Oil Levies and the Law of One Price
Abstract
The Congress failed to deal with the American budget deficit in the mid-1980 by cutting spending. Their refusal to cut spending aims at reducing their budget deficits and protecting American oil producers against foreign competition which they perceive as ‘cheap’. Instead, they decided to impose a tax all the crude oil and other refined products they get from foreign countries to match declines in the prices of world oil. The proponents of the move argued that the implementation of such a policy would have little effect on the American economic activities. They claimed it will also provide price reliefs to the struggling American refineries while encouraging their local oil production activities. According to the levels of the country’s imports, the proponents argued that a $5 tariff on each barrel and another $10 on each barrel for refined products will help in raising $11.5 billion annually for the American treasury.
Introduction
The government strives to control the prices of vital products. Subsidies and tariffs are the major tools that the government uses to control the prices of various products. OPEC (Organization of the Petroleum Exporting Countries) is the major international body that controls the price of oil. However, governments may have different strategies that strive to control the price of oil. These strategies may have different effects on the economy. This paper will strive to address some of the effects of the strategies.
Q1. Tariff on Imported Crude
In answering this question, the assumption is that the world’s economy and the American economy work together. This relationship will clearly illustrate the law of one price implications. American refineries often compete with their foreign counterparts in directly pricing commodities to the distributors of diesel fuel, heating oil, gasoline among