On Monday, President Biden once again urged domestic oil and natural gas companies to bring prices down at the pump without taking any action to make this possible. However, this time, in the wake of publicly released third quarter earnings, the President made unsettling “or else” remarks with regard to a windfall profit tax on energy producers:
“I think they have a responsibility to act in the interest of their consumers…to invest in America by increasing production and refining capacity…if they don’t, they’re going to pay a higher tax on their excess profits and face other restrictions.”
As TNG has written in depth about, if the President truly wishes to increase domestic output, there are numerous actions his administration could take to make this happen. However, as experienced in the 1980s, implementing a windfall profits tax will only further discourage domestic producers from increasing output, further exacerbating the rising cost of goods and services.
In response to the President’s claims that levying a tax could increase production, Ed Longanecker, the President of TIPRO (Texas Independent Producers & Royalty Owners Association) explained the effect of a windfall profits tax on the oil and gas industry:
“A windfall profit tax targeting U.S. oil and natural gas producers is yet another effort in a growing list of misguided domestic energy policies that will have many unintended consequences for consumers and our economy. We must not repeat the policy mistakes of the 1980s – where a similar tax ultimately resulted in lower domestic energy production, a higher reliance on foreign sources of energy, and runaway inflation. If we want to encourage energy production, America should be embracing pro-growth policy that encourages Texas producers – not punishes them.”
Lawrence H. Summers, former Treasury Secretary under Bill Clinton and President Emeritus of Harvard University, tweeted a similar sentiment in response to Biden’s remarks:
“I’m not sure [I] understand the argument for a windfall profits tax on energy companies. If you reduce profitability, you will discourage investment which is the opposite of our objective.”
Levying a windfall tax in response to one quarter of strong financial performance is particularly nonsensical, short-sighted and lacks perspective. U.S. energy producers are subject to a wide range of unique market facts, including extreme volatility. Those that were able to stay in business in 2020 lost tens of billions of dollars due to the sudden drop in oil prices. Setting a precedent that manipulates market principles when companies profit but allows them to lose when times are bleak ensures that corporations will limit their investments in the future and denies producers the opportunity to succeed in a free market system.
Phil Flynn, a senior market analyst at the Price Futures Group, also pointed this concept out:
“…[policymakers] fail to put it into the perspective of how much these companies have to invest to bring supply to the marketplace, and it fails to take into account the government regulations that have restricted supply that have caused the prices to go higher as well. It also doesn’t take into account that most of these energy companies in the past were losing money just a few years ago.”
Encouraging investment in domestic oil and gas isn’t just critical for the United States’ economic well-being, but to protect our geopolitical position as well.
Earlier this year, The Washington Post ran the headline: There’s a reason Putin can be so aggressive: Oil. Russia’s previous chokehold over European energy enabled the country to weaponize its energy supplies as it invaded Ukraine. As Russia continues to increase its aggression in Eastern Europe it is more critical than ever to ensure the United States remains a top energy producer.
Ultimately, a windfall profit tax would threaten American energy production, furthering inflation and chipping away at American energy security.