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John Wayne's Holster: A Windfall Tax on Oil Gives Me the Wind
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Monday, October 31, 2005

A Windfall Tax on Oil Gives Me the Wind

Several oil companies have reported BIG profits this quarter. Exxon Mobil posted a $9.9 billion profit, the largest quarterly profit in history! Royal Dutch didn’t do too bad either, posting a profit of $9.0 billion. Overall, it is estimated that the annual profits for the top ten oil companies will approach $120 billion.

What should the oil companies do with this money? Obviously, some should go to the shareholders who invested in those companies – either in the form of dividends or stock buybacks. How about the rest of the money? It would seem obvious to any logical capitalist that the companies themselves should decide that. Well don't cash that dividend check just yet, as it appears that Congress has other ideas.

Senator Byron Dorgan (D-ND) has introduced a bill (S. 1631) that would impose a windfall tax on oil companies. The legislation would impose “a 50-percent excise tax on the windfall profits earned by major integrated U.S. oil companies on the sale of all barrels of crude oil derived from existing wells. For this purpose, windfall profits means the amount that a barrel of oil sold exceeds $40 per barrel.” The tax is intended to provide consumers relief from high gasoline prices, which have gone from $1.86 to $2.96 per gallon over the past year.

No matter how you slice it, the windfall tax is not a good idea. Socialism aside, the tax is counter-productive. The US has tried it before, with the 1980 Crude Oil Windfall Profit Tax Act, which was signed by President Jimmy Carter. According to the 1990 Congressional Research Service report, the 1980 windfall tax "reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent…This made the US more dependent upon imported oil." This is the exact opposite of our current energy policy, which is designed to free ourselves from dependence on foreign oil.

The tax would also discourage more production, resulting in lowers supplies and higher prices. The oil companies already invest hundereds of billions of dollars annually in exploration, expanding refineries, and improving delivery systems - with no guarantee of future returns. What is the point of putting so much money at risk if you will be hit with a windfall tax when your investment pays off?

Let’s be realistic for a moment. Oil is a commodity. As such, its price fluctuates with changes in supply and demand. In the commodities market, it’s boom or bust. If the companies take the risks, they should be entitled to any payoff that comes their way. And they should swallow any losses as well. Unless of course, Senator Dorgan is willing stay up late at night authoring legislation for a windfall losses rebate?

The oil winfall tax raises other questions as well. Should other industries also be taxed to compensate consumers? There are other industries that are more profitable than oil. The financial services industry makes twice the profits of the oil industry. Should investors expect a rebate if the market tanks? Let’s not forget about the pharmaceutical industry – they make 2-3 times as much as oil. Should we tax them to offset the rising cost of health care? What about the insurance industry? The software industry? The banking industry? Why not tax them too?

The best way to get the price of gas down is to encourage (rather than discourage) an increase in the oil supply. In addition, let the market forces dictate the price. Now that hurricane damage is being repaired, refining and distribution are beginning to come back on line, supplies should increase again. In fact, we are already seeing some effect, as oil prices dropped to below $60 per barrel today.


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