It’s obvious that a $10-a-barrel tax on oil would translate into higher prices for gasoline at the pump. But how much higher?
The White House on Thursday said President Barack Obama will propose a $10-a-barrel tax on each barrel of oil to pay for clean transportation projects. The tax, which will be part of the budget request Obama sends to Capitol Hill next week, would be paid by oil companies and gradually phased in over five years. The measure, however, isn’t expected to go far.
But if it were to be enacted, it probably wouldn’t be the oil companies that feel the most pain.
“This proposal would trickle down and be a $10 per barrel tax on motorists—or 20 to 25 cents per gallon on refined fuels,” said Patrick DeHaan, senior petroleum analyst at GasBuddy.com. “To me it’s clear: this is not something oil companies are going to absorb.”
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And the impact of the tax would grow over time. DeHaan created a chart to show just how big a toll he expects the tax would take on gasoline consumers through 2023, if it were passed.
“As with almost every tax increase on fossil fuels, whether at the state or federal level, it will likely be completely passed to consumers in the years ahead,” he said.
And it won’t just impact gasoline prices, but also diesel, jet fuel, heating oil and others, DeHaan said. “It could stifle production to some degree, though to a lesser degree as long as the tax applies to imported oil as well.”
The proposal comes at the worst time for the oil market, which has already seen prices drop by more than 70% from their highs above $106 in June of 2014. On Friday, West Texas Intermediate crude CLH6, -2.27% settled at $30.89 a barrel.
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A global glut of crude supplies cratered prices in the last year and a half, and global production has yet to show any significant declines as major oil producers play a game of “you cut first” with output amid a battle to retain market share.
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It’s a “time of fierce competition in the global oil market and heavy job losses in the industry,” said Brian Milne, energy editor and product manager at Schneider Electric.
Earlier this month, BP PLC BP, -0.49% said it would cut another 3,000 jobs by the end of 2017 after reporting a full-year loss of $5.2 billion. Royal Dutch Shell RDS.A, +0.29% RDS.B, +0.25% this week reported its worst profits in over a decade.
For an industry that has already lost 60% of its gross income, it doesn’t make sense to “slap a tax on it that would take another 10% of their gross income,” said Charles Perry, chief executive officer of energy-consulting firm Perry Management.
That will eventually result in a “mass plugging of the many already marginal wells,” as well as the “need to expand the network of bankruptcy courts,” he said.
So why bring up the prospect of an oil tax right now?
Obama is adamant about the advantages the tax will create. “We’ll look back and say that was a smart investment. It’s right to do it now, when gas prices are really low,” he said Friday.
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Milne said Obama may think he can “slip the tax through…without many realizing that they’re paying the government more to fuel their vehicles and warm their houses” because oil and gasoline prices are low right now.
On Friday afternoon, the average price for regular gasoline at pump stood at $1.747 a gallon, according to GasBuddy. That’s down 40.5 cents from last year’s average of $2.152. Gasoline futures RBH6, -3.78% also dropped below $1 a gallon on Friday for the first time since late 2008.
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The tax is “certainty a hot topic,” said DeHaan. “Motorists should be eyeing this carefully.”