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February 5, 2016

Obama Oil Tax Shows True Colors

February 5, 2016
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The Obama Administration has proposed a $10 per barrel tax on oil with the supposed purpose of funding some $32 billion annually in new transportation spending and to provide a direct incentive to reduce carbon dioxide emissions. Although it has no chance of passing the present Congress, nonetheless the move is the starkest yet showing the president’s agenda. The oil tax is very regressive, falling hardest on working class families who have to drive to jobs, while it makes little sense even in the context of the Administration’s own published reports on climate change. The proposal also shows just how flimsy are the prospects of a “revenue-neutral” carbon tax: the bulk of revenues from any tax on fossil fuels will quite clearly be used to justify massive spending on “green” projects. With Bernie Sanders calling out Hillary Clinton’s progressive street cred, are we really to believe that a massive tax on motorists will be used to give tax cuts to corporations?

A Regressive Tax

The Administration proposal explains that:

[W]e are proposing to fund these investments through a new $10 per barrel fee on oil paid by oil companies, which would be gradually phased in over five years. The fee raises the funding necessary to make these new investments, while also providing for the long-term solvency of the Highway Trust Fund to ensure we maintain the infrastructure we have.  By placing a fee on oil, the President’s plan creates a clear incentive for private sector innovation to reduce our reliance on oil and at the same time invests in clean energy technologies that will power our future. [Bold added.]

Principles of economics textbooks teach that the incidence of a tax is unrelated to the true burden of the tax. Thus, it is a sheer smokescreen for the Administration to keep focusing on taxing the oil companies, as if the damage will be limited to the fat-cat shareholders. In this case, the burden of a new “tax on oil companies” will largely be passed on to motorists and other consumers in the form of higher prices, because this is an industry where demand is “inelastic” compared to supply.

When trying to assess the impact of the oil tax on gasoline prices, another complication is that barrels of crude oil are not homogenous, and furthermore in practice refiners produce other types of products besides gasoline. If we ask, “How many gallons of gasoline does the typical barrel of crude produce?” the answer is 19. However, that would be misleading because of the other products (such as 12 gallons of diesel). For our “big picture” purposes, we will simply rely on the fact that a barrel of crude oil is 42 gallons in volume, meaning that a $10 per barrel tax on oil works out to about 24 cents per gallon.

Regardless of how many barrels of gasoline or diesel are produced from a barrel of oil, the people who bear the brunt of a tax on oil are indeed middle- and especially lower-income families. Lower-income families pay a much higher percentage of their income on energy. Families that make less than $30,000 a year spend 26 percent of their after-tax income on energy expenditures, while families that make over $50,000 a year spend only 8 percent.[1]



Total Tax Hike

To assess the size of the tax hit overall, we need to know how many barrels will be assessed the relevant $10 tax (or “fee” as the Administration euphemistically describes it). According to CNN: “Jeffrey Zients, Obama’s chief economic adviser, told reporters the fee would apply to oil that is imported into the U.S. He said oil pumped in the U.S. that is exported would not be taxed.”

Thus the relevant metric to assess the total size of the tax is domestic oil consumption, not production. According to EIA, in 2014 total U.S. crude oil production was 3.2 billion barrels. EIA also reports that net imports of crude oil in 2014 amounted to 2.7 billion barrels for the year. This approach suggests domestic crude usage in 2014 (the latest full year of EIA data) of 5.9 billion barrels, while EIA also directly reports that the U.S. in 2014 consumed 6.97 billion barrels worth of petroleum products (a figure that includes a small amount of biofuels). A ballpark figure for annual U.S. crude consumption is therefore 6.5 billion barrels, meaning a $10 per barrel tax on U.S. oil works out to $65 billion annually.

This is a massive new tax which would significantly burden the U.S. economy, no matter how it is levied. The fact that it is directly applied to all—meaning it would spill over into the prices for motorists—rubs salt in the wound, as this massive hit would fall disproportionately on the poor and middle class.

If the Goal were Tax Revenues…

If President Obama really wanted to increase tax revenue, a far better course of action would be to allow more energy production on federal lands instead of increasing taxes. As a recent IER study found, allowing more energy production on federal lands would result in $3.9 trillion in federal tax revenues over the next 37 years—that is more than $105 billion a year—$40 billion a year more than the President’s oil tax generates, even if we ignore the oil tax’s hit to the economy. Furthermore, the study found that there would be an additional $1.9 trillion in state and local tax revenues.

The economic benefits of additional energy production on federal lands dwarfs the additional revenues of the energy tax President Obama is proposing. The reason that tax revenues would increase so much is because GDP would increase by $127 billion annual over the seven years with expanded energy production and $663 billion annually over the next 30 years.

Road Congestion and the Social Cost of Carbon

The Administration helps justify their new tax by telling us “today’s transportation system imposes a hidden tax through congestion, which every year costs families $160 billion and businesses almost $30 billion.” Presumably it will then argue that these enormous costs of congestion will be eased by the “smart” infrastructure spending on bike paths and mass transit.

Yet to deal with traffic congestion in this way is a bit like fighting obesity via taxing forks in order to hand out free salads. The ultimate reason for traffic congestion is that government-owned roads do not have proper prices for their use. Just as there were gas lines in the 1970s when the government imposed price controls at the pump, so too do we get traffic jams when the government lets people drive on the roads at rush hour for free (or at artificially low prices). If the Obama Administration wants to solve the problem of road congestion, the answer is less government involvement, not a new tax. (Are privately run airplanes ever crowded with people the way government subways are filled like cattle cars?)

The Administration proposal also belies the idea that taxes on oil and other carbon-based fuels have anything to do with climate change. After all, why is the proposal for exactly $10 per barrel? Is that really what the scientists in white lab coats recommended to “internalize the externality”? Why wasn’t it $9.34 or $11.73 per barrel?

The answer of course is that this is a political proposal, the purpose of which is to raise more money for the federal government to spend—not distribute in a “revenue neutral” tax cut, as some fantasized.

Recall that the Obama Administration Working Group reports the “social cost of carbon” currently at $36 per ton. A barrel of crude oil contains about 0.3 metric tons of CO2, meaning that a $10 per barrel tax on crude is roughly “correct” (as in roughly equal to the social cost of carbon) if we wanted to “set a price” on the alleged negative externality of climate change due to oil use.

But hold on a second. On top of this new $10 per barrel tax on crude oil, we would still have the 18.4 cents per gallon federal tax on gasoline, as well as the (national average) of 26.49 cents per gallon of taxes on gas levied at the state level. Then we have CAFE fuel economy standards, as well as the host of subsidies and regulations to encourage biofuels and renewables in the transportation sector. We didn’t see the White House talking points mentioning rolling back these other taxes, subsidies, and regulations in transportation.

Once again we see empty promises of those claiming that conservatives should support a carbon tax, in exchange for getting the government out of energy. Far from a new tax on oil being used to roll back these other interventions, it will instead be used to increase the government’s picking of winners and losers. Even on its own terms, then, the Obama Administration would be intervening for more heavily “for” emission-free transportation and “against” gasoline than its own computer models say is the proper amount.


The Administration assures us that the President’s plan “would support hundreds of thousands of good-paying, middle-class jobs each year” and furthermore that it would “increase the competitiveness of U.S. businesses and the productivity of our economy by making it faster, easier, and less expensive to move American-made products.”

On the contrary, you don’t make it faster, easier, and cheaper to move products by imposing a huge tax on the thing that moves them—oil. And you don’t create good paying jobs with a $65 billion annual tax hike, the proceeds of which are used to fuel boondoggle spending projects on items that wouldn’t survive in the open market.

The Administration’s suggestion to levy a $10 tax on oil will hit working class Americans the hardest, and it doesn’t even make sense according to the very metrics about climate change that the Administration’s Working Group published. The whole episode shows the foolishness of striking deals with carbon tax proponents in the hopes of gaining smaller and more efficient government.

[1] See e.g. American Coalition for Clean Coal Electricity, Energy Cost Impacts on American Families, 2001-2014, citing Census, DOE, and EIA data.

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