The Glaring Problem With Obama’s $10-a-Barrel Tax on Oil
Policy + Politics

The Glaring Problem With Obama’s $10-a-Barrel Tax on Oil

© Sergei Karpukhin / Reuters

Presidential budget requests are always more political documents than genuine legislative proposals, typically containing items that everybody involved knows will never find their way into law. However, for his last budget proposal, President Obama is floating an idea so out of the realm of possibility that it makes a mission to Mars look tame.

Specifically, Obama will ask Congress to slap a $10 per barrel “surcharge” – read tax – on oil.

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You could be forgiven for thinking that this is just a lame duck Obama trolling Congress – trying to provoke a reaction just for the sheer hell of it. But according to reporting in Politico today, now confirmed by the White House, the proposal is for real and is part of a larger green transportation initiative.

The timing of the proposal is curious, considering what the recent nosedive in crude oil prices has been doing to U.S. producers. As recently as this week, the price per barrel has been below $30, less than a third of the $90-plus it was selling for 18 months ago. The steep drop in prices has made it a challenge for higher-cost U.S. producers to remain profitable.

The effect of a $10 tax on each barrel sold in the U.S. would be to raise the prices on oil, and by extension gasoline. When prices go up, consumption falls, and in this case it will fall without any of the benefit of the price increase accruing to producers.

In fact, the Obama administration appears to be selling the plan, in part, based on the impact it would have on oil producers. The surcharge, the administration told Politico, would be “paid by oil companies.”

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Of course, believing that oil companies will pay the fee with no effect on consumer prices requires also believing that the producers won’t pass their increased cost on to refiners, who won’t in turn pass their costs on to the public. In other words, it requires suspending belief in basic economics.

There are strong arguments that petroleum products, primarily gasoline, are greatly under-taxed in the U.S., because of the damage carbon emissions do to the environment and because of the cost of maintaining the country’s transportation infrastructure. That we should be raising taxes on oil now, when prices are so low, is a defensible policy position. Pretending it will have no effect on consumers is not.

The $10 fee is meant to fund a $300 billion push to invest in new infrastructure, as well as a range of technologies meant to reduce the amount of carbon that is emitted into the atmosphere in the U.S. every year.

The odds of Congress approving a $10 per barrel tax on oil – in an election year, no less – are exactly the same as Republicans backing a Constitutional amendment to allow Obama to run for a third term: zero.