Impacts on U.S. Energy Markets and the Economy of Reducing Oil Imports
September 1, 1996
Abstract
The General Accounting Office (GAO) has responded to a request from Representative John Kasich by requesting that the Energy Information Administration (EIA) use the National Energy Modeling System (NEMS) to estimate the cost to the U.S. economy of reducing oil imports. The analysis summarized by this paper focuses on two approaches toward a target reduction in oil imports: (1) a set of cases with alternative world crude oil price trajectories and (2) two cases which investigates the use of an oil import fee.
Methodology
What is the cost of reducing oil imports relative to the existing levels found in the Reference Case of the 1996 Annual Energy Outlook? The answer to this question depends on the mechanism for achieving the reduction. The first approach focuses on a set of world crude oil price increases. Higher prices for energy reduce energy imports but cost the economy in terms of lost output and purchasing power. Four price trajectories were developed to investigate this issue. They exceed the EIA 1996 Annual Energy Outlook (AEO96) Reference Case price path by $5 per barrel, $10 per barrel, $15 per barrel, and $20 per barrel by 2005. The ratio of each new 2005 world oil price and the 2005 AEO96 Reference Case price is then maintained from 2006 through 2015 for the alternative cases. These four cases will be referred to throughout the document as +$5, +$10, +$15, and +$20 to indicate that in all instances they are incremental to the AEO96 Reference Case world oil price path.
The second approach posits an oil import fee which achieves oil import reductions in 2005 equivalent to those projected when oil prices are $20 above the Reference Case level. Here, two basic options are investigated: (1) using the collected revenues to reduce the Federal deficit and (2) recycling collected funds to maintain the Federal deficit at the same level as in the Reference Case. The return of revenues is accomplished through a reduction in the payroll tax rate.
Summary of the Aggregate Results
Four integrated model runs were implemented to relate oil import reduction projections to alternative world oil price increases. With higher world oil prices, domestic production increases and demand is constrained. By 2005, the +$5 case reduces oil imports by 1.2 mmbd, while the +$20 case backs out 3.2 mmbd (Figure 1C). By 2015, the + $5 case results in a reduction of 1.8 mmbd, while the +$20 case results in a reduction of 4.7 mmbd. The results indicate that each successive reduction of one million barrels per day of oil imports can only be achieved at progressively higher costs. The first ten dollars of price increase yields a reduction in oil imports of 2 mmbd by 2005, while the next $10 yields only an additional 1.2 mmbd . Economic impacts, as reflected by changes in GDP, mirror the changes in the world oil price.
The Import Fee Case experiment yields energy market effects which are fairly similar to the +$20 case. However, the macroeconomic impacts are more complex in part because the fee generates substantial revenues. How the funds are used makes a large difference. In addition, the fee case has effects on international trade patterns and restructures U.S. imports and exports. As shown in Figure 2, when the fee revenues are used to reduce the Federal deficit, the economy is adversely affected through 2005, but begins to return to the Reference Case throughout 2015. In the early years, the economy is adversely affected by higher energy prices; in the latter years, interest rates decline in response to the lower Federal deficit, and an investment-led rebound occurs.
When the Federal deficit is targeted to remain at the Reference Case level, the economy is essentially kept at or slightly above the Reference Case through 2005, but declines thereafter. Here, the early results stem from supporting consumption expenditures by passing collected funds back to consumers. While this ameliorates the near-term effects, investment suffers and the economy begins to rapidly decline relative to the Reference Case. Also in the deficit reduction case, the impact on GDP measured over the entire forecast period is approximately two-thirds of the impact of the +$20 case. Here, the fee adversely affects the U.S. export prices relative to import prices, whereas in the +$20 case, all nations experience higher energy prices.