Windfall Profits For Dummies
(WSJ)
This is one strange debate the candidates are having on energy policy. With gas prices close to $4 a gallon, Hillary Clinton and John McCain say they’ll bring relief with a moratorium on the 18.4-cent federal gas tax. Barack Obama opposes that but prefers a 1970s-style windfall profits tax (as does Mrs. Clinton).
Mr. Obama is right to oppose the gas-tax gimmick, but his idea is even worse. Neither proposal addresses the problem of energy supply, especially the lack of domestic oil and gas thanks to decades of Congressional restrictions on U.S. production. Mr. Obama supports most of those “no drilling” rules, but that hasn’t stopped him from denouncing high gas prices on the campaign trail. He is running TV ads in North Carolina that show him walking through a gas station and declaring that he’ll slap a tax on the $40 billion in “excess profits” of Exxon Mobil.
The idea is catching on. Last week Pennsylvania Congressman Paul Kanjorski introduced a windfall profits tax as part of what he called the “Consumer Reasonable Energy Price Protection Act of 2008.” So now we have Congress threatening to help itself to business profits even though Washington already takes 35% right off the top with the corporate income tax.
You may also be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something, you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6% and increased oil imports from OPEC by 8% to 16%. Mr. Obama nonetheless pledges to lessen our dependence on foreign oil, which he says “costs America $800 million a day.” Someone should tell him that oil imports would soar if his tax plan becomes law. The biggest beneficiaries would be OPEC oil ministers.
There’s another policy contradiction here. Exxon is now under attack for buying back $2 billion of its own stock rather than adding to the more than $21 billion it is likely to invest in energy research and exploration this year. But hold on. If oil companies believe their earnings from exploring for new oil will be expropriated by government – and an excise tax on profits is pure expropriation – they will surely invest less, not more. A profits tax is a sure formula to keep the future price of gas higher.
Exxon’s profits are soaring with the recent oil price spike, but the energy industry’s earnings aren’t as outsized as the politicians seem to think. Thomson Financial calculates that profits from the oil and natural gas industry over the past year were 8.3% of investment, while the all-industry average is 7.8%. And this was a boom year for oil. An analysis by the Cato Institute’s Jerry Taylor finds that between 1970 and 2003 (which includes peak and valley years for earnings) the oil and gas business was “less profitable than the rest of the U.S. economy.” These are hardly robber barons.
This tiff over gas and oil taxes only highlights the intellectual policy confusion – or perhaps we should say cynicism – of our politicians. They want lower prices but don’t want more production to increase supply. They want oil “independence” but they’ve declared off limits most of the big sources of domestic oil that could replace foreign imports. They want Americans to use less oil to reduce greenhouse gases but they protest higher oil prices that reduce demand. They want more oil company investment but they want to confiscate the profits from that investment. And these folks want to be President?
Late this week, a group of Senate Republicans led by Pete Domenici of New Mexico introduced the “American Energy Production Act of 2008″ to expand oil production off the U.S. coasts and in Alaska. It has the potential to increase domestic production enough to keep America running for five years with no foreign imports. With the world price of oil at $116 a barrel, if not now, when? No word yet if Senators Clinton and Obama will take time off from denouncing oil profits to vote for that.
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So the real problems with the windfalls profit tax will mean that it is better for the oil companies to buy oil and gas overseas and ship it in. It will absolutely kill exploration and production here in the U.S.
Eventually, when the windfalls profit tax is repealed we will have another late 1970’s/early 1980’s oil boom and subsequent bust.
May 4th, 2008 at 3:49 pmAnother dumbass idea that skirts the entire issue of getting off of foreign oil and drilling our own resources.
In Scotland gas is 2.88 at the pump. Why? Because they drill for their own oil.
Stupid idiots. We been fighting this problem since the gas lines of the 70’s. Getting off of foreign oil was suppose to be the end-game. WTF happened? Oh that’s right the EPA and the tree-huggers got together and had a Kool-aid party.
Wake the f*ck up or pretty soon it will be gas lines and fill-ups on every other day again.
May 4th, 2008 at 3:52 pmThe government so often will demonize a firm or an industry so they can steal their money. Take tobacco companies. If they were that bad, why don’t those dick heads in Washington just make it illegal? Because they get extra money out of them. And all the sheep in this country nod their heads and say, they deserve it. But then those same dumb ass sheep are the ones that end up really paying it. As the price of anything goes up because taxes, fees, or penalties, YOU ARE THE ONE THAT PAYS FOR IT. Government takes it from you!You think oil prices will go down with a windfall profits tax? Hell no! It’s an excuse for government theft! Want lower oil prices? Start drilling more here in the USA. Oh, but wait. Those bastards in government won’t let us! So who’s the real jack ass?
May 4th, 2008 at 4:56 pmOK, Jimmy Carter tried the windfall profits tax in ‘79 or ‘80. It didn’t pencil out on the blackboard and it didn’t work out in reality. Get it? How many times do we have to repeat the past?
May 4th, 2008 at 8:33 pmPart of me will laugh my ass off when big oil simply passes the tax back to the consumer and the dumbasses waiting in line for their gas (since big oil will move capital elsewhere being that there will be no incentive to increase supply but actually curtail it) are paying more, not less, at the pump.
Unfortunately for us, we’ll get to wait in line with them. If you think the American gov’t the most inept and stupid entity in America, then you obviously haven’t talked to a lib recently.
May 4th, 2008 at 8:45 pm