With the election just days away, President Biden has scraped the bottom of the political rhetoric barrel to try to generate enthusiasm among Democratic voters. He wants Congress to bring back the windfall profits tax on oil companies.
“Their profits are the windfall of war,” he said Monday at the White House. “At a time of war, any company receiving historic windfall profits like this has a responsibility to act beyond the narrow self-interest of its executives and shareholders.”
It is true that Russia’s invasion of Ukraine has caused a significant global disruption of energy markets. However, Biden is making it sound as though the U.S. is at war, and we are not.
But his point is to highlight oil company profits during a time of high prices and economic uncertainty and, yes, they are through the roof. Exxon Mobile reported almost $20 billion in profit in the third quarter, its best quarter ever, while rival Chevron made $11 billion.
Biden wants Congress to pass an excise tax on oil company profits considered excessive, unless the companies invest more of their revenue in production and refining instead of rewarding shareholders with buybacks and dividends.
“That is exactly what oil executives have been doing, rewarding investors after a decade of poor returns,” reported the New York Times. “The companies and their Wall Street investors have been giving priority to dividend increases and stock buybacks rather than following their past practice of pushing production when prices are high only to force prices down and reduce profits.”
The president is not going to mention that energy companies, like many other industries, lost their shirts during the pandemic. Exxon Mobile lost $22 billion in 2020, its worst year in four decades. Now with demand up along with prices, they are trying to reward investors who stuck with them.
The oil companies also know their industry has a diminishing shelf-life. The International Energy Agency’s World Energy Outlook for 2022 predicts “oil demand levels off in the mid-2030s before ebbing slightly to mid-century.” The decline is “roughly equivalent to the lifetime output of a large oil field,” and that decline will be even faster in “more-climate focused scenarios.”
Those kinds of predictions do not exactly motivate oil companies to make enormous long-term investments, like building additional refinery capacity, especially when the current administration is openly hostile toward fossil fuels.
But back to the windfall profits tax.
That is a good sound bite, but questionable policy. The U.S. had a windfall profits tax on oil from 1980 to 1988. According to a 2006 report by the Congressional Research Service, the tax produced $80 billion, “significantly less than the $393 billion projected.” The tax also “may have reduced domestic oil production anywhere from 1.2 percent to 8 percent… while dependence on imported oil grew from between 3 percent and 13 percent.”
Why would this windfall tax be any different?
A Congressional Research Service study of oil windfall profits tax proposals now pending in Congress determined, “An excise tax on domestic production, like the windfall profits tax of the 1980s, would tend to reduce domestic production.” And if the tax is imposed on domestic and imported oil, “the tax is more likely to be passed on, in part, to refiners and consumers.”
In short, if you want to get less of something, tax it more.
Railing against Big Oil when companies are making huge profits and threatening a windfall profits tax while we are all paying higher gas prices is popular rhetoric, especially around election time.
Whatever.
Let’s just hope it’s political hot air and not policy.