Optimal oil import tariffs An international perspective for the 1980s David M. Kline and John P. Weyant Since the oil price explosion of 1973-74, oil policy has focused on two problem areas: firstly, chronic- ally high intemational oil prices and secondly, vulnerability to disruptions in oil supply. Until recently, many held that measures designed to reduce the level of oil imports would mitigate both of these problems. 0il import reduc- tions would put downward pressure on world oil prices during normal supply conditions, while simul- taneously reducing the importer's exposure to oil supply interrup- tions. By the end of the 1970s, however, several analysts had con- cluded that certain characteristics of the world oil market would mini- mize both of these potential bone- fits of oil import reductions. Now, after more than two years of glut on the world oil market, many doubt that policy-induced import reduc- tions would have any beneficial effects at all. This paper assesses the value of oil import reduction policies during the oil market conditions that are expected to prevail during the 1980s. The con- clusion is that there are still substantial benefits to be gained by implementing efficient import reductions. This conclusion is robust over a broad range of assumptions about OPEC object- ives and other key determinants of world oil market behaviour. Until recently, many held that measures designed to reduce the normal level of oil imports would be highly beneficial. Oil import reductions would put downward pressure on world oil prices during normal supply conditions, while simultaneously reducing the importer's exposure to oil supply interruptions. However, some analysts now contend that certain characteristics of the world oil market minimize both of these potential benefits of oil import reductions. Some views of OPEC imply that reduced OECD demand will increase rather than decrease the world price of oil. 1 The case has also been made that either the International Energy Agency (lEA) sharing rules or the way a decline in oil import demand is shared among secure and insecure producers, might negate the vulnerability-reducing effects of a reduction in imports. Now, after more than two years of world oil glut, many doubt that policy-induced import reductions would have any benefits at all. In this article, the value of oil import reduction policies is examined under the world oil market conditions expected to prevail during the 1980s. We begin with a discussion of alternative assumptions about the key factors that will influence the value of oil import reductions. Taken together, these assumptions embody an extremely wide range of views about how the world oil market might evolve. Next, a simple analytical framework is employed to compute the net benefits of oil import tariffs, subject to the alternative world oil market assumptions. The results of these calculations imply that a tariff on US oil imports of about $10/bbl would have net benefits under almost all conditions. Similarly, the OECD countries, acting in unison, would benefit from a tariff in excess of $20/bbl. Sources of benefits from import reductions Under most assumptions about the objectives of the oil exporting nations, import demand reductions will decrease the world price of oil. 2 In the case where the oil exporters pursue a production target, producers continue to put the same amount of oil on the market after the demand reduction as they did before. Consequently, for the market to clear with reduced demand, the price must be lower. Similarly, in the case where 0301-42151831020101-18503.00 © 1983 Butterworth & Co (Publishers) Ltd 101