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Abu Dhabi, UAEFriday 20 July 2018

Robin Mills: Obama oil tax plan may be more of a legacy bid than a levy

The levy would fund about $32.4 billion of extra annual spending on public transport and new high-speed rail, next-generation self-driving and electric vehicles, and more convenient urban layouts.

Like a patriarch whose will seeks to bind his heirs from beyond the grave, Barack Obama is trying to lay down an environmental legacy to outlive his admin­istration.

His latest move: a budget proposal to tax oil companies $10 per barrel.

At once a bad, a good and an impossible idea, it still sets a marker for his successor.

The fee would be levied on domestic production and – as an apparent afterthought – on imported oil. It would fund about $32.4 billion of extra annual spending on public transport and new high-speed rail, next-generation self-driving and electric vehicles, and more convenient urban layouts.

There is something strange in the maths, since $10 per barrel on US oil consumption would raise about $70 billion annually, suggesting the sums were originally done for production only (the US still imports about 10 million barrels per day in addition to its production of nine million barrels daily). Or the White House might have been planning to use the rest of the money for something else.

A tax on domestic production only would clearly be disastrous for US oil companies: with prices hovering at about $30 per barrel, well below extraction costs, the industry would be driven to bankruptcy.

The Opec countries would no doubt be delighted by such an outcome.

A tax on all oil, domestic and imported, though, would simply be passed on to consumers. Meanwhile, exports of US oil, only recently permitted, will not be taxed under this scheme. Overall, there would be next to no immediate effect on the upstream producer.

After all, oil products are already heavily taxed in all European countries and Japan. Even the US does have a road fuel levy, although at a low level. Since it appears politically impossible to raise the petrol tax (it has not gone up since 1994), levy­ing a new tax notionally on the hated oil companies is a more complicated way of achieving the same effect.

With oil prices in any case at their lowest since the late 1990s, allowing for inflation, the hope may be simply that consumers will not notice another 6 cents per litre on petrol. It would, though, hit the competitiveness of the petrochemicals industry, unless it was somehow exempted.

Mr Obama has already sought to limit greenhouse gas emissions from coal power plants. Electricity generation emits 38 per cent of the US’s carbon dioxide, and transportation, at 32 per cent, is the next big target. The proposed tax is a clumsy tool, another one in a jumble of overlapping US and global climate policies. But a more rational fee or cap on all carbon fuels – oil, gas and coal – has repeatedly got stuck in the country’s gridlocked political system.

However convoluted the funding mechanism, the planned use of the money is good. The US’s crumbling roads, tracks and bridges need a revamp fit for new, 21st-century forms of mobility. Higher taxes would eventually reduce congestion (said to cost the US almost $200bn annually), oil consumption and pollution.

Not surprisingly, the proposal has been hotly opposed by the oil companies themselves.

In a way, it does not matter – it has no chance of passing a Republican-held Congress. The Arabian Gulf producers need not worry too much about this tax – yet.

But it does restart a debate about low-pollution transportation and higher fuel taxes.

Low oil prices give governments of oil-consuming countries a window of opportunity to raise revenues, protect the climate and lock in gains in energy efficiency. Fuel economy standards are tightening, not only in the US but also in Europe and China, and conventional engines and electric vehicles are improving steadily.

Mr Obama’s environmental plans do not bind his successors, but he has set up a signpost. If a future administration chooses to follow it, worldwide oil demand will continue steering into the slow lane.

Robin Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.

business@thenational.ae

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