ENERGY TAX RAISES OIL TRADE QUESTIONS

When the world's No. 1 importing and exporting country talks tough on international trade, other countries listen. The U.S. has been talking that way a lot lately.

April 5, 1993

4 min read

When the world's No. 1 importing and exporting country talks tough on international trade, other countries listen. The U.S. has been talking that way a lot lately.

Clinton administration emissaries have challenged trade practices of such heavyweights as Japan and the European Community, which is the world's largest exporting entity now that internal trade boundaries are disappearing. They have assigned themselves an oversight role in Japanese economic policy-making and threatened sanctions in response to EC government purchasing favoritism. So far, their aggression has not provoked a trade war.

Straightforward talk on free trade and national self-interest never hurt anyone. But it begins to sound like bluster when the country making the statements seems confused as to where its interests lie.

OIL EXPORT TAX

While the U.S. was jostling with the EC and Japan, Persian Gulf oil producers were trying to figure out what to do about energy taxes proposed in the U.S. and Europe. Some of the producers were reported to be considering a retaliatory oil export tax. As a group of countries with widely divergent interests, oil exporters would have trouble implementing and enforcing such a levy. But the mere discussion of it says something important to the U.S., where the Clinton administration's BTU tax proposal tends to be discussed strictly in domestic terms.

The U.S. imports half the oil it needs.

And oil accounts for 40% of the energy that the U.S. consumes. About 10% of what the U.S. spends on imports each year goes for crude oil and petroleum products. Developments in international oil trade are, therefore, crucial to U.S. economic interests.

This link between the U.S. economy and internationally traded oil is, in fact, a matter of policy. The country has decided not to allow exploration and development of its most promising petroleum frontiers and to instead rely on imports for volumes it might otherwise produce on its own.

For the most part, exporters have happily accommodated this U.S. preference for other countries' oil. Chastened by the crude oil price crash of 1986, they have sold crude and products on generally commercial terms and, in their market-balancing production decisions, held political mischief to a reasonable minimum. They recently have started making the multibillion dollar investments necessary to keep production capacity in step with anticipated demand growth.

With a BTU tax that hits oil most heavily, the U.S. essentially snubs its oil trading partners. It still won't produce as much of its own oil as nature and economics might allow. But it won't rely as much as before on imported oil, either. It will simply tax oil more heavily and drive consumption down.

TAX PROBLEMS

One of the many problems with this strategy is that the BTU tax won't cut oil consumption to anywhere near the point at which the U.S. no longer relies on imports. Directly or otherwise, the U.S. will still need oil from the exporters it antagonizes with the skewed BTU tax. Healthy trade relationships with oil exporters will remain as important as those with the EC and Japan.

That's not the only implication that the BTU tax has for U.S. status in international trade. By raising the costs of domestic energy inputs it will hurt the ability of U.S. industries to compete in international markets. It thus will hurt U.S. trade, subject of so much recent tough talk abroad.

A country this anxious to afflict itself with risky sacrifice needs indulgence more than anything when it demands that others attend to its economic interests. Or maybe the U.S. can get away with it because it's so big.