III. The Numbers Say No

Although currently low oil prices provide substantial economic benefits for oil consumers, some advocate that the U.S. government should limit the quantity of oil the United States imports. Recalling the economic dislocations wrought by supply disruptions during the last decade, they argue that increased dependence on foreign oil suppliers increases the probability of a replay of such disruptions and dislocations. They also argue that moderation in U.S. demand for imported oil will depress oil prices and thereby benefit oil consumers. The essence of the argument in favor of a tariff is as follows. Because of imperfections in the oil market, the price of oil does not fully reflect all the costs that are being borne by the economy to consume that oil. Because only part of the cost of oil consumption is reflected in its price, there exists a divergence between private marginal cost (the cost experienced by individual consumers from an additional unit of consumption) and total marginal cost (the cost to the economy as a whole of an additional unit of consumption). If such a divergence is present, the price of imported oil will be too low to reflect fully the true total cost to the economy. Oil will be overconsumed, and as a result the government needs to intervene by correcting oil prices to transmit the true total cost to individual decision makers in the economy. A tariff on imported oil is one means to accomplish this objective.