Roosevelt Institute | Cornell University

Obama's $10 Fee on Oil

By Jared SiegelPublished April 15, 2016

The White House revealed a plan to implement a $10 federal fee on every barrel of oil produced or consumed in the U.S. to fund its 21st Century Clean Transportation Initiative. A discussion weighing the environmental benefits of the initiative against the potentially severe economic consequences of fee needs to be a greater topic of debate in this election cycle.

    In February 2016, the White House released its proposal to implement a $10 federal fee on every barrel of oil sold in the United States. The fee aims to generate enough revenues to invest in the President's 21st Century Clean Transportation Initiative. The fee has little possibility of passing the Republican Congress, as the White House recognizes. One senior White House official told POLITCO,  "We're realistic about the near-term prospects in Congress, but we think this can change the debate." This article will analyze the potential impacts if the debate were to sway in the President's favor and the next administration were willing and able to successfully pursue this proposal.

    The fee would give next administration the revenue to completely revitalize U.S. transportation infrastructure. The U.S. consumed 3.34 billion barrels of oil in 2015. Assuming consumption remained constant, the fee would have raised $33 billion dollars in 2015 alone and could raise close to $300 billion in the next eight years. This would enable the next administration to modernize the existing transportation infrastructure and provide alternatives to flying and driving including subways, buses, and high-speed railways. In addition, as Obama's plan outlines, the revenues could go towards rewarding state and local governments for investing in cleaner transportation systems.
Perhaps the greatest advantage of the fee, according to the Obama administration, is that it might disincentive investment in oil. A White House memo outlining the plan read that the plan served as a "a clear incentive for private-sector innovation to reduce our reliance on oil and invest in clean-energy technologies that will power our future." The fee would make renewable energy more cost competitive and a more feasible option to fossil fuels in the long run.

    While the tax does have a positive goal, it needs to be weighed against the potential negative consequences to the economy. Consumers would likely be adversely affected by the tax. Jeffrey Zients, Director of the White House National Economic Council, predicts that the tax could increase gasoline prices by as much as $0.24 per gallon. According to the EIA, the average American consumes approximately 440 gallons of gasoline per year. This will cause the average American an extra $212 at the pump each year.

    The tax will likely have an even greater effect on the U.S. energy sector than it does on consumers. If the fee is passed, U.S. will find it difficult to export oil to foreign countries, as U.S. oil will no longer be price competitive. The lack of U.S. exports could increase worldwide consumption of OPEC and Russian oil. Additionally, oil companies will likely be sensitive to the tax as their profits continue to shrink from the declining price of oil. In turn, American oil companies might continue the recent trend of layoffs, possibly at an even faster rate than over the past 18 months. Energy companies might also continue to cut exploration and production budgets, which could reduce U.S. production and adversely affect U.S. energy security.

    The greatest negative effects of the oil tax, however, will likely be on broader macroeconomic trends. Oil companies will likely push the fee onto consumers and businesses with considerable energy needs. In turn, the prices of products in a variety of industries might rise. According to a Congressional Research Service report, the fallout from this tax could result in cost-push inflationary pressure. The report reads, "In general, the fee would likely result in decreased discretionary consumer purchasing power which may translate into lower expected economic growth."

   The $10 oil fee should become a greater topic of debate in this election cycle. The next President will have to weigh the benefits to the environment and to America's transportation infrastructure against the potential drawbacks to the economy. Balancing environmental sustainability and economic vitality is a discussion that will continue to occur in the coming decades. It is important that the candidates share their opinions on this issue.