The Economic and Energy Effects of Alternative Oil Import Policies

EMD-79-78: Published: Jul 24, 1979. Publicly Released: Jul 24, 1979.

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The U.S. has become increasingly dependent on oil imports, especially from the Organization of Petroleum Exporting Countries (OPEC). Our high dependency level makes us economically vulnerable to abrupt price increases imposed by OPEC. The worst affects of price increases are on inflation and unemployment, but there are also significant negative effects on economic growth and the balance of trade. Oil imports also limit U.S. freedom of action in world affairs. GAO examined alternatives to this problem of excessive reliance on imported oil. The three pricing policy alternatives are price deregulation, import fees, and domestic crude oil taxes. The fourth alternative, import quotas, is a quantitative limit on imports and so does not work directly through the price mechanism. GAO also examined the effects of the present administration's decontrol plan and its two-part windfall profits tax.

Deregulation is the most effective of the three pricing options at cutting oil imports, reducing them between 20 and 100 percent more than the crude oil equalization tax and import fees. The quota options were designed to build on deregulation and so lower imports further. Deregulation's success is due to the fact that it stimulates domestic production. While the tax stimulates production, but less than half as much as deregulation, the import fees would not stimulate it. The quota policies reduce imports considerably, but at a high economic cost. The more imports are radically reduced, the greater the economic impact. The problem is to balance oil import advantages with economic disadvantages. GAO believes that deregulation holds about the right combination of benefits versus costs for the Nation. Price controls temporarily keep economic disruption lower than deregulation does, but in the long run they lead to substanially higher imports which increases American vulnerability to economic disruption. The administration's decontrol plan should lower imports considerably and have little effect on economic growth and unemployment. The windfall profits tax on the old-oil decontrol tax will be fairly small, but the tax on OPEC price increases may collect more money than might be expected. While the latter would accomplish the objective of denying the full benefit of OPEC price increases to oil companies, it may lower the amount retained by the industry below the world price, and this might increase imports at the expense of domestic production.

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