The Impacts of Current U.s. Oil Policy: a Dynamic Cge Model

Preliminary Draft Comments Welcome Oil has been an important energy source in the U.S. for over 100 years. Increased reliance on foreign supplies has resulted in potential vulnerability, while high U.S. production costs, coupled with a dynamic market price, have resulted in a volatile domestic industry. The Federal government has responded with many initiatives. Military expenditures in the Persian Gulf are targeted, at least in part, to secure a stable supply of oil. Special tax considerations for exploration and production, lower than average tax rates, as well as the creation of the strategic oil reserve have offered substantial subsidies to the industry. The cost to the public is measured not only in the costs of these programs, but also in the influences these expenditures have on the sectors of the national economy. The purpose of this paper is to analyze the effects of such programs. We do so by employing a dynamic Computable General Equilibrium (CGE) model. Focusing on military expenditures, domestic tax subsidies, and the strategic oil reserve we find the true cost of oil is substantially higher than the market price and the combination of programs have, to an extent, antithetical results. We find the programs reduce consumer welfare at all income levels. Furthermore, while the tax subsidies clearly improve the competitiveness of domestic producers, the military expenditures greatly reduce the benefits of the tax subsidies program to the domestic producers. Finally, we find the clear winners from the combination of programs we analyze are the domestic refiners. * Professor of Economics, Ohio University and Associate Professor of Economics, University of New Mexico, respectively. The authors would like to thank Carol Dahl and participants at the International Conference of the International Association for Energy Economics (Rome, Italy June 1999) for helpful comments on a previous draft of this paper.