A Windfall Profits Tax: Energy Policy for Dummies

Biden contradicts his stated desire for more oil production

WSJ editorial.

"President Biden has the worst energy policy since Jimmy Carter, so it was probably inevitable that he would disinter one of Mr. Carter’s worst ideas—a “windfall profits” tax on oil companies. Doesn’t he know that when you tax something, you get less of it?

Sorry, rhetorical question. “Their profits are a windfall of war—the windfall from the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe,” Mr. Biden said Monday of oil companies reporting strong earnings this year.

The reality is that their profits owe more to his Administration’s war on fossil fuels than Vladimir Putin’s Ukraine invasion. Oil prices surged at the start of the war amid uncertainty about the impact of Western sanctions on Russian supply. But prices have moderated as China and India have continued to buy Russian crude at a discount, while markets have downgraded global economic forecasts amid central-bank tightening and Chinese lockdowns.

But gasoline prices remain relatively elevated because production, especially in the U.S., isn’t keeping up with demand. Recent refinery shutdowns in the U.S. and Europe have created a supply bottleneck, boosting refiners’ normally narrow margins. It’s no small irony that government policies and investor pressure to reduce production have inflated Big Oil’s profits. 

Yet even as his Administration dawdles on issuing federal leases and permits, Mr. Biden is threatening to tax windfall profits if companies don’t raise production pronto. He didn’t say how he defines “windfall,” but he did say he believes companies are entitled to a “fair return” on innovation and hard work. Fair is in the eye of progressive beholders.

“Oil companies’ record profits today are not because they’re doing something new or innovative,” Mr. Biden said. Does he think companies stick a rig in the ground and oil automatically pours out? Producers have invested huge sums on oil exploration and technologies that improve recovery from marginal fields and make operations more efficient.

Imposing another tax on oil-company profits on top of the 21% corporate tax rate will discourage companies from increasing production. That's what happened in the 1980s when Mr. Carter imposed the tax after OPEC’s oil embargo. The Congressional Research Service estimated the tax may have reduced U.S. oil production by between 1.2% and 8% from 1980 to 1988 and raised only $80 billion in revenue compared to the $393 billion that was projected. Congress repealed the windfall tax in 1988 because it made the U.S. more dependent on foreign oil.

Mr. Biden knows this history, so the windfall tax has to be one more political gambit to blame others for high gas prices. Yet it underscores that he’s not serious about increasing U.S. oil production. If he were, he’d call off his Administration’s war on the industry and encourage his friends in the climate lobby to do the same.

The windfall tax proposal repudiates everything Mr. Biden says about wanting lower energy prices."