VIEWPOINTS : Oil-Import Tax Could Aid Energy Sector but Would Hurt Other Firms

Although the Reagan Administration has vehemently opposed any tax increases, higher taxes on energy have been debated in Congress in recent months.

With Gramm-Rudman requiring $50 billion to $75 billion--or perhaps more--in some combination of spending cuts and tax increases for fiscal 1987, energy-tax revenue look to many like an easy way to narrow the gap. With the collapse in oil prices, energy taxes may soon take on even more appeal.

The falling spot oil prices spell big trouble for financially weak oil-producing countries such as Mexico, Venezuela and Nigeria.

Ironically, these countries will probably produce more, not less, oil in reaction to these lower prices. They desperately need the foreign exchange generated by oil exports to service their huge international debts.

And with lower oil prices, they need to export more oil to maintain their foreign exchange revenue.

However, the additional oil production and exports will result in bigger world surpluses and still lower prices.

A disequilibrium situation for lower prices resulting in more production, leading to still-lower prices, etc., could develop rapidly. How low prices can go is anyone’s guess, but even the low marginal cost of producing oil--no more than $2 to $3 per barrel in the Middle East--isn’t necessarily the lower limit.

We already see in the case of copper that when countries depend on one commodity almost exclusively for their foreign exchange earnings, they will produce and sell it even if the prices received don’t cover their costs.

Lower oil prices create substantial problems for U.S. oil producers and their lenders.

Above $22 per barrel, the windfall profits tax is in effect, and for each $1-per-barrel decline in the oil price, the producers lose about 28 cents and the U.S. government loses about 72 cents.

At $22 per barrel, the windfall profits tax ends, however, so all that the government loses is the regular corporate income tax, which averages about 15% for the oil industry.

Consequently, the loss to oil producers soars from 28 cents for each $1-per-barrel decline to 85 cents when the price crosses $22 per barrel.

Even if the current spot price of $17 per barrel holds, then, the oil industry will face severe financial strains as this lower price spreads beyond the spot market to more and more transactions.

Effects Will Soon Expand

Furthermore, effects will soon extend to other oil-price-related areas--natural gas, the energy development and service industries, where Global Marine has already filed for bankruptcy, oil equipment and supplies and Texas real estate.

Oil created a magnificent skyline in Houston, but many of those lovely “see-through” office buildings--they’re completely empty, so you can see right through them--would only sell for about one-half their replacement costs on the basis of today’s rental and occupancy rates.

Only hope has prevented a price collapse, and hope could disappear with the oil-price nose-dive that has already occurred.

It goes without saying that the Federal Reserve will do whatever is necessary to bail out the Texas banks and other energy lenders, dumping money out of airplanes if required.

Nevertheless, there is a distinct risk that bank depositors, after seeing a number of failures, will ask, “Who’s next?”, withdraw their funds in anticipation of further failures, and in the process touch off a collapse of confidence in the financial system.

This risk would be avoided, however, by putting a floor under domestic energy prices, and this may become increasingly attractive as Washington realizes the potential danger.

Of various techniques to accomplish this, interest might center on an import tariff on crude oil and petroleum products, which would simply be the difference between the old, higher world oil price and the lower, current price.

For example, if the old price used were $29 per barrel and the current price were $19 per barrel the tariff would be $10 per barrel. At $17 per barrel, the tariff would rise to $12 per barrel.

The attraction of this tariff is that it would not only put a floor under U.S. energy prices but would also divert revenue that previously went to foreign oil suppliers to the U.S. Treasury.

Each $1-per-barrel collected would net the Treasury about $2 billion a year, so a $10-per-barrel tariff would increase federal revenue about $20 billion annually, a handy sum at a time of Gramm-Rudman-related pressure to cut the budget deficit.

Furthermore, this would be essentially a free tax on energy consumers. You and I would not see a higher price at the gasoline pump, we would only fail to see the lower price--a much less onerous tax.

May Gain Support

As Washington more and more understands the depth of the financial crises that could result from the oil-price collapse, an import tax on crude and oil products may gain widespread support in Congress and even in the Administration.

Of course it would be sold to the voters under the banner of self-sufficiency: We will not let a temporary oil-price decline wreck our energy industry and make us further dependent on those undependable Middle East types.

The revenue-raising aspect could provide lots of frosting on the cake in Washington’s eyes.

Unfortunately, the cake would end up tasting very bitter because of the detrimental effects on U.S. industry of maintaining oil prices above world levels.

Although Canada and the North Sea oil producers might also put floors under domestic energy prices for similar reasons, the rest of Europe and certainly Japan as well as South Korea, Taiwan and other newly industrialized countries would not.

They have no domestic energy to protect--Japan produces less than 1% of its primary energy.

Consequently, U.S. industry, especially sectors that use petrochemicals as feed stocks--or raw materials--would be at a considerable competitive disadvantage in relation to industry in countries enjoying the lower world oil price.

Actually U.S. industry is already at a sizable disadvantage vis-a-vis Japan. Lacking energy resources, Japanese industries have emphasized energy efficiency much more than those in the United States.

For example, the chemical industry in Japan spends 3.2% of its output revenue on energy while U.S. producers spend 4.8%, half again as much.

A $10-per-barrel difference in the oil price between the United States and Japan would more than double this already wide difference of 1.6 percentage points for the chemical industry.

Consumes Much More

In total industry, the United States now consumes almost twice as much energy per unit of output as Japan (2% versus 1.1%), and a $10-per-barrel price difference would add another 0.7%, almost doubling the disadvantage.

These numbers measure energy use for both fuel and feed stocks, and the competitive problems for feed stock users would be even more acute because their energy costs are so much greater as a percent of their revenue.

For example, the U.S. petrochemical industry spends 19% of its revenue on energy-based feed stocks, about the same as in Japan.

A $10-per-barrel price difference would put the U.S. industry at more than a 6% additional cost disadvantage, more than the average pretax earnings of the industry.

American industry, which already has immense problems with international competition, would suffer even more output and employment losses if it had much higher energy costs than many European or Far Eastern countries.

Industries, such as plastics, that depend heavily on petrochemical feed stocks, would literally depart from our shores.

Then, rather than produce plastics in this country with American labor, the manufacturing would be done elsewhere where feed stocks are cheaper and the finished plastic resins would be exported to this country.

Of course, Washington could attempt to keep up with the process by taxing the energy content of the imported resins, but this would only drive further stages of production and employment overseas.

Where would it end? With the imported plastic resins? With the imported telephones made from those plastics?

The administrative process would be a bureaucratic nightmare, and the losses in U.S. production and jobs would be considerable.

Import tariffs, then, would put a floor under domestic energy prices and prevent severe financial problems for the energy sector, but would put U.S. industry at an additional distinct international cost disadvantage.

What are the alternatives? One is to simply accept the likelihood of financial problems for the energy industry and assume that the Fed can contain them. That could prove to be a very high-risk approach, however.

Perhaps more feasible would be to support the energy sector by maintaining domestic energy above world levels through import tariffs--but only on energy used by consumers, not by industry.

In effect, industrial users of energy, especially of feed stocks, would be exempted or granted energy credits. Administrative problems would certainly exist.

The result, however, would be far more desirable than a tariff structure that would ensure the further decimation of U.S. industry and employment.