President Joe Biden recently accused oil and gas companies of “war profiteering” as they post record profits amid soaring energy prices. He handed the fossil fuel industry an ultimatum: boost production or face a windfall tax on record profits.
This comes as crude oil prices are coming off a 2.5 percent gain in October, with a barrel of West Texas Intermediate (WTI) topping $88 on the New York Mercantile Exchange.
Ahead of the midterm elections, the Biden administration and Democrats in Washington have been hammering home the message that it is corporate greed that is leading to pain at the pump and broader inflationary pressures. But this is not the first time the Democrats have flirted with such a tax.
This past spring, Sen. Sheldon Whitehouse (D-R.I.) and Rep. Ro Khanna (D-Calif.) submitted legislation that would force oil and gas companies to owe a per-barrel tax equal to 50 percent of the difference between the present price and the pre-pandemic average price per barrel between 2015 and 2019. Revenues from the plan would have been used to fund another stimulus check.
“While the United States severs economic ties with Putin to protect our national security, I am committed to doing everything in my power to limit the fallout for Rhode Islanders who were already getting squeezed before this happened,” said Whitehouse. “We’ve seen this script before, and we cannot allow the fossil fuel industry to collect a massive windfall once again by taking advantage of an international crisis.”
The Big Oil Windfall Profits Tax Act was introduced, but nothing else has transpired since March.
Is a Windfall Tax a Good Idea?
More recently, Robert Reich, the former Labor Secretary and Berkeley professor, has repeatedly wrote in tweets that “corporations are jacking up prices, blaming inflation, and padding their margins.”
“Big Oil is using the cover of inflation to line their pockets. Shell raked in $9.45 billion in profits last quarter and has announced $4 billion in stock buybacks,” he noted in a tweet on Monday. “For once, let’s take aim at an actual driver of inflation and enact a windfall profits tax on Big Oil.”
Nobel laureate economist Joseph Stiglitz had previously supported Sen. Whitehouse’s tax on energy giants’ windfall profits. He told Agence France-Presse in September that they “didn’t do anything” to deserve the huge earnings.
“Sometimes we have this discussion: Are profits exploitation or are profits the just desserts of having invested more, putting out more effort?” he said. “This is a particular case where there is no debate. It is very clear that the oil companies didn’t do anything to deserve the high oil prices. It was [Russian President Vladimir] Putin’s invasion of Ukraine that was at the source of the problem.”
Yet dissent was public. Former Treasury Secretary Larry Summers, for example, was not so quick to endorse a windfall tax on the energy sector, warning that it would “discourage investment.”
“I’m not sure I understand the argument for a windfall profits tax on energy companies. If you reduce profitability, you will discourage investment, which is the opposite of our objective,” Summers stated. “If it is a fairness argument, I don’t quite follow the logic, since even with the windfalls Exxon has underperformed the overall market over the last five years.”
Indeed, the energy sector lagged the rest of the market after it hit a peak in the summer of 2014. From June 2014 to March 2020, the S&P Oil & Gas Exploration & Production Select Industry Index, for example, tumbled by 90 percent. By comparison, the broader S&P 500 Index rallied about 65 percent.
Even Secretary of the Treasury Janet Yellen dismissed the idea that corporate greed is behind inflation. In June, she told an audience at a New York Times event that the laws of supply and demand are “largely driving inflation,” although she conceded that price-to-cost margins have accelerated.
Republicans, however, were prompt to oppose the stern suggestion, accusing President Biden’s so-called windfall profits tax would cut production, raise prices on families and businesses, and make the United States more dependent on foreign oil.
“Haven’t American families suffered enough from President Biden’s damaging attack on American-made energy? Desperately trying to salvage the midterm elections, now he’s proposing another dangerous policy that will increase energy prices and energy poverty while making America more vulnerable to foreign countries for our daily energy needs,” said Rep. Kevin Brady (R-Texas) in a statement. “We’ve seen this mistake before. This is a Carter-era tax hike that slashed production while making the United States more dependent on foreign oil. This couldn’t come at a worse time for American families suffering under 40-year high inflation, who are on track to pay the highest prices to keep their homes warm in 25 years.”
1980 All Over Again?
The last time the United States imposed a similar levy was in 1980, and that caused an 8 percent reduction in domestic output and a greater reliance on imports, according to the Congressional Research Service (CRS).
Garrett Watson, a senior policy analyst at the Tax Foundation, does not think taxing high-profit margins is a wise public policy pursuit if the objective is to incentivize more energy production.
“Higher profits is the market signal for firms to take advantage and increase their supply,” Watson told The Epoch Times. Aside from the volatility of oil prices, the companies now “have to deal with the tax system” coming after them, he said.
“It’s going to further disincentivize production, which is the wrong thing we want to be doing.”
European markets that have experimented with this policy have not produced enough evidence to suggest this tax initiative boosts production or leads to savings for consumers, he added.
In the end, according to American Petroleum Institute president and CEO Mike Sommers, global commodities markets set prices, not oil and gas companies.
“Rather than taking credit for price declines and shifting blame for price increases, the Biden administration should get serious about addressing the supply and demand imbalance that has caused higher gas prices and created long-term energy challenges,” he said in a statement.
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