Sunday, August 31, 2008

Windfall oil taxes amount to a tax on future oil production

Today, windfall profits are a popular subject in the blogosphere. Mark Perry over at Carpe Diem blogs a bit about Exxon shareholder losses here, and Dean Baker over at Beat the Press gives a non-convincing discussion of production and supply decisions when prices reach the “windfall” level. His article attempts to undermine Ben Stein’s article over at the NY Times, where he argues that Obama should not increase taxes faced by oil companies.

Obama and the Democratic Congress are certainly worried about dependence on foreign oil (I never really knew what this meant, isn’t it just dependence on oil?), so why tax domestic oil profits? Taxing oil corporations will indeed lead to less supply both now and going forward.

Current supply is arguably fixed in the short term, but windfall prices (price spikes caused by unforeseen economic shocks like those in the 1970’s) provide the incentive for oil companies to increase oil and gas investment and infrastructure. To be sure, the fixed costs of adding to the drilling and refining capacities are monstrous; this can only be done with revenues to spare. A windfall tax amounts to a tax on future oil production. If the government is not willing to save, then allow the oil companies to save in place of the government. Don’t interfere with the oil companies' business (market) decisions to invest in infrastructure – it’s not like they aren’t paying taxes already. See a related Carpe Diem article.

Windfall profits taxes can be sizeable and oil profits are highly cyclical.

The chart shows quarterly petroleum and coal profits spanning the years 1980:1-2008:1 converted into 2008 $US using the Petroleum price index. Also included are the windfall tax revenues from the Crude Oil Windfall Profits Tax Act of 1980, which was repealed in 1988. The tax was an excise, rather than profits, tax. Revenues were based on the difference between the market price of oil and a set 1979 base price. During 1980-1986 windfall tax era, the government raked in an average of 53% of the petroleum and coal sector’s profits in tax revenues.

That sounds more like windfall tax revenues to me!

I am close to the oil and gas industry and know the income cycles well. My father is a geologist who has drilled for crude oil and natural gas all along the Gulf of Mexico, and I remember well the struggles of the oil and gas industry in the ‘90s (see chart 1992-1995). He was unemployed for a while, and that was very difficult for my family. Oil and gas is a cyclical industry, and corporate taxes should not be adjusted for its cyclicalities.

Why is the term “windfall” always attached to the oil and gas industry? As you can see, profits are subject to strong downward trends as well. Why didn’t Congress attempt to tax windfall profits tied to the money engine that was mortgage backed securitization? I know why – because the wealth was shared among many, rather than just a few.

Please leave comments. Best, Nontruths

1 comment:

  1. Where was the government when the oil was selling for $12/bbl? Is "windfall" gross or net? Saw something that indicated so-called profit was before they deducted all the costs. People are not allowed to reap big profits without someone being jealous. It happens in most other industries, too, so... It would be so simple to have a simple tax code for both companies and us peons. NO EXEMPTIONS - just one exclusion. Then we are all on the same page. Won't happen, of course, since Congresspeople are incapable of doing it. Yes, I'm mad.