Reducing the U.S. vulnerability to oil supply shocks: comment.

• Author: Tower, Edward

1. Introduction

   Recently in this journal Mine K. Yucel [2] evaluated alternative ways to reduce U.S. vulnerability to oil supply shocks. As her measure of vulnerability she uses the change in the aggregate welfare of U.S. consumers and producers due to a proportional increase in the word price of oil. She considered a specific import tariff on oil, a gasoline tax and a drawdown of stocks from the strategic petroleum reserve. She concludes [2, 309] that

   the tariff decreases vulnerability if the short-run oil supply elasticity is low, but increases vulnerability if the short-run supply elasticity is more than 1.0. The gasoline tax, on the other hand, increases vulnerability if short-run supply is very inelastic, but decreases vulnerability if elasticity is higher than 0.5. However, in the event of a supply disruption, short-run elasticities could be very high. A governmental drawdown of oil from the SPR as happened during the most recent crisis would substantially increase short-run elasticities. Then, the gasoline tax along with an SPR drawdown would be the best weapon against supply disruptions.

2. An Import Tariff Is Likely to Increase Consumer Vulnerability to Foreign Oil Price Shocks

   Dr. Yucel's result that an import tariff may increase rather than decrease vulnerability to a foreign price shock, is an intriguing point, which deserves additional attention. To see this in its simplest manifestation, assume a single period, no domestic production, an advalorem import tariff (rather than the specific one that the author uses), and assume the tariff revenue doesn't enter into the welfare calculus, as the author does (perhaps because it is wastefully spent by a kleptocracy). For a small price change, the welfare cost to consumers is the increase in price times initial imports, which equals the proportional increase in consumer price times initial spending on the import. Since initial spending on the import increases with the tariff if the demand for the import is less than unitary elastic, inelasticity of the demand curve is the condition for vulnerability to increase with the tariff.

   Dr. Yucel assumes a long run elasticity of demand for oil of 0.9 and a short run elasticity which is smaller than that. She finds that the tariff will lower vulnerability if and only if the supply elasticity is greater than a critical value. Had she used an ad valorem import tariff instead of a specific one, had she performed a single period analysis and had she...