An Ill-conceived Tax Idea

Yesterday we learned that President Obama's final budget proposal includes a plan to raise money for transportation projects and other uses by imposing a per-barrel tax on US oil companies. Here are a few quick thoughts on this ill-conceived idea:

• As I understand it, the tax would be imposed on oil companies, exempting only those volumes exported from the US. The US oil industry is currently in its deepest slump since at least the 1980s. Having broken OPEC's control of prices and delivered massive savings to US consumers and businesses, it is now enduring OPEC's response: a global price war that has driven the price of oil below replacement cost levels. This is evidenced by the recent full-year losses posted by the "upstream" oil-production units of even the largest oil companies: ExxonMobil, Chevron, Shell, BP and ConocoPhillips, particularly in their US operations. The President has wanted to tax oil companies since his first day in office, but his timing here would only exacerbate these losses, putting what had been one of the healthiest parts of the US labor market under even more pressure.
• This tax would also increase OPEC's market leverage, providing a double hit on the cost of fuel for American consumers: We would pay more immediately, when the tax was imposed and companies passed on as much of it as they could, and then even more later when OPEC raised prices as competing US production became uneconomical.
• Focusing the tax on the raw material, crude oil, rather than on the products that actually go into transportation, as the current gasoline and diesel taxes do, is guaranteed to produce distortions and unintended consequences. For starters, exempting exports--a sop to global competitiveness?--would give producers a perverse incentive to send US oil overseas instead of refining it in the US. It would also shift consumption toward more expensive fuels like corn ethanol, which provides no net emissions benefits but has been shown to affect global food prices.
• Singling out oil, which is not the highest-emitting fossil fuel and for which we still lack scalable alternatives, will put all parts of the US economy that rely on oil as an input at a competitive disadvantage, globally, and undermine what had become a significant US edge in global markets. Petrochemicals, in particular, would be adversely affected. The President's staff is well aware that the distribution of lifecycle emissions from oil, and the structure of the industry and markets, make policies focused on consumption far more effective than those aimed at production. This is why his administration's first act in implementing the expanded interpretation of the Clean Air Act to greenhouse gases was to tighten vehicle fuel economy standards. Taxing the upstream industry does nothing for global emissions but makes US producers less competitive, ensuring a return to rising oil imports and deteriorating energy security.

As widely reported, the Congress will not enact a budget containing this provision. It is hard to gauge whether this proposal represents a serious attempt to inject new thinking into the debate on funding transportation upgrades, or is simply one last shot across the bow of the administration's least favorite industry before leaving office in 349 days. It's not unusual for the wheels to come off as a presidency winds down, and this particularly flaky and futile idea might just be an indicator of that.

Disclosure: My portfolio includes investments in one or more of the companies mentioned above.