Senate Democrats for Higher Gas Prices

Or just economic ignorance-you decide. Earlier this week, Americans were treated to the unedifying spectacle of Senate Democrats trying to impose a "windfall profits tax" on Big Oil. They evidently hoped that the Americans, reeling from $4 per gallon gas, would just love the idea of sticking it to rich oil companies. One problem:  higher taxes on oil companies mean higher prices at the pump.

In any case, the country has had a previous bad experience with "windfall profits taxes" on oil companies. In 1980, as a parting gift, President Jimmy Carter and Congressional Democrats imposed just such a tax. How did it work out? Not so well. In 2005, the Tax Foundation looked at the issue and pointed out that the Congressional Research Service…

…found the windfall profits tax had the effect of decreasing domestic production by 3 percent to 6 percent, thereby increasing American dependence on foreign oil sources by 8 percent to 16 percent. A side effect was declining, not increasing, tax collections.

Great idea, huh? But it gets even worse. In 2005 Congressional testimony, ConocoPhillips CEO James Mulva cited the same CRS study as finding…

…the windfall profits tax that was signed into law in 1980 and repealed in 1988 drained $79 billion in industry revenues during the 1980s that could have been used to invest in new oil production-leading to 1.6 billion fewer barrels of oil being produced in the U.S. from 1980-1988.

So not only does a "windfall profits tax" boost prices now, it reduces investment in oil exploration helping to keep prices high in the future. Let's call that a "lose-lose" for American motorists.

And by the way, just how much in taxes has Big Oil paid? Back in 2005, the Tax Foundation reported…

…over the past 25 years, oil companies directly paid or remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments-including excise taxes, royalty payments and state and federal corporate income taxes. That amounts to more than three times what they earned in profits during the same period, according to the latest numbers from the Bureau of Economic Analysis and U.S. Department of Energy.

Meanwhile Congressman John Peterson (R-Penn.) is making a much more helpful proposal for eventually lowering gasoline prices-drop the Congressional moratorium on oil and gas exploration on the outer continental shelf (OCS). The U.S. Minerals Management Service estimates that the OCS contains nearly 86 billion barrels of oil and 420 trillion cubic feet of natural gas. Note that the U.S. consumes roughly 7.5 billion barrels of oil and 23 trillion cubic feet of natural gas annually.

Note: For those who want to read the whole CRS study, you can go here to purchase it.

Disclosure: Yep. I still own those same 50 shares of XOM that I purchased with my own money in my retirement account.

Comments

[Kyle]

This just may be my ignorance of the subject, but how would one determine the amount of profit made by a company to be "windfall profit"?

[Michael Ejercito]

Are these people truly economically illiterate, or are they expecting voters to be economically illiterate?

[Warren]

Taxes. Taxes are bad m'kay. Don't tax oil companies.

But can we Pleeeeeeease repeal the subsides of the 2005 energy policy act?

[JW]

Kyle--Whatever Congress says it is.

See how easy that is? Usually guys who talk like that have bigger trunks in their cars for "business reasons."

[JW]

Michael--Yes and yes.

No one ever got rich over-estimating the intelligence of either group.

[The Reverend Terence Fformby-S]

The real reason for rising gas prices is Peak Oil .

It is just that these cowardly politicians do not want to address the real problems.

[LarryA]

...over the past 25 years, oil companies directly paid or remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments-including excise taxes, royalty payments and state and federal corporate income taxes. That amounts to more than three times what they earned in profits during the same period, according to the latest numbers from the Bureau of Economic Analysis and U.S. Department of Energy.

How about a "Windfall Taxes Tax" on Congress.

This just may be my ignorance of the subject, but how would one determine the amount of profit made by a company to be "windfall profit"?

"Windfall profits" = any profit in excess of taxes owed

[jp]

They evidently hoped that the Americans, reeling from $4 per gallon gas, would just love the idea of sticking it to rich oil companies. One problem, higher taxes on oil companies mean higher prices at the pump.

90% of Americans are incapable of understanding that second sentence, even after it is explained to them.

[Pro Libertate]

What about those windfall profits at Google? We deserve our share. In fact, we should take it back right now.

[Reinmoose as the American Publ]

We'll just make it so that the oil companies CAN'T charge us more for gas, and then that way that won't be the effect of the tax!

[Nephilium]

One of the quotes I heard was that passing this tax would help assuage consumer anger... I'm glad economic policy is being designed around people's feelings...

Nephilium

[Episiarch]

This just may be my ignorance of the subject, but how would one determine the amount of profit made by a company to be "windfall profit"?

It's the amount of profit that comes from trees blown over in a storm that the king allows you to take for your own. Duh.

[Brandybuck]

Peak Oil? More like an invasion of Iraq, sabre-rattling at Iran, the lack of domestic exploration, and the clear signal from congress to futures markets that this situation is expected to be permanent.

p.s. As a fungible economic good, it doesn't matter if our petroleum is domestic or not. But deliberately hindering domestic petroleum production while wringing your hands over petroleum prices is disgusting.

[JW]

What about those windfall profits at Google? We deserve our share. In fact, we should take it back right now.

Yes, but then your searches will take .86 seconds, as opposed to the .43 seconds they do now. And no more hollandaise sauce in the Googleteria. Bastard.

[Michael Ejercito]

We'll just make it so that the oil companies CAN'T charge us more for gas, and then that way that won't be the effect of the tax!

But that would mean long lines at the gas station.

[Pro Libertate]

Is that freshly made Hollandaise sauce? My eggs Benedict deserve no less.

If consumer anger is all we're concerned about, why not invade Venezuela? Maybe we'll test my National Security Law course paper on whether a president can veto* a declaration of war when President McCain attempts to veto the Democratic Congress' vote to invade Hugoland. Iran, Saudi Arabia, Russia, and others are also options, depending on how angry consumers are.

* I concluded that he could, for the record.

[Lost_In_Translation]

We'll just make it so that the oil companies CAN'T charge us more for gas, and then that way that won't be the effect of the tax!

But that would mean long lines at the gas station.

Oh, the ironing.

[Kyle]

It's the amount of profit that comes from trees blown over in a storm that the king allows you to take for your own. Duh.

Then why isn't Congress going after all of the people with wood burning stoves? Those tax dollars are going up in smoke, and here were are complaining about oil.

[Pro Libertate]

The improvements in Congress since the Democrats have taken over have been staggering.

[Stephen the Goldberger]

Thank you Reason for FINALLY discussing the insanity of this. It makes zero sense and is blatantly ignorant of basic economic principles. I couldn't believe when I heard Obama argue that we needed to tax Oil Company profits and then give that money back to the consumer to lower the cost of gas. Wealth redistribution and all the ill effects of it seems to be making a comeback (populism if you will).

[The Reverend Terence Fformby-S]

[SugarFree]

Most intelligent comment he's ever made.

[Episiarch]

Then why isn't Congress going after all of the people with wood burning stoves? Those tax dollars are going up in smoke, and here were are complaining about oil.

Because these people's profits are allowed by a charter with the king. Congress has no jurisdiction. Duh.

[x,y]

Question for everyone who thinks the gas tax holiday (on its merits, not whether it's a complete pander) is moronic:

Which is more pernicious -- the gas tax holiday or this windfall profits tax?

[Kolohe]

Just playing devil's advocate here.

The cut in gas tax everyone said would not lower prices and acutally put more in oil company profits

Now a tax increase may do the same?

What am I missing?

[Matt L]

| June 11, 2008, 1:35pm | #

It's the amount of profit that comes from trees blown over in a storm that the king allows you to take for your own. Duh.

That's the only logic explanation of "windfall profits" I could think of too.

[Pro Libertate]

Dear Zod, did the 70s never happen? Have we learned nothing?

Despite their dreams otherwise, this doesn't end with Congress tearing a mask off of an oil executive while he says, "I would've gotten away with it, too, if it hadn't been for those meddling Congressmen."

[Timmy Mac]

I don't pretend to understand much about economics (me and John McCain have that in common), but common sense tells me that I should take the testimony of the CEO of the company that's paying higher taxes with a grain of salt. Of COURSE he's going to say they're bad.

[Hat Trick]

@Kolohe:

Cut tax, price goes down, demand goes up, more profits for oil companies.

Raise tax, price goes up, demand goes down, less profits for oil companies.

This is the short run impact. The problem is long run: fewer profits means less investment in future development, more foreign imports, etc.

Not much to miss.

[MP]

What am I missing?

You're missing the fact that it's a tax holiday, not a rollback. The non-permanent nature of a tax holiday has different effects than a full fledged tax reduction.

Which is more pernicious -- the gas tax holiday or this windfall profits tax?

The gas tax holiday is worthless pandering. But yes, it's not has harmful as the windfall profits tax. But just because I'd rather be punched in the mouth than shot doesn't mean I want to get punched in the mouth.

[Pro Libertate]

If prices stay high, the demand for alternatives will stay high. So even if we could reduce prices, we'd be hurting the market for Mr. Fusion. A bad thing, I think.

There's an open question about how much of this is due to a pricing bubble, too. But no, let's just muck about with the market and redistribute some wealth. I'm beginning to fear the all-Democrat government a little more every day. Sorry, joe.

[KipEsquire]

"One problem: higher taxes on oil companies mean higher prices at the pump."

Not for those politically favored factions who would receive the revenues as rebates, gas vouchers, tax credits or whatever: the "working class", state and local governments, transit authorities, schools and whatever other rent-seekers would crawl out of the woodwork.

As for the question by Kyle 1:15 -- one need only ask the Reasonable Profits Board. 😉

[Dello]

If I understand, a bunch of liberals want to tax "big corporations" for making too much money, and thus the fed can use that money to fund the Iraq/Iran wars. I must suck being a liberal.

[MP]

I'm beginning to fear the all-Democrat government a little more every day.

Pro Libertate | June 11, 2009, 2:08pm | #

McCain would've been worse.

[R C Dean]

One problem: higher taxes on oil companies mean higher prices at the pump.

Whoa, slow down there, big fella. That can't be right.

[jimmy smith]

I'm doing my share to help. By burning self- gathered wood I'm putting less of a strain on the energy market, therefore lowering the price to all others. On the other hand all this extra calorie consuming (food) I'm doing puts an additional burden of the ag people to sustain my efforts. I'm the one using the windfalls for personal profit. Don't mention me to the IRS, I may have to pay a windfall tax for my efforts.

[Jamie Kelly]

Sorry, joe.

Pro-Lib, never apologize to a man whose sole purpose is to defend the party that will only pile on more shit to the blanket of crap that Bush has already squatted on us.
As much as I hate Bush, I truly fear -- truly, for my own job, my financial health and the financial health of the nation -- the coming Democratic nightmare.

[Don Mynack]

I hate to say this, but some reforms in the commodity markets themselves may be necessary.

Check this out: "The Financial Times reported on Thursday that these passive, speculative investors in commodities "have invested $260bn (EUR169bn, ?133bn) in commodity markets, compared with $13bn just five years ago. Much of this money is in oil." FT noted also that "the daily volume in the 2008 contracts on May 21 was 657.391 contracts, equivalent to 657m barrels or nearly 8 times the daily crude oil production. [emphasis added]" Think that level of trading volume is not impacting prices? Think again."

There is more speculation in the oil commodity markets right now that ever before, and a huge amount of it is from entities that have no intention of ever accepting delivery of the product. Also, just an FYI - production is pretty much keeping up with demand, so there is something else at play. Check out TFA at that socialist hotbed the National Review.

http://tinyurl.com/6f5sty

[Santa\'s Little Helper]

Hugo and the al Saud family must be loving this stuff. The less we have to invest in energy is the more we pay for that energy. (dirty Canadians too)

Oh right, Congress will do the "investing" in new energy supplies for us due to their indepth knowledge of the field. [I have an idea of using squirrels to supply 'renewable energy' - can I haz susideez now?]

[RSDavis]

Wow, this is almost exactly what I wrote today for The Nolan Chart:

http://www.nolanchart.com/article4025.html

Great minds think alike (and obviously so do we)!

[Michael Ejercito]

There's an open question about how much of this is due to a pricing bubble, too.

I suspect that some of it, as much as 10%, is due to a pricing bubble.

Do not expect oil to go down to what it was in 1998. Nor should you expect the same about real estate.

[Pro Libertate]

McCain will suck all sorts of ways, and he may even suck by going along with some socialist--I mean, populist--legislation. However, I think he'll say no occasionally. I don't think Obama will. On the other hand, well, don't mention the war.

Rock, meet hard place. We are so screwed.

[Chris Potter]

Which is more pernicious -- the gas tax holiday or this windfall profits tax?

The gas tax holiday is a tax in disguise, as it leads to more borrowing which must be paid back eventually. The windfall profits tax is certainly worse though.

[adrian]

let's just nationalize the oil companies!

[Chris Potter]

There's an open question about how much of this is due to a pricing bubble, too.

Unfortunately, the dollar is probably on more of a bubble than oil at this time. Not that the White House is ready to talk about the latter...

[Chris Potter]

I mean, the former.

I get messed up when I try to talk fancy-like...

[Brian Defferding]

You know, I should be expecting this type of boneheaded solution by Democrats, but it does not make it any less frustrating.

[Naga Sadow]

Hmmmm . . . I think I'm gonna get a boatload of mercenaries . . . I mean freedom fighters . . . and take over a . . . I mean liberate an oil platform from the evil oil company. Always wanted to be warlord . . . sorry.

[Guy Montag]

You mean the shortages and price increases were not do to hoarding?

I suggest a government study to examine the previous study.

[Naga Sadow]

I should change my posting name to Pham Nuwen.

[Guy Montag]

However, I do have a proposed solution.

1. Remove barriers from construction of new natural gas pipelines, both from off-shore rigs and on land.

2. Deregulate the energy industry.

3. Savings!

Nope, no question mark step needed.

[jp]

Don Mynack: There is more speculation in the oil commodity markets right now that ever before, and a huge amount of it is from entities that have no intention of ever accepting delivery of the product. Also, just an FYI - production is pretty much keeping up with demand, so there is something else at play. Check out TFA at that socialist hotbed the National Review.

Speculators cause future needs to be felt (and heeded) in the present. There's more speculation currently in oil because demand is likely to keep increasing pretty rapidly (all those Chinese, y'know), plus the U.S. keeps shaking its fist and giving every indication that it will disrupt production even more by mucking around in Iran.

[alan]

Check out TFA at that socialist hotbed the National Review.

Well, it certainly is when right wing socialist like Frum writes for it. Buckley had a weakness for those God cursed Fabians.

A few questions:

How much of the problem is due to the fact no refineries have been built in the United States in thirty odd years?

Normative market forces would have brought the prices down during those years in the 80's and 90's when the dollar was fairly stable even if supply and demand stayed the same because of increased efficiencies in distribution. Why did this not occur?

What impact does Federal and State regulations have on independent start ups getting into the oil drilling and refinement business?

Has any Saudi money passed hands to environmentalist groups to advocate shutting down oil production in the Gulf and the coast lines?

[MP]

demand is likely to keep increasing pretty rapidly (all those Chinese, y'know)

Yet another person who thinks that China (and India and apparently everyone else but the US) is immune to Supply and Demand. sigh... Why do you believe that Chinese demand will keep increasing in spite of increasing commodity prices?

[Kolohe]

How much of the problem is due to the fact no refineries have been built in the United States in thirty odd years?

The refinery explanation has been around for at least a decade, and I used to believe it.

However, most refiners are struggling, some on the brink of bankruptcy. If they were really the chokepoint, *they* would be receiving 'windfall profits.'

[Milhouse]

Obama, Jimmy Carter's second term.

[alan]

However, most refiners are struggling, some on the brink of bankruptcy. If they were really the chokepoint, *they* would be receiving 'windfall profits.'

Choke holds (to extend that metaphor a bit) can also be caused by political means. The California reform of price controls at the retail end have been a big screw for the middle men between the crude producers and the pump owners, that of course being the refiners. Also, the blended requirements hit the refiners the hardest as well.

[alan]

Just to note:

The California reform of price controls at the retail end have been a big screw for the middle men between the crude producers and the pump owners, that of course being the refiners.

Because they are the ones who have to purchase the product at the unregulated end of the chain and then turn around and sell it at the regulated end of the chain.

[MP]

Because they are the ones who have to purchase the product at the unregulated end of the chain and then turn around and sell it at the regulated end of the chain.

Regardless, there's been no recent evidence to show that recent price increases are related to the inability of existing refineries to meet demand.

When the price of a commodity goes up, why would someone have to look upstream to explain end unit price increases? Refinery undercapacity only contributes to excessive gas prices when the underlying commodity price (i.e. the price of a barrel of oil) is cheap. At $10/barrel, gas is inflated due to refinery undercapacity. At $130/barrel, there's plenty of capacity.

[NAL]

On the bright side, we can take comfort in the fact that the value of the oil in ANWR and elsewhere within the US is appreciating nicely while being sequestered.

[MikeP]

MP is correct. A couple years ago refineries could barely keep up and they were reaping the windfall. This year refineries are not strapped and their profits are being squeezed between expensive supply and reduced demand.

[Olive Oil]

"Why do you believe that Chinese demand will keep increasing in spite of increasing commodity prices?"

Becuase the Chinese susidize their gasoline (for now). I expect they are burning through those mountains of US$ and right after the Olymipics they'll cut the subsidy as other countries are already doing. Of course, like those other countries, expect massive riots, fall of governments and the army machine gunning people in the streets.

See what happens when you subsidize gas... and our Senate wants us to go down that road.

[alan]

When the price of a commodity goes up, why would someone have to look upstream to explain end unit price increases? Refinery undercapacity only contributes to excessive gas prices when the underlying commodity price (i.e. the price of a barrel of oil) is cheap. At $10/barrel, gas is inflated due to refinery undercapacity. At $130/barrel, there's plenty of capacity.

But it does explain why the refiners are getting squeezed which is the question I was answering. I intentionaly left my own question ambigious with the phrase 'the problem' because of the oddnes, the stickiness of the retail price. doesn't reflect distribution in the 80's and 90's when a barrel of oil was $10 nor now where $130 would translate to very roughly 12.00 a gallon if we use late 80's early 90's as a base line.

[TrickyVic]

"""Why do you believe that Chinese demand will keep increasing in spite of increasing commodity prices?""""

Growth. China's growth may have peaked, maybe not. But as other parts of the world grow, their requirement for energy will too. Energy to supply growth is not an option it's a requirement. The extra costs due to rising prices is just the cost of doing buisness.

[D]

James Mulva
What do you expect when you are named after a female body part?

[alan]

Note to fellow Austrians, I haven't forgotten Menger. I'm only pointing out the stickiness of the price as an oddity of the different scales here without reference to limitations that demand will put on any rise in price.

[MP]

Becuase the Chinese susidize their gasoline (for now). I expect they are burning through those mountains of US$ and right after the Olymipics they'll cut the subsidy as other countries are already doing.

Yes, I'm aware of the Chinese subsidies. And as you say, sooner or later, the Chinese government will no longer elect to afford those subsidies.

Interesting article on that topic. Highlights:

Fuel-price controls might have seemed fine when oil prices were lower, but the recent price surge -- to nearly $140 a barrel -- makes it almost impossible for China to sustain them. If Beijing keeps fuel prices low, it risks seriously draining its foreign exchange reserves. If it lets prices soar, it risks worsening inflation and more political unrest.
...
To be sure, China can maintain its price controls for a while. The government has accumulated $1.5 trillion in foreign exchange reserves -- most of it dollars --to help subsidize its prices. But even that can't last forever. Some estimate that if oil prices stay at $120 a barrel, the subsidy will cost China almost $30 billion a year.

[MP]

Growth. China's growth may have peaked, maybe not. But as other parts of the world grow, their requirement for energy will too.

You can't grow when you can't afford the inputs.

[Chris Potter]

The government has accumulated $1.5 trillion in foreign exchange reserves -- most of it dollars --to help subsidize its prices. But even that can't last forever. Some estimate that if oil prices stay at $120 a barrel, the subsidy will cost China almost $30 billion a year.

So, they can maintain it for 50 years, in theory. Not forever, but still a heckuva long time. Of course, the declining dollar may interfere with that...

[Neu Mejican]

High gas prices are a problem? Why?

Just call it a carbon tax, and make it revenue neutral...

[Rick Barton]

It's not too complicated. The Dems love to raise taxes so they can use the money to bribe voters and to pay off special interests for campaign donations.

[Nate]

Is it possible that this is just a palatable way to introduce a carbon tax, of sorts?

[Nike Dunk Shoes]

thanks