PIRINC: LOADING BTU TAX ON U.S. OIL IS WRONG

Petroleum Industry Research Foundation, New York, says it would be unwise to levy a heavier BTU tax on oil than on other types of U.S. energy.

President Clinton has proposed an energy tax of 25.7 cents/MMBTU on energy and a supplemental tax of 34.2 cents on oil, bringing the oil tax to 59.9 cents/MMBTU.

Pirinc, funded by major oil companies, said the chief purpose of the BTU tax is to collect revenues, but it would impair the international competitiveness of the U.S. economy and increase the trade deficit.

"The administration expects the tax not only to raise revenue but also reduce energy consumption to improve environmental conditions and reduce our balance of trade deficit as well as our reliance on 'insecure' foreign energy supplies," Pirinc said. "Actually, the BTU tax would contribute only minimally--if at all--to these nonrevenue goals."

INTERFUEL COMPETITION

Pirinc also said the Clinton administration apparently believes the supplemental oil tax is required to prevent oil from having an advantage over coal and gas in the market.

"However, this assertion is incorrect, as it fails to consider differing distribution costs for different fuels. The tax's final incidence was intended to be the end user, and thus retail prices are the appropriate comparison point."

In areas where oil and gas compete for markets, the supplemental oil tax amounts to a significantly higher price for oil.

For electric utility fuels, for instance, the oil price increase is 25% while the gas increase is half as big, 12%. For fuel used in the commercial sector, the natural gas tax is only 5% of the end use price, compared to 12% for distillate fuel oil and 23% for residual fuel oil.

ENVIRONMENTAL BENEFITS

The administration argued the supplemental oil tax would have environmental benefits, but Pirinc said under that logic, coal should bear the highest tax because it has 30% more carbon/BTU than oil products and accounts for most U.S. sulfur emissions.

Pirinc said the low tax on coal was based on political considerations, "given the fact that coal mining is a very labor intensive industry and is important in the economies of many states."

It said the supplemental oil tax will gross about $9 billion/year in real dollars from 1997 on but have a very small effect on air pollution and global warming--less than 1% by 2000.

It said it is hard to justify any part of the supplemental oil tax as necessary for environmental reasons because the environmental quality of oil products has been improving steadily since the 1970s, as has the quality of air.

IMPORT DEPENDENCE

Pirinc also attacked the Clinton argument that the supplemental oil tax is required to reduce petroleum imports and improve the U.S. balance of trade.

"In 1992 our gross oil imports amounted to $51 billion, equal to not quite 10% of our total merchandise imports-about the same as in 1989 and 1991. By comparison, our imports of motor vehicles and parts amounted to over $71 billion last year, our chemical imports were about $28 billion, and our manufactured goods imports $60 billion.

"Completely ignored by the administration is the adverse impact of the BTU tax and the supplemental oil tax on the balance of trade. Whatever the status quo before the imposition of the tay U.S. business will be less competitive internationally after the tax takes effect.

"Finally, the administration's tax ignores the potential shift from crude oil imports to petroleum product imports. While the mix between crude oil and product may be irrelevant for dependency calculations, it has an important impact on the balance of trade since crude oil is cheaper than light petroleum products like gasoline and distillate. If refiners are unable to pass the tax through, they are likely to reduce oil runs, so the demand would have to be met from product import sources."

Regarding oil and national security, Pirinc noted the nation's 40% net import dependency includes more than I million b/d of secure pipeline shipments from Canada, so dependency on overseas oil is 35%.

"This percentage is far less than the oil import dependency of most industrial and industrializing countries. Japan must import all of its oil from overseas sources, as well as its gas. With the exception of the U.K. and Norway, all European countries have an oil import dependence ratio at least twice as high as ours and are dependent on imports for more of their gas requirements. The same is true of the industrializing countries of Southwest Asia.

"All of these countries seem to find this dependency viable. They recognize that in normal times there is a commercial interdependence between oil importers and exporters. The latter are as compelled to sell their oil as the former are to buy it.

"During any supply disruption, the shortage and accompanying price increases will be felt by all consumers regardless of their source of supply or their degree of dependence on foreign supplies. Thus, even if we could reduce our import dependence significantly by 2000, we would still have to bear the full price impact of an international oil shortage." And, Pirinc said, the supplemental tax would reduce U.S. import dependence from 56% in 2000 to 54%, a drop "irrelevant for our security of supply."

TAX PASSTHROUGH

Finally, Pirinc noted the dynamics of the oil market may prevent a straight passthrough of the BTU tax.

"Since the BTU tax puts the same base tax (25.7 cents/MMBTU) on all fuels, interfuel competition may allow the base tax to be passed through, even on residual fuel oil.

"If the supplemental oil tay however, had to be borne solely by transportation fuels, their price would raise by about 10 cents/gal rather than the 7-8 cents/gal calculated in a straight passthrough.

"Because importers will be paying a BTU tax of 7.5 cents/gal on gasoline and 8.3 cents/gal on jet fuel and diesel, refiners may be unable to pass through the increment, leaving them with an underrecovered tax in excess of $1 billion/year. This additional burden could tip the scales for some companies between viability and bankruptcy."

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