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Making higher oil prices a win for American households

Jun 23,2022 - Last updated at Jun 23,2022

NEW YORK  —  The United States exports more petroleum than it imports. As a result, the country as a whole benefits from the recent spike in global oil prices. But American households think they are hurt by the higher prices, because all the benefits have gone to US oil companies and their shareholders. No attempt has been made to distribute any portion of the windfall to US households, even though today’s higher energy prices are largely the result of a US government-led action  —  the sanctions on Russia following its invasion of Ukraine.

The US is facing neither an oil production shortage nor a sudden explosion in demand. Instead, the rising energy prices since late February have coincided with a massive increase in US petroleum exports. Calculated from US government data, US net petroleum exports in May 2022 totaled 3.9 million barrels a day, representing a whopping 45 per cent increase over the same month last year. The increase in US dollar revenue is even greater given the 76 per cent increase in the prices over the same period.

There is a policy that can make American households much better off. If the US introduced a 45 per cent tax on its oil exports, it would increase the domestic sale of oil and bring down the US energy price by between 40-45 per cent, including a decline in the gasoline price from its current level of about $5 per gallon to less than $3 per gallon. If the government distributed the export-tax revenue to low- and middle-income households, they would benefit further still. Oil companies would continue to make more money than they did before the war, just not by as much as they do now.

An export tax would also increase the effectiveness of oil releases from the US Strategic Petroleum Reserve. Since announcing the sanctions on Russia, the US government has stated that it will release about 45 million barrels of oil, starting in August. But, unsurpringingly, this has had no noticeable effect on domestic energy prices. Absent an export tax, US oil companies will simply reduce their domestic sales by the same amount and export more. But with an export tax, the exact rate can increase, depending on the amount of oil released from the reserve, domestic gasoline and energy prices could fall further.

The US administration faces three possible obstacles to such a policy: Domestic politics, the US Constitution, and World Trade Organisation (WTO) rules. But these constraints are not insurmountable.

While the Biden administration may fear an attack from the Republican Party for adopting “radical socialist” policies, or from environmental groups for undermining its pledge on climate actions, there is also a political argument in the opposite direction. Many US households currently blame the administration for failing to address rising prices, their number-one economic worry. Many do not buy Biden’s argument that Russian President Vladimir Putin is solely to blame for higher energy prices, because global supplies would not have declined without the US-led sanctions on Russia. A tax on oil exports would allow the administration to maintain the sanctions without asking American households to sacrifice their living standards.

The second constraint comes from the US Constitution, which states that “No Tax or Duty shall be laid on Articles exported from any State”. But if an export tax is socially desirable, is there a way to introduce something that lawyers would not call an export tax but is functionally similar?

For 40 years, from 1975 to 2015, the US banned oil exports altogether. This apparently was considered constitutional, even though banning exports is like levying an export tax at a rate of infinity. But simply restoring the export ban could cause US oil companies’ profits to fall below pre-war levels. These companies, with their strong lobbying power, would surely claim injury from the ban.

A more promising alternative would be a two-part policy that prohibits US oil companies and refineries from exporting any of their existing production but allows them to export a certain percentage of additional output above the pre-war level. The increased production can come from additional extraction. Since the administration has complained about US oil firms not using some 9,000 approved drilling permits, it could modify the terms of the permits to “use it or lose it”.

Moreover, because the US still imports some petroleum products, this policy would actually increase the domestic supply, and hence would lower domestic energy prices (including gas stations’ prices) to be below the pre-war level. Importantly, oil companies’ profits will remain above pre-war levels.

The two-part policy is superior to a UK-style temporary windfall tax, which reduces the incremental gain from an additional barrel of oil produced and thus creates a disincentive for oil companies to invest and produce. With the two-part approach, in contrast, the incremental gain from producing an extra barrel is still the world oil price, and rises one for one with it.

Finally, WTO rules frown on countries imposing export bans. The US could consider simultaneously removing former President Donald Trump’s tariffs on Chinese imports, which were ruled illegal by a WTO panel in 2020 and have pushed up the cost of living for US households  —  and implementing the two-part oil policy. There would be no net increase in US violations of WTO rules. And in view of America’s previous lengthy export ban, the new policy would not create a precedent in US trade policy.

For the rest of the world, this scheme would raise energy prices. But the US could and should help to increase global oil supply more aggressively by using its considerable leverage with major producers in the Middle East and elsewhere.

In sum, the gains to the US from its sanctions on Russia need not benefit only a few oil companies and their shareholders. A two-part policy that permits exports only from incremental new production, together with additional oil releases from the Strategic Petroleum Reserve, could turn American households from losers into winners.


Shang-Jin Wei, a former chief economist at the Asian Development Bank, is professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs. Copyright: Project Syndicate, 2022.

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