The Cheapest Way For President Trump To Save U.S. Oil

The President of the United States has the power, at his sole discretion without any other authority, to place a fee on imported oil or products. It becomes variable when a base price (floor price) is set and a fee is paid on any imports where the price on imports is below the base price. If the base price for oil was set at $50.00 per barrel and the import price is $30.00 per barrel, then an import fee of $20.00 per barrel would be paid to the United States Treasury. Likewise, if the import price (world price) is $50.00 a barrel, then no fee is paid. Thus, the fee is variable depending on the price paid for an imported barrel.

Covid 19 and the Oil Price War

Recently, two events, the Covid 19 pandemic and an oil price war between Saudi Arabia and Russia have had an unprecedented effect on the price of oil. Covid 19 has had a shock on demand unlike any event since 2001. This, together with Russia and Saudi Arabia flooding the market with excess crude, has sent prices sharply downward. Each event alone would have had a negative effect on oil price, however, together they have shocked the market. The impact the fundamentals of a variable import fee would have on oil price would be somewhat tempered by these two-events combined at the same time. It is the author’s belief Covid 19 will dissipate and world demand will normalize in the short term. The price war could be longer term. Irrespective, a variable import fee would have a positive effect on the oil price, yet it would be far more effective under normal market conditions.

The Effects of the Fee

The majority of the oil in the world is owned by a government and therefor a government will set the price of oil. The United States is the largest consuming nation in the world, however, because our oil is owned by private industry, the United States does not currently have a role in setting the price. We have long been held hostage to the policies of OPEC and other governments. It is estimated that the current consumption in the U.S. is approximately 20 million barrels per day. Production estimates range between 11 and 13 million barrels per day, meaning a deficit between 7 to 10 million barrels per day. If an import fee with a base price of $50.00 per barrel is placed on oil and the US imports of 7 million barrels per day then the price of the imported barrel would be $50.00 (price plus fee). Any seller would seek this price and prefer to sell to the U. S. as opposed to selling at a lower price set by some financial market indices. Likewise, other consuming nations, seeking to maintain supply, would pay a higher price to purchase oil. Purchasers in the U. S., required to rely on imports would in turn pay a higher price for domestic oil than market indices. As such, the world oil price would seek a level set by the United States base price (floor price) as set by the import fee. Accordingly, the United States, would become a vital participant in determining the world oil price.

Is the United States Truly in Balance?

Prior to the crisis of Covid 19 and the price war, there was considerable evidence that production in the United States was...

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