Suppose that the political conflicts between the U.S. and oil exporting countrie

Question

Suppose that the political conflicts between the U.S. and oil exporting countries caused the oil exporting countries to institute an oil embargo against the U.S. Then the U.S. government started considering imposing a tax on gasoline in order to reduce the U.S. dependence on oil. The policy proposal was such that a unit tax per gallon will be collected and the tax revenues will be completely redistributed to consumers. Evaluate whether or not this policy proposal will improve the welfare of the society given the following:
? Initially, Price of gasoline (pg) is $6, Price of other goods (po) is $4, and the Budget level of a typical consumer (m) is $180. Then a tax of $2 per unit of gasoline is introduced.
? Utility maximization requires that o*/g*=2pg/ po

Explanation / Answer

Despite the knowledge of oil in Venezuela for centuries, the first actual oil wells of significance were not drilled until the early 1910s. In 1908, Juan Vicente Gómez replaced his ailing predecessor, Cipriano Castro, as the president of Venezuela. Over the next few years, Gómez granted several concessions to explore, produce, and refine oil. Most of these oil concessions were granted to his closest friends, and they in turn passed them on to foreign oil companies that could actually develop them.[5] One such concession was granted to Rafael Max Vallardares who hired Caribbean Petroleum (later to be owned by Royal Dutch Shell) to carry out his oil exploration project. On 15 April 1914, the first Venezuelan oilfield of importance, Mene Grande, was discovered by Caribbean Petroleum upon the completion of the Zumaque-I (now called MG-I) oil well.[4] This major discovery is what encouraged a massive wave of foreign oil companies to "invade" Venezuela in attempt to get a piece of the action. From 1914 to 1917, several more oil fields were discovered across the country; however World War I retarded significant development of the industry. Due to the war effort, purchasing and transporting the necessary tools and machinery some oil companies were forced to forego drilling until after the war. By the end of 1917, the first refining operations were carried out at the San Lorenzo refinery, and the first significant exports of Venezuelan oil by Caribbean Petroleum left from the San Lorenzo terminal. By the end of 1918, petroleum appeared for the first time on the Venezuelan export statistics at 21,194 metric tons.[4] After about twenty years from the installment of the first oil drill, Venezuela had become the largest oil exporter in the world and the second largest oil producer, after the United States. Exportation of oil boomed from 1.9% to 91.2% between 1920 and 1935.[6] When oil was discovered at the Maracaibo strike in 1922, Venezuela's dictator Juan Vicente Gómez allowed Americans to write Venezuela's petroleum law.[7] [edit]The Dutch Disease By 1929, Venezuela was the second largest oil producing country (behind only the United States) and the largest oil exporter in the world.[2] With such a dramatic development of the industry, the oil sector had begun to dominate all other economic sectors in the country, however, agricultural production began to decrease dramatically.[8] This sudden increase of attention to oil and neglect of the agrarian sector caused the Venezuelan economy to suffer from a phenomenon known to economists as the Dutch Disease. This “disease” occurs when a commodity brings a substantial increase of income in one sector of the economy, and is not supplemented by increased income in other sectors.[2] Agriculture accounted for about one-third of economic production in the 1920s, but by the 1950s this fraction dramatically reduced to one-tenth. This sudden increase of oil production restricted Venezuela’s overall ability to create and maintain other industries. The government had ignored serious social problems, including education, health, infrastructure, agriculture, and domestic industries, causing Venezuela to fall well behind other industrialized countries. [edit]Xenophobia With a large influx of foreign “invaders” it did not take long before the effects of a xenophobia that had not been seen before were apparent. Novelist Jose Rafael Pocaterra described the oilmen as “the new Spaniards.” He wrote in 1918: "One day some Spaniards mounted a dark apparatus on three legs, a grotesque stork with crystal eyes. They drew something (on a piece of paper) and opened their way through the forest. Other new Spaniards would open roads…would drill the earth from the top of fantastic towers, producing the fetid fluid…the liquid gold converted into petroleum." Popular resentment of the foreign oil companies was also evident and expressed in several ways. Rufino Blanco Fombona, a Venezuelan writer and politician, accounts for the conflict between Venezuelan workers and their foreign bosses in his 1927 novel, La Bella y la Fiera: "The workers asked for a miserable salary increase and those blond, blue-eyed men who own millions of dollars, pounds and gulden in European and U.S. banks, refused." These strong sentiments towards foreign oil companies in many ways never went away, and it was these thoughts that Venezuela’s natural resources were being exploited by foreign countries that convinced the government that it needed to gain more control over its oil industry. This of course eventually led to the eventual nationalization of the oil industry in 1976.

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