After increasing the tax on imported crude oil, Oleum reduced its balance of trade deficit by 20 percent. To strengthen this belief, the author presents evidence in the form of a decrease in gasoline consumption. There are some issues that might need to be addressed, however, in order to better evaluate this argument

First, the entire premise that a reduction in the consumption of gasoline will lead to a decrease in the balance of trade deficit is questionable. It is theoretically possible that gasoline could be replaced with another fuel, such as ethanol, which would theoretically reduce Oleum’s dependence on foreign crude oil, but in practice, this is unlikely. The factor that is most likely to keep Oleum from switching fuels is its reliance on gasoline as a transportation fuel. Gasoline is currently the only fuel that Oleum uses in its cars or trucks. Ethanol can only be blended into gasoline at up to 10 percent, and for cars, the gas tank must be redesigned to accommodate ethanol, which requires extensive modification. Therefore, it is unlikely that Oleum will switch to ethanol anytime soon, and it seems unlikely that it would reduce its balance of trade deficit by substituting ethanol for gasoline

Second, the author makes the claim that decreasing the consumption of gasoline by 20 percent is a ‘dramatic decrease’. According to Economics 101, a change of 20 percent in anything is dramatic. However, this statistic seems grossly inflated. The author does not state how ‘gasoline consumption’ is measured, but if it is based on the number of gallons consumed, 20 percent seems somewhat exaggerated, since gasoline consumption fluctuates widely depending on weather and economic conditions. In fact, a 20-percent change in gasoline consumption would be closer to a 3-percent change in gasoline consumption, since gasoline has a greater impact on Oleum’s balance of trade when it is consumed at a high volume. Therefore, even if the author’s assumptions are correct, the statistic does not seem nearly as impressive as the author makes it out to be

Third, the author claims that ‘Oleum will dramatically decrease its balance of trade deficit’ by imposing a ‘second and significantly higher tax increase next year’. It is unclear from the argument whether the second tax increase would come into effect immediately, or if it would happen some time later. If the second tax increase would be imposed immediately, the author’s conclusion would be incorrect. When tax is levied on goods before they reach the consumer, the taxes paid by the consumer are unchanged, but the taxes paid to the government are increased. Therefore, the taxes paid by the government do not decrease, and the trade deficit continues to exist. In addition, if the second tax increase were imposed at some point in the future, the taxes paid by the government would not decrease, because the consumer would not pay the tax immediately. The consumer would experience a higher purchase price, but the tax would not be added to the price, and it would be added to the price some time later. This delay would allow consumers time to adjust their habits in order to avoid the higher price, thereby reducing the amount of gasoline consumed by consumers

Oleum should not rely solely on the decrease in gasoline consumption to justify its proposed tax increase. Instead, it should analyze its actual balance of trade deficit, and determine what factor is most likely to contribute to that deficit. If the analysis reveals that importing crude oil is the factor that contributes most to the deficit, then Oleum should increase its tax on imported crude oil in order to reduce that deficit.