The Social Cost of Imported Oil

Abstract

Two arguments are advanced to explain why the market price of imported oil may not reflect the full cost of using oil. The first stems from the marginal risk of a deliberate oil-supply disruption that is generated unintentionally by importers in the course of their activity. A tax subsidy scheme can correct this problem when the tax revenues are used in a program aimed at deterring disruption. The optimal-tariff argument proposes that the US government can serve as a representative of the combined economic power of all US oil importers. By restricting US oil importers activities, the government may be able to wield some monopsonistic power in the international oil market, and if the use of US market power depresses the world oil price, the US economy may capture a large share of the gains from world trade. The success of such a policy rests on the assumption that the oil-producing countries will not retaliate with measures that cause the US more harm than it gained from the manipulation of the world oil prices.