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In the recent years, the US government has been called upon to intervene in the market of oil and gasoline. One of such interventions involves the imposition of tariffs to regulate the import of oil and petroleum products into the United States. The tariffs serve three functions. First, they encourage domestic production of oil by increasing the competitiveness of domestic refiners. Second, they support the development of sources of alternative energy since an increase in oil prices makes the prices of energy sources comparable. Finally, they promote the conservation of oil and associated products that include diesel and gasoline. However, the imposition of tariffs on imported oil will introduce various costs. In particular, the tariffs will increase the depletion of US oil reserves and complicate the long-term energy security. Second, they are likely to impose additional costs on the US consumers and the economy. Third, tariffs are a complicated method of achieving national objectives.
Tariffs as a Facilitator of Energy Development and Conservation
Protection of Domestic Industries
Crude oil is one of the important raw materials used in the production of refined products used in various sectors of the economy such as transport and manufacturing. For a long time, the demand for petroleum products was high above domestic production, prompting their importation. The refining capacity of the United States has fallen to 16 million barrels per day from the previous 19.1 million barrels per day. At the same time, the number of refineries fell by 30 percent (Hill, 2014). The refiners claim that the reason for the closure of the refineries is the increase of imports. They state that if the government allows the oil imports to increase, it will not achieve its objective of energy conservation and development. The situation prompted policymakers to propose an imposition of tariffs on oil imports to protect the domestic refiners from collapsing. In the recent past, the current lowprices of petroleum have been associated with low domestic crude oil development. If the condition persists, the country will have insufficient crude oil readily available to cushion supply disruptions. A tariff on the oil imports will increase its price for the domestically produced oil, enable US refiners to compete favorably, and ensure their survival (Carbaugh, 2013).
Development of Renewable Energy
The tariff on imported oil will have a significant impact on the development of renewable energy. Particularly, it will increase the price of oil and make alternative forms of energy more attractive. A hefty tariff on carbon would tax all carbon energy sources to reduce their consumption and consequently change the energy consumption trend to fossil fuels (Crane et al., 2009). The increased demand for fossil fuel will prompt the government to develop the production of fossil-fuel sources.
The federal government is currently experiencing budget deficits, which acts as an additional incentive to consider levying the tariff. The global decline in oil prices is a good opportunity for the US government to impose the tariff and raise revenue without increasing the energy prices to the final consumer. The revenue generated from the proceeds will help in the development of renewable energy sources.
Tariffs as a Deterrent to Energy Development and Conservation
Depletion of Domestic Reserves
Attempts to increase energy conservation by imposing tariffs may turn out to be counterproductive in the end. Tariffs on oil imports will increase their prices and subsequently reduce oil imports. To satisfy the domestic demand for oil, the United States will embark on massive oil fracking that will deplete the domestic reserves. The tariffs will also reduce the supply of oil imports and consequently increase the domestic oil prices. As a result, the domestic oil prroduction will become more profitable and stimulate expedited depletion of oil reserves. These actions will not only reduce the long-run energy conservation but also cause adverse effects on the environment.
The imposition of tariffs on oil imports introduces significant additional costs to the energy production and the society. A tariff on crude oil and gasoline makes the US economy worse off. The consumers and refiners of gasoline suffer losses that exceed the revenue generated by the government and the profits to producers of crude oil. For example, a tariff of $5 on gasoline increases the annual payment by consumers for the product by about $12.5 billion. It also reduces annual profits of petroleum refiners by about $9 billion (Kelleher, 2012). The loss on refiners hampers energy development in the United States. The economic costs to the consumers and producers cause an annual cost to the economy of $3.7 billion (Hill, 2014).
Challenges in Implementing the Tariff
Designing and implementing the tariff possess some political, administrative, and institutional challenges. The tariff may involve complexities that are likely to introduce additional costs and create inefficiencies. Some trading partners may enjoy economic benefits from previously held tariff exemptions by importing without restrictions. The tariff system should accommodate exemptions from these countries and firms. A country seeks these rights through a rigorous political process. A state selectively grants these exemptions to specific groups; thus, they may create distortions that require special treatment to different countries. Therefore, creating the tariff that increases oil prices uniformly to all partners is hard to effect. Further, the cost implication of effecting the special exemptions and other administrative costs increase the costs of tariff programs. These special treatments make tariffs a complex method of regulating the oil imports (Ervin & Smith, 2008).