It has become popular for politicians to advocate going after oil
companies for their seemingly outsized profits. Otherwise rational
people turn red-faced with anger when they think about the tens of
billions of dollars flowing into the coffers of “big oil.”
The most often talked about “solution” to—really
punishment of—big oil’s big profits is the imposition of a
“windfall profits” tax. Such a tax would set an arbitrary
limit to what oil companies can make and then slap an extra tax on
profits if they exceed that limit.
Now set aside the question of whether it makes sense for politicians to
determine what profits companies should earn; a belief that politicians
should be the arbiters of economic rewards seems to be a continually
recurring idiocy that we will have to fight indefinitely.
Also set aside the fact that oil company profits are actually much more
modest than the profits in other industries, including agriculture
which has seen its profits recently skyrocket faster than oil companies
have. Nobody is calling for confiscating farmers’ profits, which
are bolstered substantially by agriculture subsidies and mandates that
would make oil company executives blush if they we offered similar
treatment.
Instead, let’s just examine the immediate and discernable results
from the imposition of such a tax. What, exactly, would happen in the
oil markets if Washington decided to impose a windfall profits tax on
oil companies?
Where is the big money in the oil business? The profit margin on
refining oil into gasoline and other oil products has actually narrowed
by almost 50%--because the high price of oil and a decline in gasoline
consumption has made refining less profitable. Ditto for gas stations,
which have seen their profit margins decline as the price of gas went
up.
The fact is that the spike in oil companies’ profits comes from
selling the oil that they own and pump out of the ground. And
increasing taxes on pumping oil will do one thing and one thing only:
make it less attractive to pump that oil. A windfall profits tax would
reduce the oil production of American companies(as it did last time we
imposed a windfall profits tax on oil)--and guess who would pick up the
slack?
Only a small fraction of the oil on the market is actually owned by
“big oil.” Most of the rest—about 90%--is actually in
the hands of governments such as Saudi Arabia, Iran, Russia, and
Venezuela. And if you haven’t thought of it, none of those
governments or non-American oil producers would have to pay that
“windfall profits” tax.
So a windfall profits tax would guarantee one thing: Americans would be
put in the unenviable position of sending even more of their
hard-earned dollars overseas to mostly unfriendly governments to buy
oil that could have been produced by American companies.
Driving American production down would also mean that the price of oil
would go up. A windfall profits tax, in other words, would make for a
nice windfall profit for all those unfriendly governments that
currently own most of the market for oil anyway.
As you can see, even if you think that a “windfall profits”
tax would somehow be fair or is economically justifiable, imposing it
would still be profoundly stupid. All we would be doing is handing over
more money and more power to foreigners who don’t like us very
much.
