important impacts on the remainder of the economy.25’26

The use of a general equilibrium model to assess the impact of energy on the economy is not unique to this study. Earlier efforts in this direction include those by Hudson and Jorgenson,27 Manne*’ and Borges and Goulder.29 While it is not the purpose to criticize these and other earlier efforts, it should be noted that each one is subject to a variety of shortcomings.30T31 In the spirit of these earlier general equilibrium efforts, the model developed here attempts to capture the interrelationships between energy and economic activity while at the same time endeavoring to overcome some of their limitations.

The model presented below follows in the tradition of the Shoven and Whalley tax analysis research3* and incorporates some of the methodological enhancements of Hudson and Jorgenson. 33 For example, it recognizes the differences in preferences of consumers as a function of their incomes and specifies a distinct demand system for each group of households. Additionally, a neoclassical microeconomic model of producer behavior is employed. The model of consumer behavior is integrated with the model of producer behavior (which contains a price-responsive input-output component) to provide a comprehensive framework for policy simulations.

The general equilibrium nature of the model is reflected by its attempt to determine a vector of prices for consumer goods and services and producer goods and services that will clear all markets. The equilibrium prices determine the optimal allocation of resources, given the endowments of labor, capital, and natural resources (land).

On the production side, technologies are represented by production functions that exhibit constant elasticities of substitution. Technological progress (both embodied and disembodied34) is assumed not to occur over the period of investigation. The supply of crude oil is determined as a function of both the domestic and the imported price of crude oil. The response of both the domestic and imported quantities of crude oil are measured exogenously to the model.

On the demand side, the model captures the behavior of consumers (who can also serve as investors), the government, and foreigners. Consumers are grouped according to income and a demand system is specified for each group. Each income group has an endowment of labor and capital and, given the vector of prices, decides the amount to save and invest and the amount of each good and service to consume (purchase). Investment, consequently, is determined by saving. The government levies taxes on both production and consumption. That is, there are taxes on factors of production, on output, on income and on consumption. Revenues are used to distribute income back to consumers and to purchase goods and services, as well as capital and labor. The government budget deficit is assumed to equal zero.

The foreign sector produces imports and consumes exports. Trade balance is assumed but the exchange rate is not explicitly incorporated into the model specification. Exports are scaled to match imports. As a result, foreigners can be regarded as consumers who purchase U.S. exports with income from the sale of imports to the U.S.

Table 1 details the specific production sectors and types of consumers goods and services considered in the general equilibrium model. The various household categories (classified by income) are delineated in Table 2. This choice of the level of disaggregation was predicated on the availability of data and on the economic variables (producing and consuming sectors and income categories) that are of interest. Note that a comprehensive description of the general equilibrium model together with its parameterization is found in Boyd.35

A general equilibrium model

Production. The production sector of the general equilibrium model is composed of an input-output model with some flexibility with regard to the substitution of the factor inputs (capital, labor and land). The degree of flexibility depends, of course, on the choice of functional form for the production function. In the current model, each sector is assumed to have a constant elasticity of substitution (CES) production function where the value added by the specific sector is a function of labor and capital. Little is gained by explicitly writing out the

32 ROY Bon, and NOEL D. URI

Table 1. Classification of producing sectors and consumer goods and services.

Industries Consumer Goods

1. Manufacturing

2. Mining

3. Service

4. Chemicals and Plastics

5. Food and Tobacco Products

6. Petroleum Refining

7. Financial

8. Forestry

9. Crude Oil and Natural Gas

10. Agriculture 1 - Program Crops

11. Agriculture 2 - Livestock

12. Agriculture 3 - All Other Agriculture

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Food

Alcohol and Tobacco

Utilities

Furnishings and Appliances

Housing

Clothing and Jewelry

Transportation

Motor Vehicles

Financial and Other Services

Reading and Recreation

Nondurable Household Items

Gasoline and Other Fuels

Savings

functional form of this production function since it is so well known. The novitiate, however, can refer to, e.g., Arrow et a1.36

For four sectors (the three agriculture sectors and the forestry sector), however, a third factor of production-land-is included. This is done because of the special importance of this input to these sectors, as discussed by, e.g., Heady and Dillon.37 The incorporation into the production function of this factor is accomplihsed by nesting the CES production function. In particular, an input is defined which is solely a function (in CES form) of land and capital which, in turn, takes the place of capital in the original production function specification. While it would be possible to simply add land as an explicit input in the production function, this would implicitly assume the elasticity of substitution between all pairs of inputs are the same. By nesting, however, the substitution elasticities are permitted to be different between different inputs.

Table 2. Household categories based on income.

I Category

I Income Range, in $

I

II

III

IV

V

VI

0 - 9,999

10,000 - 14,999

15,000 - 19,999

20,000 - 29,999

30,000 - 39,999

40,000 and over


Demand. The output of the 12 producing sectors accrues to the owners of the factors of production (i.e., land, labor and capital) which they sell. With the receipts from these sales, these individuals either consume domestic or foreign goods and services, save or pay taxes to the government. The savings are used for investment and the taxes are ultimately returned to these individuals.

The demand for final goods and services comes from three primary sources. First, final goods and services may be directly consumed by individuals. Second, investment (which is equal to savings) consumes some of the goods and services produced. Finally, foreign demand (in the for-m of exports) consumes a portion of the goods and services. Note that net foreign trade balance (i.e., exports minus imports) is zero.

A review of Table 1 will show that the composition of the consumer goods sectors does not match that of the producing sectors because the final goods and services produced by the producing sectors must go through various channels (i.e., transportation and distribution) before they can be consumed by one of the three groups previously enumerated. To address this problem, a transformation matrix is introduced that defines the contribution of each producing sector to the composition of each of the final (consumer) goods and services.

For each category of households (cf. Table 2), utility is assumed to be a weighted constant elasticity of substitution function of the 13 consumer goods and services plus leisure. The weights on these goods and services (which are household category specific) are computed as the share of total purchases going to a specific consumer good or service. The nature of the CES utility function implies that the elasticity of substitution is the same between any pair of goods and/or services. Because reliable estimates of the respective substitution elasticities across pairs of goods and/or services is difficult to obtain, they are assumed to equal one or all of the combinations. Finally, consumers get utility not only from the consumption of goods and services (which comes about through owning the factors of production) but from leisure as well. The astute reader will note that with this specification, there is an explicit treatment of the labor-leisure tradeoff. See, e.g., Deaton and Muelbauer” for more on this. Hence, it is necessary to determine a weight for this factor in the utility function. For the purpose of the current analysis, this value is assumed to be 0.5 times labor income. Boyd3’ provides a discussion of the choice of this value. Thus, an increase in leisure can lead to an enhancement of individual well-being in the model.

A household’s budget constraint is defined such that expenditures on goods and services must be less than or equal to its income which is defined to equal its portion of the returns to labor plus the returns to capital plus the returns to land. That is, expenditures by a household must be less than or equal to the total factor payments it receives. Maximizing utility subject to this expenditure constraint gives the demand for the various goods and services by consumers (individuals).40 Observe that since savings are considered as one of the items in an individual’s utility function, the choice between consumption and savings is made explicit. That is, intertemporal tradeoffs are an integral part of the model.

The second component of the demand for goods and services is investment. Like the final demand by individuals, total investment is disaggregated (through a transformation matrix) by the sector of the economy that produces it. For the purpose of constructing the general

equilibrium model and calibrating it, investment is taken directly from the national income and product accounts (as compiled by the Bureau of Economic Analysis of the U.S. Department of Commerce) and, since savings are assumed to exactly equal investment, personal savings are

scaled to equal the gross investment observed (measured) for each of the 12 producing sectors. The final component of demand for goods and services is the demand by foreign consumers.

In the model exports (Le., foreign demand) are delineated by producing sector. That is, a transformation matrix analogous to that used for the consumption of final goods and services is not used. A similar delineation is employed for imports (i.e., foreign supply) and then the exports and imports are scaled so that the total foreign account is balanced. By employing

elasticity estimates (both demand and supply) found in the literature, export and import demand relationships are constructed for each producing sector.

Taxes. Although not used as a policy alternative in analyzing the impact of an oil-import fee directly, the government and its tax receipts do enter into the general equilibrium model

34 ROY Born and NOEL D. URI

specification and they do impact the model results with regard to factor use, factor prices and output.

First, there is a question of how to treat the government in a general equilibrium model. For the purpose at hand, it is treated as a separate sector with a constant elasticity of substitution utility function. That is, it is treated in a fashion analogous to one of the household sectors. The elasticity of substitution is assumed to be 1. This means that the production function collapses to a Cobb-Douglas-type production function. The government collects tax revenue in various forms. The explicity considered taxes include the personal income tax, labor taxes (e.g., social security tax), capital taxes (e.g., corporate income tax), property taxes, and sales and excise taxes. All of the taxes are treated as ad v&rem taxes and a marginal rate is used for each household category, consumer good or service, producing sector and factor input. In this respect, the model is a distinct improvement over earlier general equilibrium models which simply employed lump sum transfer schemes or use average tax rates. Note that in this model, labor is treated as variable commodity that is subject to taxation.

With the tax revenues collected, the government produces public goods and redistributes income. Hence, all tax revenue is eventually returned to consumers in the form of transfer payments or subsidies or in the form of payments for capital or labor services (the two factors of production used by the government).

A mathematical statement of the model

Given these foregoing considerations, it is useful to state precisely the conditions that the model being used here must satisfy for a general equilibrium to exist. First, there cannot be positive excess quantities demanded, i.e.,

2 aiiMj - E,(p, Y) 3 0 for C.S. pi 2 0. j=l

(1)

Here i (i = 1, 2,..., n) denotes the consumer goods and services, Mj (j = 1,2,. . . ,m) the activity levels, aij the ijth element in the actvity analysis matrix, Y a vector of incomes for the k consumers, p a vector of prices for the IZ consumer goods and services, and Ei the excess demand for good or service i.

The notation C.S. implies that complementary slackness holds for each consumer good or service, i.e., if the expression (for a specific good or service i) is multiplied by pi, then the relationship will hold with equality.41

The second requirement for general equilibrium is that the profits associated with a given activity are not positive. That is,

3 0 for C.S. Mj 3 0. (2) i=l

Finally, all prices and activity levels must be nonnegative, i.e.,

and pisO, 1, 2 ,..., n,

Mi>O, j=1,2 ,..., m.

(3

(3b)

The actual general equilibrium model is solved using the iterative algorithm nominally referred to as the Sequence of Linear Complementary Problems (SLCP) developed by Mathiesen.42,43

Data for the 1984 base year

The general equilibrium model is calibrated for 1984. For the producing sectors (the 12 enumerated in Table l), data on capital receipts and taxes are computed from data obtained directly from the Bureau of Economic Analysis of the U.S. Department of Commerce, the U.S. Department of Agriculture, the U.S. DOE, and from Hertel and Tsigas.44 The various elasticities of substitution used in the analysis were obtained from a variety of sources in the literature on estimating production functions.45


Capital income (earnings) and labor income were obtained from the Bureau of Economic Analysis of the U.S. Department of Commerce. Land income was estimated using factor shares obtained from the Economic Research Service of the U.S. Department of Agriculture and applied to the capital income component noted above.

Data on expenditures on each of the 13 goods and services by each of the six household categories were obtained from Ref. 46. By combining this information with the number of households in each household (income) category (these data come from the Bureau of Economic Analysis), the aggregate expenditures on each category of consumer goods and services by each household category are computed.

The various tax rates used in the analysis were obtained from a variety of sources including the Internal Revenue Service, the Economic Research Service of the Department of Agriculture, Hertel and Tsigas47 and Ballard et a1.48 These rates, as noted previously, are marginal rates.

The value of exports and imports in 1984 were taken from the Suruey of Current Business (various issues) with the exception of the energy data which were obtained from the EIA of the U.S. DOE and the agriculture data which were obtained from the Economic Research Service of the U.S. Department of Agriculture.

METHODOLOGICAL CAVEAT

Before proceeding to discuss the results obtained from the general equilibrium model, a short digression is in order with regard to the advantages and shortcomings of using the particular modeling approach that has been opted for here.

The primary advantage of the general equilibrium modeling approach is that, with all economic entities maximizing their behavior (subject to the relevant constraints), all markets are required to clear. No transactions are conducted at prices other than equilibrium prices and for every factor of production and every good and service consumed, the quantity supplied must exactly match the quantity demanded. All interactions among markets are taken into account and consequently, all interrelationships between sectors (both consuming and producing) are explicitly taken into account.

Another advantage of this modeling approach is that it performs the analysis at a disaggregated level and hence can identify sector specific impacts of the policy question being addressed. Frequently, small aggregate effects often obfuscate the larger impacts at the sectoral level. Thus, for example, at the aggregate level a change might have little effect on income but at the household level, the distributional impacts on income might be fairly substantial.

The general equilibrium model also includes a treatment of all taxes. These taxes can introduce a considerable differential between prices paid by consumers and prices received by producers. This can introduce distortions in market signals that lead to market failure (e.g., inefficient use of factors of production).49

The model is solved numerically and, after any change in the exogenous (e.g., policy) variables, a new, independent equilibrium is computed. That is, the new equilibrium is independent of the previous solution. As a result, any conclusions do not depend on first or second order approximations or the assumption of an infinitesimally small change in one or more of the variables.

The general equilibrium modeling approach is not devoid of deficiencies. The values of the various parameters used in the model are not estimated directly by econometric means. Rather, as noted, they are taken from the literature and represent a consensus among researchers with regard to appropriate values. This does not mean that a complete set of econometric results cannot be generated at some future date. The complexities of such an undertaking, however, are enormousso’5’ and so it is not attempted here.

Another assumption that does not emulate reality completely is that consumer and producer behavior is modeled with full and complete adjustment between perturbations. This means that the distributed lags associated with the adjustments of the various factors are assumed not to exist although the magnitude of the full adjustment by each producing and consuming sector is

36 ROY Bon, and NOEL D. URI

captured. Additionally, there is the implicit assumption that all economic agents know, or have available in a certainty equivalence sense, 52 the vector of final equilibrium prices allowing for full adjustment.

Finally, the model does not, as noted, make any provision for technological innovation and hence, is not suitable for addressing policy issues that will take a long time to reach their full (cumulative) impact.

These model limitations imply that the results of the subsequent modeling effort should not be unequivocally accepted but rather interpreted in the context of offering an improved, but not perfect, analysis of the impact of an oil-import fee.

SIMULATION RESULTS

Before discussing the results of the general equilibrium model, several items need to be mentioned. First, as observed in a preceding section, the model is solved by the SLCP algorithm of Mathiesen. This algorithm is based on the fixed point theorem proved by Scarf.53

Next, the magnitude of the effect that an oil-import fee will have on the quantity of crude oil imported into the U.S. is an important consideration. Consequently, in an ancillary analysis,54 the authors empirically estimate this magnitude based on a time series of historical data (quarterly) covering the period 1973 QI through 1987 QII. The results suggest that, for the long run, a 1% increase in the price of crude oil leads to a reduction in the quantity imported by 1.17%. The standard error of this estimate is 0.52. Because of the importance of this value to the inferences drawn, however, sensitivity analyses are conducted where the responsiveness of crude oil imports to an increase in the price of crude oil is allowed to vary by 1 SD in both directions around this estimated value.

Finally, before presenting the results and as noted previously, the model is calibrated based on 1984 data. Reference prices for all activities (both producing and consuming) are normalized to 1. Changes in the model from this reference calibration (which hereafter will be referred to as the Reference Case) in response to some perturbation(s) are not fully exhausted (that is, the cumulative total impact is not reached) for approximately 5-6 yr after the perturbation(s) occur(s), i.e., a new equilibrium will not be realized until approximately 1990. This result follows because of the intertemporal optimization on the part of producers and consumers which is incorporated into the model. Therefore, the model equilibrium (i.e., the equilibrium vector of prices and quantities) represents the cumulative effect of the oil-import fee between approximately 1984 and 1990. During this period, the implicit assumption is that the price of crude oil will not change either from the Reference Case (if this is the case being considered) or from the Oil-Import Fee Case (if this is the case being considered) in response to factors other than normal market forces.

The Reference Case results (both quantities and normalized prices) are presented in Tables 3-5 for the producing and consuming sectors and households (income categories), respectively. The nominal values of the quantities are in hundreds of billions of 1984 dollars. The sector numbers and category numbers correspond to those used in Tables 1 and 2. By themselves, the values found in Tables 3-5 provide little useful information beyond showing how the model is calibrated. Rather, the significance of the general equilibrium model and of the equilibrium values is in how these values in response to some policy initiative(s) that perturb(s) the general equilibrium. With this in mind, the impact on the general equilibrium will be addressed where it is assumed that a $5.00 per barrel fee is levied on crude oil imported into the US. This particular figure (i.e., $5.00 per barrel) was selected because it has been considered by others. In particular those studies by the DOE55 and Hogan and Mossavar-Rahmani56 and Yanchar and Caton5’ use this value.

Tables 6-8 present the general equilibrium values for prices and quantities for the producing and consuming sectors and households, respectively, as a result of imposing a $5.00 per barrel crude oil-import fee. The higher price of crude oil as a result of this import fee will have several effects. Consider the producing sector first. Domestic output of crude oil will rise by 4.11% (that is, $5.31 billion) as imports fall (due to the oil-import fee) by about 37% and as the

Impact of an oil import fee

Table 3. Equilibrium prices (normalized) and quantities (in hundreds of billions of dollars) for the

producing sectors in the Reference Case.

Sector Price Quantity

8

9

10

11

12

1.00000 18.8762

1.00000 0.46231

1.00000 23.7818

1.00000 2.27376

1.00000 3.50580

1.00000 1.61239

1.00000 5.54883

1.00000 0.10592

1.00000 1.29059

1.00000 0.45214

1.00000 1.09923

1.00000 0.61131

31

domestic price of crude oil rises by 0.064%. Note that in order to limit the number of tables, some of the equilibrium prices and quantities will not be explicitly presented although selected values will be discussed. Such is the case with the import prices and quantities. The omitted tables are available from the authors upon request. Also, by way of explaining the results, many of the interrelationships between markets are self-evident and hence the simultaneous

Table 4. Equilibrium prices (normalized) and quantities (in hundreds of billions of dollars) for the

consuming sectors in the Reference Case.


8

9

10

Il.

12

13

1.00000 4.52072

1.00000 0.83301

1.00000 1.17792

1.00000 1.46137

1.00000 3.74070

1.00000 1.83322

1.00000 0.28041

1.00000 1.46336

1.00000 5.84739

1.00000 1.66132

1.00000 0.67238

1.00000 0.91156

1.00000 3.03333


Table 5. Equilibrium utility levels (in hundreds of billions of dollars) by household categories

in the Reference Case.

Category Utility Level

I 2.23826

II 2.10802

III 2.42417

IV 6.01311

V 5.49734

VI 13.7363

Government 7.45752

nature of these relationships will not be discussed. Thus, for example, domestically produced

crude oil is a near perfect substitute for imported crude oil. As a result, an increase in the price

of imported crude oil due to an oil-import fee will lead to the substitution of domestically produced crude oil for imported crude oil and therefore to a higher price and larger quantity demanded for domestically produced crude oil. That is, the demand for domestically produced crude oil will increase and the explained results will follow. These sorts of interrelationships will not be examined in detail but are implicit in the analysis. In response to the overall higher price of crude oil, total output in the other producing sectors (with the exception of the financial sector) will fall by 0.14% or by about $8.6 billion. The financial sector is an anomaly because its output is a non-traded good. As such, the price and quantity behave as expected for this type of good.” With regard to the observed results, output falls for a couple of reasons. First, with a higher price of crude oil, the price of one of the inputs into the production process

Table 6. Equilibrium prices (normalized) and quantities (in hundreds of billions of dollars) for the producing sectors in the $5.00 oer barrel Import Fee

Case. .

Sector

1

6

7

8

9

10

11

12

Price

1.00000

1.00024

1.00007

1.00015

0.99886

1.00051

1.00041

0.99995

1.00064

0.99692

0.99676

0.99721

Quantity

18.8020

0.45865

23.7539

2.26591

3.49871

1.59823

5.55214

0.10493

1.34368

0.44922

1.09670

0.61006

Impact of an oil import fee

Table 7. Equilibrium prices (normalized) and quantities (in hundreds of billions of dollars) for the consuming sectors in the $5.00 wr barrel Import Fee

Case. -


1 0.99942 4.52352

2 0.99947 0.83348

3 1.00007 1.17763

4 1.00003 1.46105

5 1.00038 3.73873

6 1.00006 1.83280

7 1.00007 0.28034

8 1.00007 1.46299

9 1.00007 5.84596

10 0.99997 1.66111

11 1.00012 0.67218

12 1.00029 0.91115

13 1.00001 3.03257

39

rises and, given the aforementioned requirement that the equilibrium conditions in all markets must be met, factor use (in physical terms) falls and consequently, output declines. Hence, as an example, with the oil-import fee leading to a higher energy price, output in the manufacturing sector will decline by 0.39%. This is not meant to imply that a higher energy price will be the sole cause of a reduction in output. It will be the primary cause of such a reduction, however. Second, with a higher import price of crude oil leading to a reduction in available foreign exchange, there will be a reduction in the quantity demanded by foreigners of domestically produced goods and services. Thus, for example, agricultural exports (for all four agricultural sectors) will fall by, on average, 1.03%. Again, this is not meant to imply that the total reduction is attributable to this factor. The most heavily impacted producing sectors (in terms of a reduction in output) are the forestry sector (experiencing a 0.93% fall in output), the

Table 8. Equilibrium utility levels (in hundreds of billions of dollars) by household categories

in the $5.00 per barrel Import Fee Case.

Category Utility Level

I 2.23817

II 2.10790

III 2.42392

IV 6.01230

V 5.49653

VI 13.7363

Government 7.49374


petroleum refining sector (experiencing a 0.88% decline in output) and the mining sector (experiencing a 0.79% reduction in output). The beneficiary, in terms of expanded output, will be the crude oil industry as noted above.

With regard to the consuming sectors, the oil-import fee in general results in a slightly higher price for the various goods and services. The exceptions are for the food sector and the alcohol and tobacco sector. The higher prices for the goods and services leads to a reduction of the quantities of these goods and services consumed. Note that that reading and recreation sector experiences a barely perceptible decline. Thus, overall as a result of a $5.00 per barrel oil-import fee, consuming sector prices will increase by 0.0002% and the aggregate quantity consumed will fall by 0.01% ($318 million). This aggregate result, however, masks the effect that the import fee will have on specific goods and services. Sector specific results are more telling. For example, the import fee will reduce consumption in the housing sector by 0.053%, in the gasoline and other fuels sector by 0.045% and in the motor vehicles sector by 0.025%. The oil-import fee will lead to an increase in consumption in the food sector and in the alcohol and tobacco sector. While these results (i.e., the increases) at first might seem anomalous, they are not when considered in the context of a general equilibrium. Since the import fee leads to a reduction in the quantity of agricultural commodities demanded (due to a lower foreign exchange), the price of agricultural commodities will be lower. As a consequence, the quantities of these commodities demanded by domestic consumers will rise, all other things being constant. All other things, however, are not constant as the income of consumers (from labor and capital) falls reducing the demand for all commodities (as the budget line shifts). The net effect, nevertheless, of the changes is an increase in the quantity demanded of the agriculture related goods, namely food, alcohol and tobacco.

Utility falls for five of the six household categories. The aggregate reduction in utility is 0.0065% ($208 million) for all household categories. The reduction does not fall evenly across households, however. Category VI households (i.e., those with incomes in excess of $40,000) experience no reduction in utility while Category V households suffer a 0.15% ($81 million) reduction in utility with the remaining household categories incurring reductions in utility of lesser magnitudes. Additionally, when all of the effects of an oil-import fee are considered (that is, both the direct and the indirect effects), such a fee is not, in general, regressive. That is, it does not fall most heavily on the lowest household (income) category and progressively less heavily on households with larger incomes. Rather, as noted, the effect increases (in both relative and absolute terms) up to Household Category V. Household Category VI is not appreciably impacted because, in the general equilibrium framework, while the prices of the goods and services it consumes do rise, its income, of which a disproportionately large share (relative to the other household categories) comes from capital, rises as well offsetting the negative effect on utility of the higher prices (and lower quantities demanded).

The government is the other beneficiary (besides the crude oil industry) of the oil-import fee. Since the fee accrues to the government, its income increases leading to an increase in utility of 0.49% or about $3.41 billion. This, in turn, expands transfer payments and the provision of public goods and so on since it has been assumed that in equilibrium the government has a balanced budget. As an added note, since the price of land falls relative to capital, the wealth of farmers as a group declines (relative to other asset holders).

In summary, then, the impact of a $5.00 per barrel fee on imported oil will be a reduction in output by all producing sectors (except crude oil) of 0.14% or about $8.6 billion, a reduction in the consumption of goods and services by about 0.01% or $318 million, a fall in total utility by 0.0065% or $208 million and an increase in crude oil output of 4.11% or $5.31 billion and increased revenue (from the import fee) for the government of $3.41 billion,

In the analysis, the impacts of a $5.00 per barrel import fee have been discussed. In another sequence of computations, however, the impacts of a $10.00 per barrel crude oil-import fee were examined. The results from this suggest that a $10.00 per barrel fee would lead to a decline in output by the producing sector of 0.81%, a fall in consumption of goods and services by 0.04% and a loss of total utility of 0.02%. Government revenues, on the other hand, would increase by 0.53% while the output of the domestic crude oil industry would expand by 8.21%. A complete analysis of this $10.00 per barrel Oil-Import Fee Case is available from the authors upon request.


From this, it is posssible to identify specific benefits and costs to producers, consumers and households plus the government of the imposition of an oil-import fee whose objective is to enhance energy security. Once these benefits and costs have been identified, the efficiency and equity consequences can be evaluated and relevant questions answered. Thus, for example, is it justifiable to impose costs of magnitudes considered here for the sake of mitigating the potential future costs of an interruption in the supply of foreign crude oil? Answers to such questions, obviously, are subjective and, hence, are not provided here. Recall the earlier admonition against becoming involved in the emotional aspects of the oil-import fee debate. The analysis, nevertheless, provides a firm foundation from which policymakers can proceed.

COMPARISONS OF RESULTS

How do the results obtained here compare with those obtained by others? Other recent available studies do not provide disaggregated (i.e., by producing and consuming sectors and by household categories) estimates of the impact of an oil-import fee. They indicate only aggregate values. Thus, for example, the DOE59 concludes that the aggregate value of output (Gross National Product) will fall by between $12 billion and $20 billion (depending on the world price of oil). This is of the order of l&2 times larger than the value obtained here. The DOE’s estimated welfare loss by households is put at between $370 million and $540 million (depending on the world price of oil). These values likewise are 14-2 times as large as the value computed here.

No claim to more realistic values for this study over those of the DOE estimates is made. It should be realized, however, that the model developed here is a general equilibrium model-which reflects both the direct as well as the indirect impacts of any policy initiative-whereas the model used by the DOE is a partial equilibrium model and thus will not capture all of the relevant interrelationships.

SENSITIVITY OF THE RESULTS

No analysis is complete without an examination of the sensitivity of the results to key assumptions. In the foregoing discussion, many assumptions were made with regard to model structure and parameter estimates. A full examination and discussion of these assumptions would be virtually insuperable. Consequently, only the results from the sensitivity analysis of one crucial assumption will be discussed. Namely, what are the effects on the results of the assumptions concerning the crude oil import elasticity ? The estimated crude oil import elasticity was - 1.17 with a standard error of 0.52. Two separate sensitivity results will be considered. The first set of results if for the case in which the crude oil import elasticity is assumed to be 1 SD below the estimated value (this estimated value, it will be recalled, was used in the foregoing analysis) and the second set of results is for the case in which the elasticity is assumed to be 1 SD greater than the estimated value.

Consider the results obtained when the crude oil import elasticity is assumed to be 1 SD below the point estimate. For a $5.00 per barrel fee on all crude oil imported, output by all producing sectors (except crude oil) will fall by 0.12% while consumption of goods and services will decline by approximately 0.01%. Total utility, on the other hand, will remain virtually unchanged. Crude oil output will rise by 2.51% while government revenues will expand by $4.01 billion. Thus, the reduction in output will be slightly less if the lower oil import elasticity is the correct value while domestic crude oil output and government revenues will be lower with the lower elasticity. Sector specific effects and household category effects are consistent with those found when the higher elasticity value is used. The magnitudes of the indicated changes, however, are somewhat smaller.

We now consider the change in the general equilibrium if it is assumed that the crude oil import elasticity is 1 SD larger than the point estimate initially used. In this instance, producing sector output will fall by 0.15%, consumption of goods and services will be reduced by 0.02% and utility will decline by 0.008%. These values are somewhat larger than the general


equilibrium values obtained when the original point estimate of the crude oil import elasticity is used. Both government revenues and crude oil output will expand by more than they would in the situation where the original point elasticity estimate is used. In particular, government revenues will rise by $3.45 billion while crude oil output will increase by 4.65%. Sector and household category specific changes move in a consistent fashion (i.e., consistent with previous changes) with no anomalous fluctuations.

These sensitivity results suggest that the value of the crude oil import elasticity, while important in the determination of a general equilibrium and significant in determining the implications of a policy initiative affecting crude oil, is not so pivotal to the model that an error in its value leads to misleading and nonsensical results.

CONCLUSIONS

The foregoing analysis has been directed at examining the impact of an oil-import fee on the U.S. economy. The analytical vehicle used in the analysis consists of a general equilibrium model composed of 12 producing sectors, 13 consuming sectors, six household categories classified by income, a foreign sector and a government. The effect of a $5.00 per crude oil-import fee on prices and quantities is examined. Over the period 1984-1990, such a fee would result in lower output by the producing sectors (by about $8.6 billion), lower consumption of goods and services (by about $318 million), and a reduction in welfare by about $208 million. The government will realize an increase in revenue of about $3.41 billion while the domestic crude oil industry will experience an increase in output of approximately $5.31 billion.

Finally, the results, when subjected to a sensitivity analysis, are fairly robust with regard to the assumption of the value of the crude oil import elasticity, i.e., while the equilibrium values for the model vary in response to different assumptions concerning the value of this elasticity, the fluctuations are not so enormous as to suggest that the model is unrealistically sensitive to this parameter, nor do the likely effects of such a policy prescription change dramatically.

Acknowledgements-The authors would like to thank C. Ballard of Michigan State University and T. Hertel of Purdue University for assistance in developing the model used in the analysis of the oil-import fee issue. The views expressed are those of the authors and do not necessarily represent the Policies of the Department of Agriculture or the view of other Department of Agriculture staff members.

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assessing the impact of an oil import fee

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