Obama Tax on Oil

It could have long term implications for oil prices…

On Feb 04th the US president, Barrack Obama, proposed a $10 tax on imported crude oil. While a tax on imported oil is nothing new; remember India also imposes higher excise on petrol and diesel to enhance revenue collections in tough times. The point is that Obama plans to use the $10 tax on oil to finance clean transport initiatives.

This will not be imposed on domestic oil by the US government. It will only be imposed on oil that is imported into the US. Innocuous as it may seem, it could set the trend to commence a revival in oil prices. Let us understand why…

Economics of oil importers…

The oil market is divided into net oil exporters and net oil importers. For starters, countries like the OPEC nations, Norway, Canada, Mexico and Russia are net oil exporters. For most of them oil revenues forms a very important part of their national revenues and is critical for them to manage their national budgets. On the other hand, there are countries like the US, EU nations, Japan, China, Turkey and India which are net importers of oil. Over the last 18 months, there has been a wealth transfer of trillions of dollars from the oil exporters to the oil importers. Most oil importers have benefited from that.

For most oil importers this sharp fall in oil prices will give them an additional leeway to earn revenues from cheap oil without putting a burden on domestic oil consumers. For example, India has used excise on petrol and diesel to make up for the shortfall in disinvestment and direct tax revenues. The proposed Obama tax of $10/bbl is exactly on those lines.

How will oil exporters react?

Oil exporters have already been exporting wealth to the oil importers over the last 18 months. This is apparent from the way their currencies have depreciated sharply versus the oil importers. A steep Obama tax of $10/bbl will make a lot of OPEC and other oil producers rethink their logic of keeping oil prices low and focusing on market share. When oil importers are using low oil prices to enhance their revenues, the oil exporters will surely do a rethink.

We believe that three things could happen. Firstly, most oil producers may unilaterally cut production so that supply disruptions become much faster. Secondly, we may see larger informal alliances among oil producers. Currently, the OPEC excludes key producers like Russia and Mexico. If they are pulled into an informal alliance, then they have over 50% of oil share. Lastly, it may create a bottom for oil prices as these levies will start distorting global oil prices. All in all, it may help oil find a base. After 18 months of cheap oil, some sanity may finally return! ©

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