You have probably heard commentators claim that the United States is overly reliant on foreign oil. This view stems from the fact that the United States produces less of its own oil and imports much more from foreign sources than in the past. The concern with the United States' dependency on foreign oil has led to a number of policy recommendations aimed at reducing the amount of oil imported into the United States. One such recommendation is an oil import fee, which amounts to a tax on imported oil. Such a tax on imported goods is known as a tariff.

A tax on imported oil would make foreign oil relatively more expensive than domestically produced oil. This would enable domestic producers to supply a larger share of the oil consumed in the United States and reducing the reliance on foreign oil. However, there is a price for using less foreign oil! The price of gasoline to United States consumers will be higher as a result of the oil import fee. The situation is shown in the following figure:

Before the tax on imported oil, the world price of oil is $18, as shown by the first graph. At that price, United States producers supply only part of the overall United States demand. This is shown by the second graph, where total quantity demanded at $18 is 13.6 million barrels per day. With an oil import fee, the price of oil in the United States rises to $24. At a price of $24, the third graph shows that U.S. producers supply more oil (from 7.7 to 9.0 million barrels per day). However, in response to the higher price, consumption of oil in the U.S. falls from 13.6 to 12.2 million barrels per day.

What is the overall result of such a policy? As we have shown, the oil import fee increases U.S. production of oil, reduces the amount of oil the United States imports from other countries, raises the price of oil in the United States, and reduces the amount of oil consumed in the United States. There are other effects as well. Because each barrel of oil imported into the United States is taxed, there is tax revenue that goes to the United States government. This helps reduce the budget deficit (or adds to the budget surplus). In addition, because oil and its derivative products, such as gasoline, are more expensive, less oil and gasoline will be used. This will help reduce air pollution in the United States.