Implications of a Tariff on Oil Imports

The sharp drop in oil prices from $30 per barrel in November 1985 to about $15 recently has sparked efforts in Congress to enact a tariff on imported oil.

Proponents argue that such a tariff would help reduce the federal budget deficit, that it would help cut the foreign trade deficit, and would prop up a sagging domestic oil industry. However, our analysis indicates that while the tax would certainly contribute somewhat on all three of these counts, on balance it is probably a bad idea. The tax would reduce real economic growth, raise the overall price level, subsidize domestic petroleum production at the expense of the rest of the nation, hurt oil exporting nations—particularly heavily indebted ones such as Mexico—and move the world further away from the economic efficiencies of free trade.