THE embargo and naval blockade of Iraq means more money in United States government coffers, at least in the short run. Every cloud has a silver lining, and the Gulf oil crisis means not only higher profits for oil and gas producers in the southwestern US, but also higher tax revenues for the federal government.
The US Treasury should glean some $50 million in higher income taxes and royalties for every day that the present confrontation lasts. This tax bonanza could rise still higher should the conflict escalate and result in even greater shortfalls in oil deliveries.
The key to this profitable turn is the fact that the US federal government taxes the production of much more oil and gas than any member of the Organization of Petroleum Exporting Countries (OPEC). Total US domestic hydrocarbon production - most of which is oil - is the equivalent of about 18 million barrels per day (b.p.d.). This amounts to almost 80 percent as much oil as is now produced by OPEC, not including the shut-in production of Kuwait and Iraq.
Thus the $10 per barrel increase in oil prices in recent weeks translates into federal income tax revenues of $3.40 per barrel of oil - which totals $32 million per day above what was coming in prior to the price increase on 8.5 million b.p.d. of taxable production.
Natural gas will also yield higher tax revenues, albeit somewhat less promptly. If natural gas prices, driven by spot markets and the opportunities for fuel switching, respond comparably, these increases could add as much as another $20 million per day to federal tax revenues.
Higher royalties from oil and gas produced on federal lands will bring in further revenues of several million per day, so that the total comes to more than $50 million, even if there is no further jump in oil prices.
The British government is almost as well off. Total oil production in the United Kingdom is some 2.5 million b.p.d., much less than the US. However, the marginal rate of income tax, plus royalty, in the UK North Sea is more than 85 percent. So the British exchequer will reap around $20 million a day from the crisis-induced windfalls.
At this stage, the crisis pays for itself from the US federal perspective. The tax bonanza, even without any restoration of a windfall profit tax, should more than cover the genuine incremental cash costs of the intervention.
The cash costs of moving forces to the Gulf are relatively low - the troops would be paid in any event and the equipment must be maintained. Brookings Institution estimates the incremental (extra) costs at only $10 million per day. So the profit is still more than $40 million daily, or $1 billion-plus per month.
The OPEC brethren of course also have benefited: total OPEC revenues are unexpectedly up about $200 million per day, of which somewhere between $50 million and $60 million per day accrue to Saudi Arabia, an amount the Saudi's would gladly forsake to see peace restored.
In the interim, however, the US should show a net tax profit as long as the crisis persists - but only as long as it remains ``contained'' and the shortfall only raises prices but does not cost casualties or jobs.
The longer-term economics of the crisis are of course both unclear and subordinate to the political ramifications. If the shortfall deepens - if Iran becomes involved - then tax gains are swamped by the recession which would certainly follow any sustained oil supply shortage.
Absent escalation, however, the fiscal impact in the US hinges upon the multibillion-dollar question of who gets the rest of the windfalls. The domestic oil and gas producers now collect some $100 million per day in windfalls, net of income taxes and state levies - almost $40 billion per year.
The real fiscal question is: will the federal government pass up the chance to capture these windfalls? If not, how soon might it act? If it does act, how can incentives for incremental new production be preserved?