Democrats’ flawed hate affair with corporate profits and stock buybacks

By Catherine Rampell. Excerpts:

"Democrats insist, however, that there is a non-wasteful alternative use of companies’ mounting profits: investment! In a House hearing on Wednesday, lawmakers berated oil executives for (you guessed it) too-high profits and too many buybacks. Democrats complained these companies should funnel their cash into expanding output.

This makes about as little sense as when Republicans promised “capital deepening” in 2017.

The issue is not whether oil executives deserve sympathy. (They don’t.) It’s that — as in 2017 — it is hard to convince companies to undertake risky investments they don’t think will be profitable.

As I have written before, there are real hurdles to investment in fossil fuels (unrelated to President Biden’s climate agenda). The number of rigs in operation has been rising, but there still aren’t enough. It will take months to get more into position and ultimately pumping oil. By then, prices may have collapsed, which would lead these investments to become unprofitable.

This is precisely what happened in several bust cycles — including in 2020, when prices briefly went negative. And it’s why investors are pressuring firms to be cautious about their pace of expansion today.

Yelling at companies to stop their buybacks won’t cause them to increase investment or oil output. In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

Progressives have been threatening to impose a tax on “excess profits.” They’ve proposed a “windfall profits tax” that actually functions as an excise tax. It would take half the difference between the price of a barrel of Brent crude today, and the average inflation-adjusted price from 2015 to 2019. With prices hovering around $100 per barrel, this would effectively add about $17 to the cost of each barrel for oil producers.

This sort of thing makes risky investments look even less attractive, and could cause producers to reduce oil output. That’s what happened the last time Congress enacted a similarly structured “windfall profits tax.” It is also the opposite of what’s needed to bring prices down today.

White House officials sometimes appear to understand that energy producers seek greater certainty that they won’t lose their shirts again in a few months if they invest in expanding production. Sometimes, though, the administration joins the populist chorus bashing greedy firms for “profiteering,” buybacks or the like. If they actually want sky-high gas prices to come down, they would do well to stop encouraging the confused populists."