A couple of sayings that need repeating. “People who do don’t pay attention to History are doomed to repeat it. And, doing the same thing over and over while expecting a different outcome is the definition of Insanity.”
Consider the concept of a Windfall Profits Tax. According to Investopedia “A windfall [profit] tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.” Now energy companies deal in commodities so that makes them the likely targets for sleazy politicians of the ilk of Senator Sheldon Whitehouse (D-Rhode Island).
Now let me ask you a question. In the immediate past the whole world went through a Pandemic. It was a windfall for Big Tech, in particular Amazon, Google, Twitter, Apple and Microsoft. So my question is: Where is the Windfall Profits Tax proposal for Big Tech? Services are now the “new commodities.” But before the politicians jump into the idea, let’s look into the history a bit.
Following the late 1970s Arab oil embargoes, Congress passed the 1980 Windfall Profits Tax bill on domestic oil producers. They were expecting to generate tax revenues. According to the Congressional Research Service, the Act’s title was a misnomer. “Despite its name, the crude oil windfall profit tax... was not a tax on profits. It was an excise tax... imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes.”
But also, according to the Congressional Research Service, “That, instead of increased revenues, domestic crude oil production dropped fell by 8.0 percent and foreign oil imports were increased by 3 to 13 percent.” The cash went to OPEC, not the U. S. Treasury.
At the time of the Windfall Profits Tax enactment, production from Prudhoe Bay Alaska had just begun and discoveries in the North Sea were hinting at the need for even more massive capital investments which would be spent in Europe and the United States. So, the petroleum industry was strapped for cash and lacked the number of employees necessary to bring home the goods. The Windfall Profits Tax was a bad idea and was initiated at the worst possible time.
During the crisis, the public panicked and began lining up at the gas stations with their cars running just to top off their tanks. This panic instantly reduced the available supply by over 10 percent. The prices went up and oil company revenues increased. It was a world-wide embargo and oil trades on the world market. With only 6 percent of the world market, U. S. domestic producers had very little to do with the price increase, but they would need the additional capital to reinvest.
So there really is no such thing as a windfall profit in a responsible commercial enterprise. The capital is reinvested to increase future production followed by more income that is reinvested in more exploration, production and refining. That’s the way it really works. There aren’t any greedy old oil tycoons anymore. This is big business and most of the shareholders are corporate, state and municipal retirement accounts. A good rate of return for the industry at that time was 8 percent, about the same as a utility company. Investment projects were expected to generate a positive present value profit with a discounted rate of return of 15% after paying federal and other taxes. That’s the way it really was.
Now we are seeing record inflation with higher prices on everything under the Biden administration. The higher prices on food and commodities are entirely due to higher fuel prices. The Biden cabinet performance has been bizarre. The head of the Energy Department was not qualified for such a critical component of the U. S. Economy. In fact, it was an appointment based on Diversity, not experience, merit or even basic business acumen. But then, all of the Biden appointments have followed the same playbook. So now inflation has increased by 8.6%, a six-fold increase from when President Biden took office in January 2021. It will exceed 10% by the time of mid-term elections.
Across the country we are experiencing record-high gasoline prices, now averaging over $5 per gallon, more than double the average price when Biden took office. These prices will remain high and could exceed $6 per gallon by the end of August. Diesel, natural gas and jet fuel prices will also increase to never-before-seen levels. The domestic producers are producing at maximum capacity. There is no surplus.
Democrats think the solution to these high prices is tax increases. The Biden administration is proposing a trillion-dollar tax hike. They say tax the rich, but the taxes will fall on the middle class. Separately, progressive lawmakers like fascist Senator Sheldon Whitehouse, Representative Ro Khanna and Senator Elizabeth Warren are proposing a discriminatory Windfall Profits Tax on American energy producers. They and the White House have said that American energy producers are responsible for high gas prices. But any windfall tax will just be passed along to consumers in the form of higher prices or reduced supply.
Most of the domestic energy producers are members of the American Petroleum Institute, the API. In full disclosure, I am a past member of the API. Here is their position:
“The American people are looking for solutions, not finger pointing. The price at the pump that Americans are currently paying is a function of increased demand and lagging supply combined with the geopolitical turmoil resulting from Russia’s aggression in Ukraine. Lawmakers should focus on policies that increase US supply to help mitigate the situation rather than political grandstanding that does nothing but discourage investment at a time when it’s needed the most.” American Petroleum Institute
Americans say “Tell Big Oil to pump more.” But getting more oil takes capital and capital is hard to come by under the Blackrock/China Environmental Social Governance (ESG) restraints placed on investment banks. The Biden administration is full of ESG advisors but no real energy industry advisors are to be found.
And so, with the likes of Senator Sheldon Whitehouse in charge, we have fulfilled the definition of Insanity. Maybe the Senator should look into the windfall profits raked in by Amazon? Fat chance.
VOTEdemsout2022.