Lower Dependence on Foreign Energy via Taxing Domestic Production?

October 24, 2006

In California, Proposition 87, a measure to raise taxes on oil production in the state, is on the ballot and supporters claim that it could reduce our dependence on foreign energy sources. From the Pasadena Star-News:

Anthony Rubenstein said he began thinking about the nation’s dependence on oil after the 2001 terror attacks, an obsession that five years later has resulted in a ballot initiative seeking to tax oil companies as a way to fund alternative energy programs.

If approved, Proposition 87 would tax companies drilling for oil in California until it has generated $4 billion. The money would be set aside for loans, grants and subsidies to promote alternative fuels and more energy-efficient vehicles.

One of the initiative’s goals is to reduce oil dependence in California by 25 percent in the next decade.

“The bottom line is if you could make the needle move in California, you could make the needle move for the whole country when it comes to using less oil,” said Rubenstein, a former screen writer and community activist.

Oil pumped in California accounted for 37 percent of the state’s demand in 2005, according to the state Legislative Analyst’s Office. Twenty-one percent of the state’s oil comes from Alaska, while the rest is imported from abroad.

It appears that since terrorism is Mr. Rubenstein’s reasoning for thinking initially about this issue, that he like many others are seeking ways to reduce our dependence on energy from areas of the globe that are mixed with that terrorism.

But raising production taxes only domestically will not lessen our dependence on foreign energy. This is backwards thinking at best, and is a direct contradiction to what many on the same side of the aisle have claimed previously in that free trade (i.e. no tariffs) increases our dependence on foreign products.

Specifically, opponents of free-trade agreements like NAFTA argue that imposing higher taxes on foreign products, while leaving the domestic goods free from the tax will lead to the production taking place here rather than abroad and thereby decrease our “dependence” on the foreign producers for that product. So how would taking the opposite policy position of taxing the domestic producer while not being able to tax the foreign producer also lead to decreased “dependence?” The answer is that it will not.

If one finds it legitimate for whatever reason to “reduce our dependence” on foreign energy sources, taxing only domestic production will do little in this regard and could actually make the problem worse. On the other hand, taxing all oil production could reduce our dependence on foreign energy as it would merely reduce overall oil production and lead to other energy sources. But only if those alternative energy sources were produced in a disproportionate amount domestically would you actually reduce your dependence on foreign energy sources. (For example, if all of the alternative source was foreign produced too, you wouldn’t change the situation much.) Taxing oil in general just reduces “dependence on oil,” whether that oil comes from Alaska and Texas or Iran and Venezuela.

Finally, there is a global market for oil so even if the United States gets 15 percent of its oil imports from a Chavez-ran Venezuela, does it really matter? Not really. What happens in Venezuela long-term affects the world price of oil and even affects countries that do not get any oil from Venezuela. The same is true for oil that is produced in certain places of the world that does not physically flow to the U.S. Only to the extent that non-oil energy sources have higher costs to be transported around the globe and these non-oil sources would be produced in the U.S. could taxing oil really reduce “dependence” on foreign energy sources.

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