Limiting U.S. Oil Imports: Cost Estimates

By Huntington, Hillard G. | Contemporary Policy Issues, July 1993 | Go to article overview

Limiting U.S. Oil Imports: Cost Estimates


Huntington, Hillard G., Contemporary Policy Issues


I. INTRODUCTION

U.S. concern about limiting oil imports had its root in the late 1950s when the possibility that inexpensive Middle East crude oil would replace domestic supply first became a real threat (Bohi and Russell, 1978). The oil shocks of the 1970s temporarily interrupted rising U.S. dependence on oil imports, but many experts now anticipate a return to this long-run trend (U.S. Department of Energy, 1987). Moreover, this conclusion appears to be independent of the expected future oil price path (Energy Modeling Forum, 1991). Given these trends, one might expect U.S. policymakers to adopt aggressive new policies to limit oil imports in the coming years. Concerns about clean air and global climate change reinforce this shift away from the consumption of gasoline and other petroleum products.

How easily could energy policymakers curtail U.S. oil imports? This paper provides some estimates of the costs of curtailing oil import growth. Energy Modeling Forum (EMF) comparisons of several world oil models that contain U.S. supply and demand responses to price are the bases for the estimates. The EMF study focuses on long-run dependence on Persian Gulf oil under alternative conditions (for example, price paths and economic growth rates) but does not directly address how limiting U.S. oil imports might impact market conditions. Specifically, the study does not explicitly consider a scenario incorporating both U.S. oil import reductions and OPEC price-setting assumptions.

The cost estimates assume that policymakers use pricing policies to limit oil imports. If energy markets are operating efficiently, these estimates will provide a lower bound for the costs of other nonprice instruments (for example, end-use standards on oil consumption) that limit imports. If significant market failures exist, the cost of import restrictions may be less than estimated here. To provide a more balanced perspective, the analysis incorporates estimates of several benefits from import-reduction programs. These benefits include smaller wealth transfers during a disruption and lower oil prices without disruptions. One can relate these costs and benefits to the level of imports in each projection and thereby extend the analysis to address key questions: What level of import reduction would create offsetting costs and benefits, and what level would be optimal for achieving the largest net gain?

II. RESULTS FOR TWO OIL PRICE PATHS

A. Models

Table 1 lists the eight world oil models reporting U.S. results by name of the working group representative and affiliated organization.(1) Since the models incorporate EMF standardized assumptions for prices, economic growth, and cartel capacity, these projections are not forecasts of the particular organizations. (For long-run energy and oil projections, see International Energy Workshop [IEW] semiannual polls as described in Manne and Schrattenholzer, 1989.) Moreover, table 1 lists institutional affiliations to identify the model rather than to indicate a particular organization's official modeling framework.

TABLE 1 Models Reporting U.S. Results in EMF Study

Model           Working Group Contact(*)
EIA:OMS         Mark Rodekohr, Energy Information Administration
IPE             Nazli Choucri, Massachusetts Institute of
                Technology
CERI            Anthony Reinsch, Canadian Energy Research
                Institute
HOMS            William Hogan, Harvard, and Paul Leiby, Oak Ridge
                National Laboratory
FRB-Dallas      Stephen P.A. Brown, Federal Reserve Bank of Dallas
Gately          Dermot Gately, New York University
DFI-CEC(**)     Dale Nesbitt, Decision Focus, Inc.
ETA-Macro(**)   Alan Manne, Stanford University

(*)Organization listed for identification purposes. Models and results do not necessarily represent listed organization's official view.

(**)Not included in the analysis because results were reported in 5 or 10 year intervals only. …

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