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ANDREW MORAN has been writing about business, economics, and finance for more than a decade. He is the author of “The War on Cash.” Andrew Moran
High Inflation: Who’s to Blame?
The Biden administration sharpens its attacks on oil companies
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.
Ahead of the midterm elections, the Biden administration and Democrats in Washington hammered home the message that it’s corporate greed that’s leading to pain at the pump and broader inflationary pressures. But this isn’t the first time the Democrats have flirted with such a tax.
Early this year, 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.
The Big Oil Windfall Profits Tax Act was introduced, but nothing else has transpired since March.
More recently, Robert Reich, former labor secretary and Berkeley professor, has repeatedly written in Twitter posts 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 an Oct. 31 Twitter post. “For once, let’s take aim at an actual driver of inflation and enact a windfall profits tax on Big Oil.”
Yet dissent was public. Former Treasury Secretary Larry Summers, for example, wasn’t 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 wrote on Twitter. “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 October 2020, the S&P Oil & Gas Exploration & Production Select Industry Index, for example, tumbled by nearly 90 percent. By comparison, the broader S&P 500 Index rallied by about 75 percent during the same period.
However, Republicans were prompt to oppose the stern suggestion, saying that 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.
“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,” Rep. Kevin Brady (R-Texas) said in a statement. “This couldn’t come at a worse time for American families suffering under 40-year high inflation.”
The last time the United States imposed a similar levy was in 1980, and that caused as much as an 8 percent reduction in domestic output and a greater reliance on imports, according to the Congressional Research Service.
Garrett Watson, a senior policy analyst at the Tax Foundation, doesn’t 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.”
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 longterm energy challenges,” Sommers said in a statement.
