Tariffs not the answer for low oil prices

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Appeared in the Toronto Sun, April 29, 2020
Tariffs not the answer for low oil prices

Alberta Premier Jason Kenney recently (and correctly) warned that Canadian oil producers currently suffer from a “triple threat” from the COVID pandemic, a global recession and crashing oil prices. In response to OPEC and Russia, earlier this month Kenney announced that he and U.S./Mexican energy officials were considering a regime of North American oil tariffs. But while the situation for our domestic producers is dire, Canadians must realize that imposing tariffs will only make a bad situation worse.

When assessing the global oil market, we must consider Canadians in their roles both as producers and consumers. As a net crude oil exporter, Canada as a whole benefits from higher world oil prices because the producer gains outweigh the losses to everyday Canadian consumers who must pay higher prices for gasoline, air travel, home heating and so on. Just as a wheat farmer benefits from higher wheat prices—even though bread is now more expensive for him at the grocery store—Canada as a whole benefits economically when world crude prices are high.

However, even though it’s true that crashing oil prices have made Canada poorer, imposing tariffs on foreign oil imports won’t have the same economic impact as a higher world price of oil. Premier Kenney seems to believe that putting a “floor” under oil prices would simulate a revival in global demand for Canadian oil. But imposing tariffs would hurt Canadians a second time, after the damage caused by the original price crash.

Depending on how we measure it, as of this writing the Brent crude oil spot price is about US$17 per barrel, and on some contracts was briefly negative—something that never occurred before. Suppose Canada imposed a tariff of roughly $35 per barrel, bringing the after-tax price of crude back up to $50. Would this make Canadians richer?

No, it wouldn’t. Because a tariff is simply a tax; you don’t make your country richer by imposing taxes on your consumers. If Canada slaps a surtax on oil entering the country, it won’t make foreign buyers willing to pay more for Canadian exports. If the tariff were levied merely by the Canadian government, the extra $30 per barrel enjoyed by Canadian oil producers would be effectively taken out of the pockets of Canadian consumers. Transferring wealth from one group of Canadians to another doesn’t make Canada richer.

Now it’s true that a North American regime of tariffs would operate differently. Because the total cost of the tariff would be effectively paid by Canadian and U.S. consumers, it’s possible the gains to Canadian producers would outweigh the losses to Canadian consumers. Yet even here, we should be honest about the source of this “prosperity.” American consumers would have their access to OPEC and Russian oil cut off, in order to make them pay more for Canadian exports. That’s not something Americans should support, and it’s not a sustainable framework for operating in a global market.

Premier Kenney is right—the oil sector is a vital part of his province’s, and indeed the country’s, economy. And his provincial government should consider measures to help, including tax incentives and regulatory relief. However, tariffs only “work” by forcing a country’s (or a continent’s) consumers to pay more to its producers. Taxing your own people to raise energy prices is not a viable long-term strategy.