Social Cost of Imported Oil and US Import Policy

Abstract

Attempts at estimating and applying the oil import premium require a large number of uncertain assumptions about economic behavior. Analysts can easily construct opposing arguments that the premium is large or small, and that the benefit of import reduction is correspondingly large or small, depending on the choice of assumptions. Long-run oil import policy depends most critically on the nature of normal supply behavior, an area in which surprisingly little is understood or considered reliable, and on private initiatives to undertake energy-efficient investments in response to higher current and expected oil prices. A better understanding is also required of the magnitude of macro costs caused by market rigidities relative to those caused by wealth transfers abroad when the oil price jumps suddenly. In spite of the uncertainties about magnitude, the case for an import premium and an import tariff is credible. The uncertainties suggest, however, that a tariff should be applied conservatively. Moreover, a tariff should not be regarded as a substitute for a strategic stockpile, and vice versa. On the contrary, the two are highly complementary and together effectively address both demand and disruption components of the premium.