The Iran Sanctions: Donald Trump’s Carbon Tax

Most folks may have noticed that gas prices have been going up in recent months. While there are always multiple causes for market fluctuations, virtually all analysts would agree that the sanctions that Donald Trump has imposed on Iran are a major factor.

Donald Trump re-imposed sanctions on Iran earlier this year after pulling out of a deal that restricted Iran’s ability to produce nuclear weapons. While just about every expert who does not work for Donald Trump agreed that the deal effectively restrained Iran’s nuclear capacity and that the country was abiding by the deal, Trump refused to be bothered by the facts.

He re-imposed the sanctions against Iran that had been in place for more than three decades following the Iranian revolution. These sanctions not only prohibit US companies from dealing with Iran, they also apply to third parties so that a company that does business with Iran is also subject to sanctions.

Since virtually no one else in the world shares Donald Trump’s perspective on Iran, its oil exports will not fall to zero. Some companies will not care about the sanctions or find ways to skirt them. Nonetheless, the sanctions are substantially reducing the amount of Iranian oil that is coming on world markets.

Before the new sanctions went into effect, Iran was exporting 2.8 million barrels of oil a day (a bit more than 3.0 percent of world supply). Its exports were heading up as foreign investment was coming into the country to help it tap its vast reserves. It had been exporting almost 6 million barrels a day before the Iranian revolution in 1979.

Since the imposition of sanctions, exports have fallen to below 1.8 million barrels a day. They will almost certainly fall lower in the months ahead as the Trump administration increases its efforts to enforce the sanctions.

The result is a shortfall of more than 1 million barrels a day in production that cannot easily be replaced, at least in the short run. Consequently, oil prices have risen from roughly $50 a barrel a year ago to almost $72 a barrel in the most recent trading days.

With roughly 40 gallons in a barrel, this $22 price hike in oil translates into an increase in gas prices of more than 50 cents a gallon. We can think of this 50-cent-a-gallon price hike as Donald Trump’s carbon tax.

While Donald Trump has made it as clear as possible that he doesn’t give a damn about global warming, this rise in the price of gasoline will have the same impact in reducing greenhouse gas emissions from oil as a $50 a ton carbon tax. This is the amount that many environmentalists had been advocating as a first step in reducing oil consumption.

Although Trump’s version of a carbon tax will have the same effect in encouraging conservation as the carbon tax advocated by environmentalists, there is a very important difference. The revenue from the tax advocated by environmentalists would go to the government. Most of them advocated using some of the revenue as a rebate to low- and moderate-income households.

Environmentalists also wanted to use some of the revenue to promote energy efficiency, providing subsidies for better insulation in homes and businesses and for mass transit. They also wanted to promote the development of clean energy, like wind and solar. But we know Donald Trump has an aversion to such things.

With Donald Trump’s backhanded carbon tax, the beneficiaries from higher oil prices will be big oil companies like Exxon-Mobil and BP. Major oil exporters will also gain, giving a bump to countries like Saudi Arabia, the United Arab Emirates, Russia, and Trump’s newfound enemy north of the border, Canada.

The folks who thought that electing Trump would mean that their gas prices would stay low are likely disappointed. But, they can take some pleasure in knowing that at least the money out of their pockets is not being used to address the problem of global warming.