President Joe Biden’s pledge to impose a Crude Oil Windfall Profits Tax on U.S. oil and natural gas companies if they don’t increase production to “bring down gas prices” is another failed Democratic policy, critics, including a former Treasury Secretary, argue.
In a speech one week before midterm elections, Biden said the companies have “a responsibility to act in the interest of their consumers, their community and their country, to invest in America by increasing production and refining capacity. If they don’t, they’re going to pay a higher tax on their excess profits and face other restrictions.”
His threat has been seen as an election ploy by those who point out only Congress can levy taxes.
Others simply say it won’t work, pointing to former Democratic President Jimmy Carter’s Crude Oil Windfall Profits Tax Act of 1980. It imposed a 70 percent excise tax on some oil sales in response to record-high inflation that saddled Americans with sky-high grocery prices, housing costs and long gas lines.
According to the Congressional Research Service, the tax reduced domestic oil production by 3 percent to 6 percent and increased foreign oil imports by 8 percent to 16 percent. It also cost the industry $38 billion in revenue and nearly 1.3 billion barrels of domestically produced oil, the American Petroleum Institute reports.
“High oil prices are a signal of strong demand and scarce supply, and they provide an incentive for increased production,” the Tax Foundation argued in 2008 in response to then president-elect Barack Obama initially vowing to reinstate it. “Taxes discourage production because they drive a wedge between the price paid by the consumer and received by the supplier. Windfall profits taxes also drive up oil imports because they discriminate against domestic oil producers to the benefit of the Saudis and the Venezuelans.”
One day after Biden’s speech, Larry Summers, former Clinton administration U.S. Treasury Secretary and Obama administration economic advisor, said he didn’t “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.
“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 5 years.”
In March, U.S. Rep. Ro Khanna, a California Democrat, introduced the Big Oil Windfalls Profits Tax Act. It would impose an “excise tax on the windfall profits of crude oil on taxpayers who extracted and imported more than 300,000 barrels … of taxable crude oil (i.e., crude oil, crude oil condensates, and natural gasoline) in 2019, or who extracted and imported that amount in the current calendar quarter,” according to the bill summary.
Democratic California Gov. Gavin Newsom has proposed a windfall profit tax on refining profits—after California enacted a plan to ban the sale of internal combustion engine cars by 2035 and diesel trucks by 2040. As California has imposed more regulations, its oil production has declined by 70 percent since the 1980s; Californians now pay the highest gas prices in the U.S.
As of Nov. 1, Californians pay the highest average $5.54 for a gallon of regular gasoline; Texans pay the lowest average of $3.17. The national average is $3.75, according to AAA. Last November, Californians paid $4.06; Texans paid $3.05.
On Oct. 29, President Biden took credit for gas prices dropping by roughly $1.25 a gallon since the summer. He said, “that’s adding up to real savings for families. We’re continuing to take action to decrease prices at the pump,” in part by releasing a portion of the Strategic Petroleum Reserve.
In March, the White House announced another drawdown of 1 million barrels per day over six months. Equating to 180 million barrels—it was enough to meet nine days of U.S. oil demand or fewer than two days of total global oil demand.
A July Department of Treasury analysis estimated the drawdown would only lower gas prices by 13 to 33 cents a gallon.
The SPR currently holds the lowest volume since November 1984, according to the U.S. Energy Information Agency. As of Sept. 16, the SPR holds 427,158 million barrels compared to 644,818 million barrels the week of Sept. 20, 2019.
Biden’s claims, Daniel Turner, Power The Future’s Founder and Executive Director, says are another attempt to “shift attention from [his administration’s] colossal failures.”
“Only in Joe Biden’s mind does it make sense to lower prices by raising taxes,” he said. “Raising taxes will do nothing to address our current supply imbalance or lower prices for consumers who are already suffering under Biden’s inflation tax.”
The U.S. Oil and Gas Association said of the president, “Chest-pounding against an entire industry sector and its millions of workers is a pretty weak closing argument for mid-terms that don’t appear to be going your way.”
One aspect that policymakers “fail to put it into the perspective,” Phil Flynn, a senior market analyst at the Price Futures Group, explains to Fox Business, is “how much these companies have to invest to bring supply to the marketplace” and the plethora of “government regulations that have restricted supply” causing prices to increase. They also don’t “take into account that most of these energy companies in the past were losing money just a few years ago.”
In 2020, over 100 U.S. oil and natural gas companies filed bankruptcies, with the most in Texas. Since then, and despite high inflationary costs, Texas has continued to lead the U.S. in oil and natural gas production and job growth.
“Those that were able to stay in business in 2020 lost tens of billions of dollars due to the sudden drop in oil prices,” Ed Longenecker, president of TIPRO, told The Center Square. “Setting a precedent that manipulates market principles when companies profit but allows them to lose when times are bleak ensures that corporations will limit their investments in the future and denies producers the opportunity to succeed in a free market system.”
Instead of repeating “the policy mistakes of the 1980s,” he said American leaders should “embrace pro-growth policies to encourage, not punish,” the oil and natural gas industry.
