Oil prices

Elizabeth Warren Says the Solution to High Gas Prices Is Higher Taxes on Oil Companies

A windfall profit tax on oil companies didn't work in the 1970s and it won't work today.


"Putin's war is causing gas prices to rise, but this is no excuse for large oil companies to pad their bottom line with war-fueled profits," tweeted Sen. Elizabeth Warren (D–Mass.) along with an MSNBC video of her explaining her stance. "Senate Democrats are watching closely—and already working on a windfall profits tax." Warren also said that she gets "supply and demand—that prices go up" but that "profit margins should not go up, that's just oil companies gouging."

What she calls "gouging" is actually demand adjusting to supply. She also forgets that higher profit margins strongly incentivize entrepreneurs to supply more of a good to the market thus eventually driving down prices through competition.

Leaving aside the fact that the senator has evidently never met a corporate tax she didn't want to hike, history shows that imposing a windfall profits tax on oil is particularly shortsighted. As part his administration's response to the Iran oil shock that tripled the price of petroleum in 1979, President Jimmy Carter championed the Crude Oil Windfall Profit Tax of 1980.

"The main purpose of the tax was to recoup for the federal government much of the revenue that would have otherwise gone to the oil industry as a result of the decontrol of oil prices," noted a 2009 Congressional Research Service (CRS) report. That report found that the windfall profits tax (WPT) raised far less money than projected by the Carter administration while simultaneously reducing the amount of domestic oil that would have  otherwise been supplied:

The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected. This report presents estimates of the amount of foregone oil production from 1980-1986 due to the WPT under three alternative supply price responses, reflecting three different assumptions about the price elasticity of the domestic oil supply function, a critical factor (statistic) in estimating lost oil output and increased import dependence. From 1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2% to 8.0% (320 to 1,269 million barrels). Dependence on imported oil grew from between 3% and 13%.

Warren's proposal would doubtlessly achieve the same results: Less domestic production, more dependence on foreign oil, higher prices at the pump, and negligible tax revenue.

In the short run, consumers are going to feel the pain at the pump as gasoline prices soar. In the longer run, higher prices will draw forth more investments in production capacity and supplies will increase.

The prospect of higher profit margins is already encouraging investment in domestic oil production. As a minor example of this dynamic, The New York Times today reports:

"Everything I've got is on and going at full speed," said Darlene Wallace, chief executive of Columbus Oil Company, an Oklahoma operator with 25 oil wells. Ms. Wallace said she had been holding back an investment of $100,000 to fix one well, but that is about to change.

"When oil is at $60, I'm not going to do that, but I'm just about ready to put the work in it," she said. "At $100 a barrel, I can put that sucker back to work."

If Warren's tax were enacted, Wallace would most likely keep that $100,000 in her pockets or find more profitable opportunities in which to invest.