By Guy Caruso
Federal data is painting a very clear picture of the next three decades. The key takeaway? Oil and natural gas aren’t going anywhere as leading fuel sources to meet our demand as Americans recover from the pandemic and increased economic activity re-emerges.
Why then does President Biden insist on attacking our own oil and gas companies who are supporting this energy demand? On October 31, President Biden again accused these companies of “war profiteering” citing their third quarter profits and threatened to impose a windfall profits tax. He failed to note those profits are a result of high consumer demand. Second, these energy companies do not control the price of oil. He also failed to point out that more taxes placed on these companies would cause even higher energy prices, lower production, and more reliance on foreign imports.
What could Biden’s proposal look like? A windfall profits tax would add a surtax on oil company profits in the name of pushing down prices and helping struggling consumers at the pump. If companies are forced to use investment and operating costs to pay new taxes, well-paying American jobs supported by this industry’s robust supply chain would be at risk.
According to the Energy Information Administration’s updated Short-Term Energy Outlook, global consumption of petroleum and natural gas will remain high. Long term forecasts expect these fuels to remain the most consumed sources of energy in the U.S. through 2050, with motor gasoline maintaining its status as most prevalent transportation fuel. This forecast looms over the ideological tug of war this administration has been grappling with regarding a clean energy transition and ensuring the American people have abundant and affordable energy.
Economist Diana Furchtgott-Roth pointed out that “energy commodity costs have risen much faster than the average annual inflation rate of 8.6 percent.” EIA expects U.S. natural gas prices to remain high through 2022, meaning the time is now to increase oil and natural gas supplies if we hope to ever see cheaper energy prices.
But instead of constructive policies to rectify serious supply and demand imbalances, solutions by some have focused on punishing the very industry critical to fixing our current situation. A recent RealClear Energy report notes that President Biden’s first budget proposal for 2022 included $35 billion in brand new taxes that would directly target oil and gas companies. In his 2023 budget proposal, the proposed tax boost on oil and gas companies was $43.6 billion.
In California, Governor Gavin Newsom is now leading a renewed push to levy new taxes on oil companies, and the EU recently agreed to impose a similar policy calling it a “solidarity contribution” to help consumers impacted by high gas prices.
We’ve seen this ploy before. In 1980, President Jimmy Carter implemented a 70 percent excise tax on oil profits. What happened was predictable. America energy producers tamped down their production and consumers were forced to rely more on imports. A 2018 study in Economic Policy details clearly that Carter’s windfall profit tax aimed at oil companies lowered the amount of oil and gas from American wells.
Not only did Carter’s approach – one that’s very similar to those being proposed in Congress today – fail to lower energy prices; it was expensive to implement and didn’t provide nearly the revenues lawmakers or the public expected. Even worse, domestic oil productiondropped in the U.S. during that time. Fundamentally, you get less of something if you tax it.
A windfall profits tax is based on a narrative with flawed logic. While Biden and lawmakers like to target “Big Oil,” sixteen of the nineteen biggest oil companies in 2020 were state-owned companies, controlling more than three quarters of the world’s global reserves. And American oil and natural gas companies? They are mostly owned by millions of everyday Americans through retirement funds and public pension funds for public servants such as teachers and firefighters.
The profits aren’t as high as advertised either. For the period April 2019 through April 2022, the three-year annualized total returns for oil and natural gas companies was 11.5 percent, a figure less than the average return of 15 percent for the S&P 500. In fact, sectors such as information technology, healthcare, and materials were significantly higher in that period than the oil and natural gas sector.
In that light, there is no compelling reason, other than political grandstanding, to target American energy producers for new punitive taxes. As one columnist succinctly described the windfall profits tax policy in Bloomberg, “Proponents offer them as a deceptively simple solution to big but complex problems, thereby playing on the emotions rather than the intellect of voters.”
As we head into the winter months, President Biden should embrace policies that boost domestic energy production to continue improving prices at the pump. Unfortunately, a windfall profits tax won’t secure America’s energy future. The only thing that can? Producing more American energy. If the Biden administration and Congress are serious about reducing gas prices, they’ll focus on producing more American-made oil and natural gas. Lower prices are a result of greater supply. It’s time we get work on following that simple rule of economics.
Guy Caruso is a former administrator of the U.S. Energy Information Administration and a Center for Strategic and International Studies senior adviser in the Energy Security and Climate Change Program.
Originally published by RealClearEnergy. Republished with permission.