Social cost of imported oil and US import policy

Technical Report · Tue Dec 01 04:00:00 EST 1981

OSTI ID:5469579

Bohi, D R; Montgomery, W D

The question addressed is with US oil prices at world levels, does the world price accurately measure the true cost of imported oil to the US economy. If there are costs to imports not factored into private energy use and production decisions - an ''import premium'' - then total welfare could be enhanced by government policies that lessened the rate at which we use foreign oil. Import reduction, based at least implicitly on the existence of such a premium, has been the proximate target for energy policy for much of the same period that, paradoxically, saw price controls providing incentives in exactly the opposite direction. ''Men of affairs'' seem to have gravitated toward two contradictory views of the premium paid when we import rather than conserve or produce additional barrels of oil. On the one hand, there is implicitly the view that the premium is zero. Market forces are believed to provide the proper signals to the private sector, and thus will yield the correct import level. Any imposed change in the level of imports would make the country worse off. The contrary view is that importing oil poses risks from disruptions, limits our diplomatic and military freedom of action and transfers wealth abroad. Hence fewer imports are better than more, a view consistent with a positive premium. Conflicting policies are advocated on the basis of these views. This report evaluates the premium concept and estimating its size. Findings from an investigation of the role of disruption risks in changing the social cost of imported oil are reported. The import premium notion is subjected to careful evaluation from the perspective of economic theory. Results indicate that the issue is more complex than either of the polar views noted above suggest. Decision rules are suggested that provide useful guidance to decision makers, though they cannot substitute for the application of informed judgement. 19 refs., 1 fig., 1 tab.

• Research Organization: Resources for the Future, Inc., Washington, DC (USA)
• DOE Contract Number: AC01-80PE70267; AC02-76CH00016
• OSTI ID: 5469579
• Report Number(s): DOE/PE/70267-T30; ON: DE85016756
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
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COST
DECISION MAKING
ECONOMY
ENERGY SOURCES
FOSSIL FUELS
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IMPORTS
INSTITUTIONAL FACTORS
NORTH AMERICA
PETROLEUM
SOCIO-ECONOMIC FACTORS
USA