Auctioned Quotas To Limit U.S. Imports (includes associated papers 20012, 20159, 20160, 20164, 20272 and 20273 )
Authors: McDonald Stephen L. , Thore A. Sten 
Published: December 2007

Since the mid-1970's, substantial literature-e.g., Refs. 1 through 3-has been written on the existence of a U.S. security premium on imported oil. Such a premium means that with unrestricted trade, the true marginal cost of imported oil exceeds that of domestically produced oil and oil substitutes. This implies that U.S. well-being would be enhanced in the long run if an import fee equal to the premium were imposed to raise the market price of imported oil to the level of its true marginal cost, thus inducing fewer imports and greater self-sufficiency in energy. The purpose of this paper is not to argue for or against an import fee, but to show that if such a fee is adopted on security grounds, the appropriate fee must vary with the excess of the marginal costs of supplying U.S. domestic oil or oil substitutes over the world oil price. The paper concludes with an explanation of an automatic device to set and maintain the appropriate fee.

Inadequacy of a Fixed Import Fee

The usual approach for measuring premium on imported off, and therefore appropriate import fee, is to the (per unit imported) to the U.S. of a interruption, under various scenarios, probabilistic terms. This cost obviously depends positively on the degree of dependence on imports and the marginal costs o domestic energy sources and negatively the world oil price. The world oil price can not be expected to remain stable. The marginal costs of domestically produced oil or substitutes also cannot be expected to remain stable because depletion of the resource tends to raise marginal costs and technological advances tend to reduce those costs, with a zero net effect resulting only by coincidence. Consequently, with the fluctuation of world oil prices and domestic marginal costs, a fixed import fee cannot ensure a constant ratio of domestic (oil or energy) production to domestic consumption. The desired degree of self-sufficiency can be provided automatically, however, by a system of auctioned oil-import quotas.

Auctioned Quotas

With auctioned quotas, the size of the import fee is not fixed by law or regulation, but is determined in a competitive market for import rights and fluctuates like any other market price. The U.S. government's sole role is to set the total quantity that may be imported in a given period (e. g., 6 months) and to conduct the auction of rights to participate in attaining that total. The allocation of the total quantity among firms is determined entirely by the voluntary sealed bids of potential importers. No one willing to pay the market-clearing price is denied the right to import any quantity desired at that price. Anyone not willing to pay the market-clearing price presumably has a lower-cost alternative, either domestically produced oil or an oil substitute.

The procedure for the simultaneous determination of the market-clearing price of import rights and the allocation of rights among potential importers for a given period is as follows. The responsible governoil imports that would be consistent with the desired degree of self-sufficiency (of oil or total energy) during the specified period. This quantity and the e for sealed bids are announced publicly. The bids specify the quantities potential importers wish to import and the price per unit they are willing to pay for the import rights. The bids are then arrayed in order of price per unit. Starting with the quantity specified by the bidder with the highest price, the quantities are added until the cumulative sum is equal to the total quantity of imports to be allowed in the period. The price per unit of rights in the lowest bid that fills the total quota is the marketclearing price for that auction. Everyone granted import rights from that auction pays that price for the quantities requested (even though most would have been willing to pay more), just as in any competitive market. No bidder offering less than the marketclearing price receives any import right for the period covered by the auction.

This method is a highly efficient way to limit imports to the desired level and to allocate the total quantity among potential importers simultaneously. The target total is always achieved, and reasonably frequent auctions ensure that target totals that miss the desired degree of self-sufficiency in any auction period can be quickly corrected. Furthermore, import rights are allocated to those to whom they are most valuable-i.e., those with the least attractive alternatives, who alone can know the marginal costs unique to themselves. Each potential importer would be willing to offer up to, but not more than, the excess of the personal marginal cost of domestic oil or an acceptable substitute over the world oil price. If the world price were equal to the general marginal cost of domestic energy sources at the desired self-sufficiency level, the import restriction would be inoperative, and the value of the import rights would be zero. But if the world price were less than the marginal cost of domestic energy sources at the desired self-sufficiency level, the import restriction would be operative, and potential importers would be willing to pay for import rights. They would also be willing to pay domestic producers of energy sources this premium in the form of higher prices.

P. 1332^