I haven't the energy

Exhibit A in my political beliefs: the fate of the Democratic energy bill.

The Senate passed its energy bill on June 21; the House passed its on Aug. 4. The most significant provisions include increasing automobile fuel-efficiency standards to a fleet average of 35 miles per gallon by 2020, compared to 27.5 m.p.g. today.

The standard for light trucks is 20.7 m.p.g.

Another section would require utilities to generate 15 percent of their electricity from renewable sources by 2020.

The mileage standard appears just in the Senate bill, having been squelched in the House by the opposition of Representative John D. Dingell, the powerful Democrat from Michigan. The mandate for renewable power is just in the House bill, having failed in the Senate.

Ordinarily, House and Senate leaders appoint conferees to reconcile bills. But because the Senate and House passed entirely different bills, not simply different versions, one or both chambers will have to pass the other’s bill before it can be “conferenced.”

Incidentally, the piece also mentions that Republicans are pushing for domestic oil production subsidies, while Democrats want a penalty for "price-gouging" by oil companies. I'm so proud to have voted for a party that thinks that retroactive taxes on "excess" profits are a good way to deal with high prices. After all, it worked terribly well in the 1970's and 1980's. I bet that will teach those nasty oil companies that there are penalties for producing a highly desireable product!

Is it any wonder that I'm not affiliated with either party?

Comments

I find the whole price-gouging penalties thing a pretty silly response to high oil prices, but what exactly is so horrible about retroactive taxes on a vital product that's become abruptly more profitable for no good reason? Is the theory that if oil companies get too spooked about the possibility of future windfall profits taxes, they might stop sucking the stuff out of the ground and selling it to us? Or that they might charge less for it than they otherwise would and hold down profit? (Horrors!) Why should my response not be "BFD"? It'd be one thing if they'd invested all kinds of research and invented a cure for cancer, but we're talking about freaking oil wells here. The stuff comes out of the ground.

Or should I weep for the poor stockholder? Or what?

Posted by brooksfoe | September 13, 2007 2:25 PM

I'm pretty sure that the idea is that, if they have no reason to expect big profits, they're less likely to do more exploratory drilling.

Oil doesn't exactly just "come out of the ground." You have to find it for one. And then you have to build an oil well there -- which is a mild challenge when it's in the middle of a desert, but really quite a tricky proposition if it's, say, in the middle of the North Sea. And then, despite all of your work, it may not work out as well as you expect.

So, yeah, while oil is pretty easy to get from the places where we know it is, there actually is a lot of R&D that goes in to finding new sources. Since we're perpetually worried about running out of the stuff, we need to find new sources.

Posted by Bill H | September 13, 2007 2:35 PM

brooksfoe,

The profits are high because the bid price for oil is high. Now, if the concern is that people are paying too much for oil, I don't see how reducing the profit margin helps. This can only reduce supply on the margin going forward while doing nothing about the demand going forward, thus causing the bid price to rise higher. If this is a good idea, then the government should just nationalize the oil companies and be done with it. At least that way we will know explicitly who to blame for the high oil prices of the future.

Posted by Yancey Ward | September 13, 2007 2:42 PM

Because oil and natural gas are extremely expensive to take extract. Except in few places in the world like Saudi Arabia, you cannot just stick a pipe in the ground and get oil to come out.

The natural result of a retro-active tax would be a reduction in supply. This would cause prices to increase even more than they have, in the long-term.

In any event, oil companies already pay enormous taxes to the government. Last year, Exxon-Mobil generated $39.5 Billion for its shareholders, which is terrific. It also paid the government $27 Billion in taxes. Further a significant portion of that $39.5 Billion will eventually filter back to the government in the form of capital gain or dividend taxes.

Posted by lannychiu | September 13, 2007 2:45 PM

"I bet that will teach those nasty oil companies that there are penalties for producing a highly desireable product!"

The penalties were not for making a lot of money. The penalties were for effectively colluding with foreign powers seeking to inflict as much harm on the United States as they could. OPEC did not impose the oil embargo as a way to make money. They did it to inflict harm. Oil companies exacerbated the problem. It may be that they were only following market dictate. They had no choice but to make all that money. So be it. Call the response political dictate. When an industry makes that much money due to foreign powers causing harm to Americans, that industry will pay a price. A pretty small one considering the profits involved.

You must also weigh those special circumstances against the enormous subsidy that our defense spending is to the oil companies. What would happen to Exxon's stock if the US decided to go back to Jefferson's idea of a militia and some coast-bound gunboats? "Special" activities by the US government put a lot more money into oil companies than they take out.

Posted by Njorl | September 13, 2007 3:04 PM

"The natural result of a retro-active tax would be a reduction in supply. "

The natural result of any tax is a reduction in supply.

The natural result of smaller subsidies is a reduction in supply.

The natural result of not gearing the entire resources of our economy to oil extraction is a reduction in supply.

Taxes that only come into play when profits exceed all expectation are probably the least likely to deter exploration. By definition, the company is not considering the possibility of making such profits when they invest the money to do the exploration.

Posted by Njorl | September 13, 2007 3:15 PM

Sorry, Megan. Someone who votes Democrat doesn't get a pass, for that is someone who is part of the problem.

Posted by beneficial | September 13, 2007 3:28 PM

A windfall profits tax on oil companies would likely cause oil companies to reduce their investments, thus increasing the price of fossil fuels in the long run. At the same time it would protect consumers from short term price spikes caused by short-run inelasticity of demand. What’s so horrible about that? If you’re for a carbon tax, why not be for a windfall profits tax as well?

Posted by RC | September 13, 2007 3:30 PM

Njorl,

Is it your view that oil prices are high simply because OPEC colluded to raise prices?

If so then we should a massive reduction in oil being produced by those countries. Which is not the case.

Rather what has happened is demand has skyrocketed, as global growth has been strong and we can see the high oil prices having a positive aspect. They are a reflection of a strong overall global economy.

Posted by lannychiu | September 13, 2007 3:33 PM

It's my understanding that oil prices are rising mainly because China and India are using a lot more energy and there's limited excess capacity. Expenses aren't rising much, which is why profit has gone up. I don't really see what virtuous work the oil companies have done to deserve this increased spread between prices and expenses.

I understand the argument regarding incentives to further exploration, but I find it difficult to believe that oil companies are looking for new oil that much harder now than they were when prices were also very profitable at $40 a barrel. Also, because high oil prices are overall a good thing, from an environmental and long-range energy planning perspective, I don't see why it's in America's interests to encourage oil companies to find more oil as fast as possible.

If higher energy prices were showing up as dangerous inflation, that would be different. And of course higher energy prices are a regressive tool for encouraging conservation. But then retrospective taxing of profits would seem a good way to redistribute the higher prices in a progressive fashion. And I still don't see what the big harm is supposed to be. No one has ever proposed windfall profits taxes on Microsoft or Pfizer for making lots of money off of things they invent; what we're talking about here is more like a retroactive tax on a store owner in NO who raised the price of a bottle of water to $10 in the aftermath of Katrina. The retroactive tax doesn't distort the proper distribution of the good in an environment of scarcity, as a price freeze would. It just takes the profits, which the businessman did little to deserve, and makes them available to redistribute to those who could least afford the increases at the time.

This is all kind of tongue in cheek because, as I say, I think the whole idea is a bit pointless. But still.

Posted by brooksfoe | September 13, 2007 3:36 PM

The only thing worse than a windfall tax on profits is subsidies to companies making windfall profits. Why are all the comments so far focused on the former?

Posted by Derek Scruggs | September 13, 2007 3:41 PM

"I'm pretty sure that the idea is that, if they have no reason to expect big profits, they're less likely to do more exploratory drilling."

US tax policy has little effect on oil exploration, likewise subsidies. The volitility in the future price of oil dominates by orders of magnitude. Consider a not-so-far-fetched scenario of armed struggle between a Shiite coalition and a Sunni coalition for control of oil in Iran, Iraq, Kuwait and Saudi Arabia. At either extreme, both sides could either try to cripple the other by destroying its oil production, or fund their own efforts by dumping as much oil on the market as possible. This could result in either $100+ per barrel oil or $10 per barrel oil.

Investments in exploration are made with that in mind. Nothing that manages to get through Congress will be meaningful by comparrisson. People like to cite that after the Windfall profits tax netted a few 10s of billions of dollars, domestic production fell by 5% while imports rose by 12-16%. What they leave out is that the price of imported oil dropped by 70% over the period cited.

Posted by Njorl | September 13, 2007 3:43 PM

Njorl, brooksfoe, etc. all have the same positive sentiment that Stalin and the soviet planners had. Unfortunately we seemed doomed to continually repeat these lessons. Only now it looks the liberals prefer to tinker with things at the margins and only screwing the economy up enough so that we don't notice too much.

But attacking the oil company for making too much money as a result of their investment 20 years ago, that paid off, is foolish. Exxon has to factor in a variety of risks into its exploration, and expecting them to start predicting whether or not the government will just get angry and take control is not something you want them to consider in their long term planning.

You'll probably be ok for 4-5 years. Maybe 10 years if you don't get too greedy and suck up all their profits. But after the existing supply of wells run dry you'll be howling for the government to take over the whole industry because Exxon didn't have the foresight to search for more, harder to find wells when they should have been doing so all along since it was so necessary to society.

I really don't know why we must have these conversations over and over and over again. Self interest is a powerful motivator. Tinker with it at all our risks.

Posted by sam | September 13, 2007 3:44 PM

I can see why Megan didn't have much energy. Explaining supply/demand/prices to people who don't believe in it is pretty pointless.

Posted by Yancey Ward | September 13, 2007 3:52 PM

sam, your post defies all economic logic.

after the existing supply of wells run dry you'll be howling for the government to take over the whole industry because Exxon didn't have the foresight to search for more, harder to find wells

No one is contemplating taxing Exxon so severely that they do not make a very healthy profit. And Exxon did not make its investments 20 years ago in the expectation that oil would hit $80 a barrel today; no one expected China to have sustained 9% GDP growth for 15 years. If oil were at $40 a barrel today, those investments would still have been handsomely profitable. They were already profitable in 2002 when oil was at $40 a barrel. And obviously, if Exxon invests a tremendous amount in exploration, they will not have to worry about taxes on windfall profits; their profits will go down, and there will be less of a windfall to tax. So the tax should provide an incentive to invest in exploration. And, indeed, the windfall profits taxes of the late '70s were not followed by a scarcity of oil production. They were followed by a surplus in the '80s, driving prices down.

You are not thinking clearly. You see "taxes" and you think "Stalin". You have to think carefully about what would actually cause what to happen.

Posted by brooksfoe | September 13, 2007 4:18 PM

This discussion assumes that oil companies might have made windfall profits. What is known is that the total dollar amount of the profits is large, but what doesn't get talked about much is the profit margin--which was right in line with General Electric. Yep, right around 10%. Why that's an okay profit margin for GE but not for oil companies is a mystery for me.

However, the two main problems with a retroactive tax on windfall profits are (1) how can you trust Congress to properly define windfall profits, and (2) the Law of Unintended Consequences could have severe applicability here.

Posted by Rex | September 13, 2007 4:22 PM

Yep Sam, that's me...a modern incarnation of Stalin. My mother is very disappointed. I am reminded of when I had the Kulaks exterminated and seized their land because they made too much in profits. This windfall tax stuff is exactly the same ... except without the killing and the seizure is miniscule.

Sheesh. I guess I should also mention that I was not in favor of the WPT. I was merely pointing out the aspects of its justification that our hostess omitted.

Posted by Njorl | September 13, 2007 4:52 PM

the period of the taxes on oil you are referring to saw oil drilling and oil profits soar and was the only time since 1969 that domestic oil production rose. Since the taxes you referred to were lifted domestic oil production fell 40%.

So where was all the damage you imply the taxes caused.

Posted by spencer | September 13, 2007 4:53 PM

"Njorl,

Is it your view that oil prices are high simply because OPEC colluded to raise prices?"

Oil prices jumped significantly (+200%)from 1973 to 1975 due to the embargo, not growth. They jumped about 70% due to the fall of the Shah, not growth. They dropped about 70% due to the Iran/Iraq war, not growth. Prices reached an inflation adjusted low in 1998, despite significan world-wide growth between 1973 and 1998. Since then, prices have shot up by 300%, and this particular fluctuation is supposed to be due to demand rather than market uncertainty or intentional manipulation? I'd be surprised.

http://www.wtrg.com/oil_graphs/oilprice1947.gif

Posted by Njorl | September 13, 2007 5:16 PM

Well, I was wondering when the "increased taxes induce more work" meme to appear on this thread. By this faulty reasoning, we should tax oil company profits at 100% to to get Exxon Mobil to invest as much as possible in exploration and development.

Given a choice of investing in a less than 10% profit margin business vulnerable to future political attack and profit confiscation, and investing in a business that has just an equal present return but minus the political risk, a rational investor will opt for the latter.

Once more, for effect- if the problem here is that Americans are paying too much for oil and oil products, then adding extra tax on the return to oil exploration and production will decrease future supply while doing nothing to decrease present and future demand, and, as at least one commenter has advocated giving the money to lower income consumers of gasoline, the tax will be used to subsidize demand itself. And this policy is supposed to do what, exactly? Lower prices? Decrease use of Middle Eastern oil by US consumers? It can logically accomplish neither goal. So what is the goal?

Posted by Yancey Ward | September 13, 2007 5:18 PM

Oil companies explore and drill for oil based on what they think the price of oil is going to be years down the road. It can take 10 years to get first oil out of a field from the initial planning phase.

Much of the exploration in the US is offshore. New build offshore drilling rigs are rated for up to 10,000 feet of water depth with 12,500 feet in the near future. They cost hundreds of thousands of dollars per day to operate. Exploring in deep water is an expensive proposition. It's not easy. Finding the oil is just the beginning... getting it out of the ground is non-trivial, as well. In addition to the difficulties of drilling and producing oil in oceans up to 2 miles deep, modern oil production must contend with very stringent safety and environmental rules, both government imposed and internal.

Even on land, oil can be 10,000 to 20,000 feet underground. Except in rare cases, oil does not just come out of the ground. It's often mixed with water and other crap and comes out of the ground hot and under high pressure.

The easy to find/produce oil has already been found. When demand goes up, the new supply comes from harder to get oil. New oil is discovered offshore and existing fields can be refreshed using costly methods. The marginal oil production is expensive.

It seems like we should be encouraging domestic oil production not punishing it. Or do we want to be dependent on foreign oil? The way the Democrats talk about the oil companies reminds me of a kid I knew in high school. I'd offer his dog popcorn (the dog loved popcorn). Half the time, he'd give the dog the popcorn. The other half, he'd smack him on the nose. The kid was a jerk.

Oh, and increasing CAFE on cars and not light trucks just means that more people will start driving SUVs and pickups. It seems like motorcycles are becoming more popular... given how dangerous they are, I'm not sure this is a good thing. I guess they get good gas mileage and maybe culling the herd has some advantages from a resource consumption standpoint.

EI

Posted by Earnest Iconoclast | September 13, 2007 5:31 PM

as at least one commenter has advocated giving the money to lower income consumers of gasoline, the tax will be used to subsidize demand itself.

If not taxed, the profits would go to upper-income consumers of gasoline, hence also subsidizing demand. If the money were simply redistributed to poor oil consumers, they would only recoup a fraction of what they had lost to higher gas prices, and would obviously continue to have an incentive going forward to spend that money on something other than gasoline, the price of which is still rising. A just society should try to reduce gasoline consumption in a fair way, not one which disproportionately burdens the poor; and any attempt to mitigate their burden could obviously be termed "subsidizing increased demand".

Your claim that we are adding extra tax on the return to oil exploration is unsubstantiated. What you mean is that we increase the expectation of a possibility that, if oil again becomes outlandishly profitable, retroactive taxes will be instituted, and that the expectation of this possibility is a disincentive to exploration. You have no idea what the magnitude of the disincentive might be and no historical evidence that previous windfall taxes have been a disincentive to exploration.

What's the goal? I'm not really sure. Maybe to get some revenue so we can pay for all this stuff we've bought, including a war in Iraq that is ultimately a major driver in the risk-related price increases that produced the record profits. The point is, nobody seems to be able to explain what's so harmful about this tax increase in any convincing way, yet. I remain open to the possibility that I'm wrong and this is a terrible idea, but none of the arguments on offer here so far are at all convincing. They seem to variants on "Communism! Boo!"

Posted by brooksfoe | September 13, 2007 5:52 PM

brooksfoe,

If you think that profits (of any industry) go to mainly upper income consumers, then you need to look at (1) mutual funds, (2) 401K funds, and (3) pension funds.

Posted by Rex | September 13, 2007 5:59 PM

brooksfoe, I'm fairly certain that Congress would not tax the oil industry at a fair level. They would probably screw and over or under tax. Once they isntituted the tax, getting rid of it would be incredibly difficult... we were still paying the WWII phone tax up until several years ago.

I've also heard the Democrats talk about their desire to punish the oil industry. I am really uncomfortable with the idea of our government punishing a business like this. If a crime was commited, then prosecute. But punishing them for having good fortune in the market? Does that mean that if the price of oil tanks, the government will step in and subsidize the industry and make sure we all keep our jobs? Back in the 80's when the oil industry went into the toilet, I distinctly recall the layoffs and the shutdowns... I don't recall the government stepping in and paying for all those workers to keep their jobs.

EI

Posted by Earnest Iconoclast | September 13, 2007 6:15 PM

I don't really see what virtuous work the oil companies have done to deserve this increased spread between prices and expenses.

This is an interesting basis upon which to make economic allocations -- whether or not the owner of an asset [recently] did anything virtuous to deserve the increased value of the asset. To brooksfoe, et al, private property rights are contingent on an owner's continuing virtue such that the owner is deserving of the fruits of his or her property. I'm not sure how one would diagram the virtue and deserving functions or plot the resultant curves on a graph, but I'm sure making economic allocations dependent on virtue and deservedness will yield something approaching a price/quantity equilibrium as efficiently as does our current understanding of markets -- with no need to put people in positions of authority to make after-the-fact subjective judgments about how economic benefits should be enjoyed.

Of course, until brooksfoe, et al, flesh out how this system would work, and since my feeble brain cannot conceive how a system based on virtue and deservedness could NOT involve quantum increases in corruption over our current market-based system, please allow me to state: the oil companies deserve to keep their profits by virtue of their having acquired (through purchase or development) the oil. Period. Dividing the spoils up after-the-fact (in an effort to achieve a more equitable result or for some other laudable purpose) ALWAYS leads to massive distortions in the market and creates all-but-overpowering incentives for corruption. I'd rather allow the occasional windfall profit to be undeservedly received than run such risks. (Besides, next, you'll be saying I don't deserve to keep the more than doubling in value of my home over the last 5 years on the basis I did nothing more than live there during that time.)

Posted by David Walser | September 13, 2007 8:28 PM

brooksfoe,

Yes, I do know that taxing a profit at a higher rate than other types of profit will reduce investment in that type of business relative to what it would have been without the distorting tax- this is really basic stuff. And it literally does nothing at all to reduce the price of oil and oil products because it targeted at taxing future supply but not demand, it actually causes the price to rise more than it would have- again, really, really basic economics. In addition, the tax will affect domestic supply more than foreign supply because a good deal of the foreign oil is owned outright by foreign governments, of whom you have aided in their market actions.

If you want to tax oil, you should do it at the user>/i> level. That way you lower demand without damaging the supply relative to the supplies of other commodities; and you get to tax OPEC indirectly. And if you are concerned about the regressivity of such taxes, you can use the revenue one for one to eliminate the payroll tax.

Posted by Yancey Ward | September 13, 2007 8:48 PM

I would remind folks like brooksfoe and Njorl that there are real flesh and blood people behind the nebulous "big oil" you folks dislike so much. This link illustrates that
.
Crash of ‘86 Left Permanent Scars

in less than 12 months, world crude oil prices fell by more than 60 percent.

Hundreds of thousands of oil workers were laid off.

Texas reported 366,200 jobs related to oil and gas extraction and oilfield equipment in the early 1980s, according to the Federal Reserve Bank of Dallas.

By 1987, only a year after the price collapse, 175,000 of those jobs had vanished.

Texas alone -- just Texas -- lost more than $1 billion in oil and gas severance taxes.

Another interesting quote (in the history repeats itself)from the linked article

in January 1986, he traveled to New York City with the then-executive director and the president of AAPG to spread a good-news story about the oil industry to the "eastern press."

"We were going to have meetings with the New York Times, Time magazine, Newsday, the Wall Street Journal," Nation recalled.

"One of the difficulties at that time, we thought, was that people believed the world in general and the United States in particular was running out of oil. They were asking, in that case, ‘Why should I invest in the oil industry?'"

That is life in the commodities business, prices go up and prices go down. But it does have an impact, good and bad, on the people who produce and consume commodities
.
However, few people understand the pricing history of oil. They don't understand how low the price of oil was and how long it stayed low. And they don't understand how past low prices contributed to the current high price of oil today
.
Take a look at the article, it is an interesting human interest read.

Posted by TJIT | September 13, 2007 10:39 PM

A link for those that are interested in the economics and history of previous windfall profit taxes and oil price controls.

Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes

Because price controls and profit taxes can be levied only by the U.S. government on U.S.-based companies, such policies also increase the economic attractiveness of foreign relative to domestic oil. The U.S. experience with price controls from 1971 to 1980 and the Crude Oil Windfall Profit Tax from 1980 to 1988 amply demonstrates the problems.

Profits in the oil sector have historically been lower than profits in the rest of the U.S. economy, so profits would have to be quite large for some time before they equaled returns in other sectors of the economy. Restricting profit opportunities now would amount to a form of one-way capitalism in which meager profits are allowed but more robust profits are punished.

A point that is worth emphasizing is made here
.

Intervention under those conditions would certainly reduce the incentive to invest in the oil business.

There is a flip but true saying regarding commodity prices "the cure for high prices is high prices"

Posted by TJIT | September 13, 2007 10:48 PM

Put me in the column with those who believe gasoline is still too cheap, and any tax should be at the user level with off-sets in payroll taxes 1 for 1.

Despite the increases post-Katrina, the 'high' price of gasoline appears to have had small effects on behavior and consumption patterns. Our consumption is driving profits not just to Big Oil, but to Big OPEC, and Hugo Chavez. If consumption dropped significantly, and oil went to $10/barrel the Saudis, e.g. would be a little more concerned about productive investment than fueling jihad. I'm with Tom Friedman, among others, on this point.

CAFE is crap is still waaaay too short-sighted. Let the market drive up the price of gas, add a carbon tax, and watch the consumers demand hybrids, diesels, and public transportation. I'm guessing that would be around $6/gal (still less than the UK, Germany, etc at current exchange rates).

Posted by Michael W | September 13, 2007 11:44 PM

(Besides, next, you'll be saying I don't deserve to keep the more than doubling in value of my home over the last 5 years on the basis I did nothing more than live there during that time.)

Okay! There we go. That's a good argument against a windfall profits tax. I still there are grounds for a distinction, basically along the lines that oil is a vital consumable commodity, and price changes in those kinds of commodities are subject to government intervention in most countries simply because dramatic shifts could be too destabilizing and regressive. (In many poorer countries the list includes bread or rice.) However, Isocrates is also right that a windfall profits tax does almost nothing to affect prices, and any subtle deterrent to future rapid price rises (based on discounting for the political likelihood of another windfall profits tax) would only be as large as the equally subtle deterrent to investment in oil exploration and production.

In any case deterring a rise in energy prices should not be a government goal: energy prices should certainly be at least at market levels, if not higher for various social goals. There is a legitimate government interest in mitigating the regressive effects of high prices, but any case for using a windfall profits tax to do this remains to be made.

When I say "virtuous", I assume that almost all economic activity is virtuous in the sense that it produces some utility for others. Extracting the same amount of oil as usual while world demand rises doesn't produce any added utility beyond the usual, but it produces lots more money for the extractor. The counter-argument is that the oil producer goes into the businesses expecting ups and downs in demand, and arbitrarily creating new one-off taxes on profits when there are ups will destroy the business environment. The counter-counter-argument is that actually oil producers will never face much of a downturn because the government will protect them due to national security and economic concerns, and they should have to accept special responsibilities concomitant with their privileges. But all of that would argue for some kind of predictable tax on profits for oil producers that kicks in during rapid price rises, which can be factored into a business model rationally, rather than this kind of ad-hoc garnishing of profits, which seems a bit Russian or third-world.

Posted by brooksfoe | September 14, 2007 2:24 AM

I'm sorry, I meant Yancey, not Isocrates. Sorry about that Yancey.

Posted by brooksfoe | September 14, 2007 2:27 AM

"What exactly is so horrible about retroactive taxes on a vital product that's become abruptly more profitable for no good reason?"

The world's remaining oil is becoming exponentially more expensive to get at. Removing oil from shale, drilling in deep seas, etc., are extremely risky ventures that require enormous amounts of startup capital. Without profits now, oil companies would shut down rather than face these costs, and we would wind up subsidizing them (!) the way we did Chrysler, back in the day. It is after all, as you say, a VITAL product. Do we really want to fool with the marketplace dynamics which have kept it flowing all these years, and see what happens?

Yes, some people have become rich off oil. Some people have become rich off publishing, high tech, real estate, communications, etc. And it's always the WRONG people making that money. Let's tax them more heavily and discourage this sort of thing. That will solve the problem of the wrong people getting rich, and I'm sure it will have no macroeconomic implications whatsoever.

Just give me some notice, please, so I'll have time to get to Canada befors the madness begins.

Posted by Mister Snitch! | September 14, 2007 7:52 AM

Absent clear and unambiguous reform, rewarding the Democrats' bad behavior since 2000 by voting for them is fecklessness defined.

It's not as though two equally respectable flavors are being offered by the ruling classes.

Posted by Brett | September 14, 2007 7:53 AM

Isnt' the whole notion of 'windfall profit' really just a matter of accounting, not the economics of oil?

After all, if I obtained oil as a factor of production at a low price set during time 1 and, then, during time 2 demand rises (with supply being held equal for sake of simplicity) and prices rise both at the producer level and the retail level, most of my increased 'profit' for low priced oil sold at a higher price during time 2 will be required to replace the now higher-priced oil during time 3. The fact that I've computed profit at the end of time 2, before the impact of the higher factor cost.

I suppose the ultimate producer, that is to say the owner of the oil in the ground, sees an increase in his profit as factor prices change, but so what, is he responsible for the change in factor prices? Hardly. His resource has simply become more valuable relative to other factors.

While there is integration in the oil business, for the most part the oil companies are middlemen - purchasing the factor of production (crude oil) at prices set in prior times or on the spot market and selling at current market prices. What they cannot do is replace the factor bought at yesterday's price at that same low price - their profits would be increased significantly only if that were true, and, in the long run, it's simply not.

I also wish serious people would stop talking about inflation effects from rising oil prices. As long as the total money supply is not changed, there is NO inflation - what there is, is a change in relative prices among factors of production, which changes the prices of produced goods. To the extent one factor increases in price, and demand (and supply) for that factor relatively inelastic, then demand for other factors will fall.

Posted by CatoRenasci | September 14, 2007 8:00 AM

The Democrats have been pushing for "windfall profits" tax on oil for at least thirty years. They have promoted raising taxes on almost everything for at least seventy. Did you miss that?

Posted by Ken Hahn | September 14, 2007 8:02 AM

It is my understanding that only one group ultimately pays taxes in a consumer based economy and the would be the consumer.

All others would be considered tax collectors. Unpaid tax collectors for the federal government at that.

Get over it.

Posted by Keith D. Milby | September 14, 2007 8:11 AM

I find it amazing how many of you who are not in the oil business think it's your business. Voting status is irrelevant

Your business is to buy or refuse to buy the product, based on your personal decision that the price is or is not worth the benefit to you.

Mulling over how much to hamper the business through taxation is the unintelligent preoccupation of an unproductive intelligentsia.

Posted by Brett | September 14, 2007 8:20 AM

a vital product that's become abruptly more profitable for no good reason

I'd love for you to cite any a single source even, of economic data demonstrating this is true.

Please.

I want to see how oil companies profits compare to those of other industries based on a cite you can provide.

Posted by The Ace | September 14, 2007 8:32 AM

If the tax is on oil co. profits it will affect only American oil companies. Thus "foreign" oil will get a competitive advantage making us more dependent on "foreign" oil.

Them Congress critters is brilliant.

"Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself." Mark Twain

Posted by M. Simon | September 14, 2007 8:43 AM

This proposed tax amounts to a subsidy for Saudi Arabia.

I love populist envy.

Posted by M. Simon | September 14, 2007 8:49 AM

brooksfoe: Using big words does not hide the flaws in your logic. Go back to the English/Philosophy faculty lounge.

--The government does NOT subsidize oil companies during the lean years. Someone has already cited articles about the 50% reduction in jobs in the '80s related to the bust. Imagine if 50% of farmers or auto workers had lost their jobs in one year...or ask anyone who lived in Houston, Oklahoma City, Lafayatte LA, Calgary, or Denver how long it took real estate prices to recover from the bust

--A rule of thumb that has worked since the 50s is that an oil well is profitable when Finding and Development (F&D) are 1/3 the market price. This accounts for taxes and increased costs for labot, machinery, chemicals, etc. F&D in Saudi is $3-$4 and is declining. F&D in Canadian tar sands is $25-$30. I don't know what F&D in Chevron's 30,000' Jack field is, but I know they spend $100 Million per wellbore and each well is expected to last 3-4 years.

--Even if you're not in the oil business, it should make you very nervous to hear a bunch of politicians discussing what fraction of their money people who earned from fair exchange, risk, and hard work "deserve to keep." They may not be coming after you today, but tomorrow they will. You don't have to think tax = theft to recall the "brain drain" from the UK in the 70s or Venezuela today.

--In an earlier comment you suggested that drilling a well is as easy as poking a hole in the ground and waiting for oil. Not so. In the Chevron Jack field, downhole pressures and temperatures will be as high as 500F and 20,000 PSI. Designing casing to control such temperatures (and preventing the oil from freezing when it passes through the 34F seawater at 10,000'. If you're 200' off your drilling target (at the bottom of a hole in 20,000 of rock and 10,000' of seawater), you might get nothing. If anything, the oil and gas business is MORE of an intellectual property business than, say, the software industry. When Windows crashes or Amazon screws up your order, it is annoying. In the oil and gas business, people die is such a spectacular fashion that the bodies are not usually recovered.

Posted by bristlecone | September 14, 2007 9:11 AM

...what exactly is so horrible about retroactive taxes on a vital product that's become abruptly more profitable for no good reason?

It violates the Constitutional prohibition on ex post facto laws, for one.

I'm all for nailing oil companies or refineries for collusion, monopoly behavior, or any other illegal activity, but raising tax rates and making them applicable to earlier fiscal years is a can of worms you do not want to open.

If they can do it to the oil companies, they can do it to us.

Posted by rosignol | September 14, 2007 9:46 AM

I'm not an economist, to be sure, but who defines what dollar amount or profit margin constitutes excess profits? Is a figure randomly plucked from the air? That's certainly the impression I get.

Posted by shawn | September 14, 2007 10:19 AM

Democratic economic "analysis":

1. If a business charges more than its competitors, it's gouging.

2. If a business charges less than its competitors, it's unfairly competing and maybe dumping.

3. If a business charges the same as its competitors, it is colluding in restraint of trade.

Professor, where's my A?

Posted by Chester White | September 14, 2007 10:22 AM

While you're arguing that the companies which produce, broker, and sell the product don't deserve the profits, please be intellectually honest and make the argument why the tax-eaters do deserve the profits.

Posted by lrC | September 14, 2007 10:24 AM

Wait a sec, guys: most all of you are assuming that the oil companies are making surprising profits. Last time I looked, though, their profit margin was about the same as always. They're making bigger profits in absolute dollars because 7% of $80 is greater than 7% of $40.

Posted by Charlie (Colorado) | September 14, 2007 10:55 AM

Hooray for excess profits taxes. Finally, justice for the profiteers.

In line with the Walser comment above, all of you homeowners, we now require an expected value growth declaration when you buy or sell a house. Any increase in your house value in excess of your projections will be taxed as excess profits.

Oooh, I like the concept.

We will now require an expected value growth declaration when you buy or sell stocks as well. Bought Microsoft in 1976 and sold it last week? Excess profits. Tax your profiteering arse off, you capitalist swine.

Oh, and if your your projections are 'unreasonable', that will be treated as tax evasion. So don't tell us you 'knew' back in 76 that Microsoft was a goer.

Posted by BlacquesJacquesShellacques | September 14, 2007 11:06 AM

Take a stock, XYZ. I buy it at $10. Nothing happens to the company, but next week it is worth $15. To many people, I have just made windfall profits. I didn't do anything but hold something, and suddenly it's worth more money? I didn't do any work! And why is it worth more anyway?
Why Understanding Economics is Hard

What is the rational for a windfall tax? Clearly, the Democrats are not saying the tax will increase economic growth, they'd be laughed out of the room. They're not saying it will lead to lower prices, they'd be laughed out of the room. I think they are making a moral argument, so arguing economics with them is futile, they either don't understand or don't care. You must focus on the moral argument.

Perhaps their argument is utilitarian: everyone uses X, but a small number of people own or make X. Therefore, anytime X rises in price because of exogenous factors, the government should take money from people who own X and give it to people who use X. (I think that describes how voters feel about it.) Currently, you could add farmers in with oil companies, because they are making windfall profits. Plus, all they do is stick seeds in the ground and plants pop up by themselves.

Yet is anyone calling for windfall profit taxes on farmers, who receive far more in subsidies than oil companies? No. So that can't be their reason either. What's left? Why are oil companies hated and farmers loved? I have some theories, but none ascribe rational thought to the Democrats.

Posted by 8 | September 14, 2007 11:34 AM

Lost in the economic conversation is the fact that it just seems morally repulsive to punish companies via taxation because they are selling at the market price. Unless there is proof of direct price fixing collusion with OPEC, it's ridiculous to ask US oil companies to charge less than market price or else surrender undefinable 'windfall' to the government.

Posted by JohnG | September 14, 2007 12:18 PM

I agree with JohnG, using taxation to punish anyone is not what the tax code should be used for. We need to fix this system and allow taxes to fund the government (hopefully a smaller one at that) and to stop social engineering with the tax code.

Posted by Jeffrey Weaver | September 14, 2007 12:21 PM

Don't forget that after expenses, R&D that type of thing most big oil companies pay a Dividend to their shareholders. Exxon paid approximately $5 billion last year in dividends. They also raised their dividend last year.

Why not cut the taxes on gasoline? How about lowering barriers to entry for Refineries?

Posted by Paul | September 14, 2007 12:36 PM

The nature of oil prices is to go up sharply whenever a disruptive event (e.g., hurricane) takes productive capacity out of the system, then gradually go back down when the disruption is cured.

There really isn't a lot that can be done to change that, because there are no corresponding abrupt constructive events (a refinery doesn't suddenly double its output for six months).

If the top of the sawtooth curve can be wacked off by a "windfall profit" tax, this has to be factored in by the producers. They have to assume that they will effectively be taxed at a higher rate than before, which will discourage investment in production of volatile commodities, and drive it toward businesses that don't experience as many ups and downs. That means less production, which means higher prices, which means more "windfall profits" to tax.

Posted by The Monster | September 14, 2007 12:44 PM

"--The government does NOT subsidize oil companies during the lean years. "

A significant chunk of the US defense budget is a subsidy to the large oil companies. An independent Saudi Arabia (and Kuwait, to a lesser extent) with a friendly government is a key aim of US military policy. Protecting the rest of our trade relationships - Canada, Mexico, Europe, Japan, China - is not so expensive, and provides benefits across a wide array of industries. Our involvement with Saudi Arabia protects one industry, and very few companies in that industry.

The case for special vindictive taxation isn't as good nowadays though. Up until 1988, many of the people running Aramco (the Saudi national oil company) were the same people running Exxon and the other Standard Oil spinoffs. The people who were implementing the OPEC embargo were paying high ranking Exxon executives and large stockholders large salaries. In 1988, Saudi Arabia completed its buyout of Aramco from the American companies that created it, and, coincidentally, that's when the windfall profits tax died.

Posted by Njorl | September 14, 2007 12:47 PM

"Is it any wonder that I'm not affiliated with either party?"

Well... except for the one that you actually, you know, voted for.

Twit.

Posted by Billy Beck | September 14, 2007 12:55 PM

Why do people complain when oil companies, pharmacutical companies, etc. make a good profit, but don't mind when entertainers (movie studios, actors, musicians, etc.) make obscene money?

I am much happier with people who produce things that I NEED making large amounts of money than people who make things I DON'T need doing so.

Where is the whining about actors making 10 million a film?

Posted by KiddClassDDG | September 14, 2007 1:15 PM

Why is it that we are paying higher and higher prices for oil? The British and the Europeans aren't paying as much as we are. Please note the exchange rate for the pound and euro against a rapidly weaking dollar. Higher oil prices are because the federal government has inflated, and continues to inflate, the dollar.

Willi

Posted by William A. McQuiddy | September 14, 2007 5:39 PM

"A significant chunk of the US defense budget is a subsidy to the large oil companies."

No more than it is a subsidy to Europe and Japan. The world economy depends upon the US Navy's ability to keep the shipping lanes open; frankly, nobody else bothers to maintain such a capability, and so they don't pay the 1-3% GDP cost of that burden. Believe me, I have heartburn with the notion that there are or ever will be any truly "friendly" governments in Araby, but until the West is prepared to do without oil, the pretense must be maintained for the sake of all those other industries and trade relationships. (Except for China; China is adversarial enough already that I don't see any American interest advanced by helping them get oil.)

See, we could choose to defend only American oil shipping lanes, and consume only American product. Once al-Qaida (yes, them again) pirates operating in SE Asia and the horn of Africa figured that out, the world spot market price of oil would rocket upwards. I expect some here would then decry the "windfall profits" to oil companies in that scenario too. Damned when it's cheap, and damned when it's expensive.

Posted by craig | September 14, 2007 5:47 PM

A significant chunk of the US defense budget is a subsidy to the large oil companies.

Too funny.

How does one become so comically ignorant?

Posted by The Ace | September 14, 2007 7:09 PM

Why do people complain when oil companies, pharmacutical companies, etc. make a good profit, but don't mind when entertainers (movie studios, actors, musicians, etc.) make obscene money?

You're right: I did not hear them complaining about the profits Mike Moore made off his movies that took advantage of Democrats gullibility. Who also happens to have plenty of investments in oil companies.

I doubt that the Democrats will make more then noise about the oil companies, simply to pander to their base. Too many of them have holdings in domestic oil companies, and will not want to give up their profits. Or their SUVs and Gulfstreams.

Oil companies make an easy target, as did the cigarette industry, and Big Pharma. There is always quite a bit of pontification against them, but never any solid ideas to make the situation better, ie, a win/win for the companies/industry and the consumer.

Posted by William Teach | September 14, 2007 8:56 PM

Where is the whining about actors making 10 million a film?

Right here. I think it's ridiculous and disgusting, and supports a vapid, materialistic Hollywood lifestyle that is corroding American values. Fortunately, in the modern film economy, these overpaid freaks are facing increasing competition from computer-generated rats, which I hope will drive their salaries down.

Posted by brooksfoe | September 15, 2007 12:00 AM

Go ahead then Ace. You've done a fine job of baselessly insulting me, how about attempting to back it up with a shred of argument? Explain to me how our military spending in the middle east is not about oil.

I eagerly await your flailing attempts at logical argument.

Posted by Njorl | September 15, 2007 3:30 AM

"The world economy depends upon the US Navy's ability to keep the shipping lanes open; frankly, nobody else bothers to maintain such a capability, and so they don't pay the 1-3% GDP cost of that burden."

You over estimate the activities of the US navy. It does not bother fighting piracy in some areas.

You underestimate the activity of other states. Singapore, Malaysia ans Indonesia have been fighting piracy in the busiest shipping lane in the world for several years now. They've recently opened their initiative to funding, but not military contributions, from beneficiary states like Japan and China.

Also, 1% of US GDP is an order of magnitude too high for controlling world piracy. It can be (and is) done more cheaply.

Posted by Njorl | September 15, 2007 3:55 AM

Njorl you need to understand that the US military making sure oil can be transported out of the middle east provides two forms of subsidies youarer ignoring

1. A peace subsidy for europe
2. A social welfare subsidy for europe

Every modern economy needs oil to function, europe is not exempt from this.

The presence of the US military means that Europe did not require a large military to defend themselves against the soviet union, or to guarantee the transport of oil from the middle east.

One thing the first half of the 20th century made terribly clear is that a well armed europe with large standing armies can produce human slaughter on a breathtaking scale.

The US military provided a "peace subsidy" by making it possible for europe to have a secure oil supply without having to have large standing military. No large standing military, no chance of someone getting to big for their britches and starting to march across borders.

Not having to pay for a large military gave europe a lot of extra money. They promptly spent this money on welfare to grave social welfare policies. The large US military made the european social welfare programs economically possible.

If you are going to call the US military budget a subsidy you need to bill part of the expense to the above two items.

Thats just two examples of how the large US military provides benefits that are rarely accounted for.

Posted by TJIT | September 15, 2007 10:25 AM

Njorl, you are smuggling in a premise with these two statements you made.

You must also weigh those special circumstances against the enormous subsidy that our defense spending is to the oil companies.
.
A significant chunk of the US defense budget is a subsidy to the large oil companies.

Your smuggled premise is that the US defense budget would be much smaller if there was no oil in the middle east.
.
This premise ignores the fact that the US military was sized to deal with the Soviet Union, China and other countries with large military organizations that could project power and threaten our national interests. Including threatening our allies (for example, europe and taiwan)
.
Once you take that into consideration the idea that the military provides a subsidy to the oil companies becomes dubious.

Posted by TJIT | September 15, 2007 10:48 AM

"Njorl you need to understand that the US military making sure oil can be transported out of the middle east provides two forms of subsidies youarer ignoring

1. A peace subsidy for europe
2. A social welfare subsidy for europe"

That is immaterial.
Whether it subsidizes Europe or not, it subsidizes a select group of American companies. They make billions of dollars that they would otherwise not make every year. If the government chooses to squeeze a little back from them when it is politically convenient, it is not immoral. It is the price of doing business when you rely on someone else for free muscle.

Posted by Njorl | September 18, 2007 1:20 AM

"This premise ignores the fact that the US military was sized to deal with the Soviet Union, China and other countries with large military organizations that could project power and threaten our national interests. Including threatening our allies (for example, europe and taiwan)
.
Once you take that into consideration the idea that the military provides a subsidy to the oil companies becomes dubious."

Our European allies face no threats. It is cheap to deter the Chinese from crossing oceans. True, South Korea is expensive, but all of these operations have a broader spectrum of beneficiaries. The very large amount we spend to keep the middle east a place where our oil companies can do business disproportionately benefits the large oil companies.

Posted by Njorl | September 18, 2007 1:34 AM

Keeping the Middle East safe enough for oil to flow helps the entire world. If we were not there, the Europe or China or Russia would have to be there. And I would much rather we be there than let China and/or Russia be the ones keeping the oil flowing. US oil companies benefit, but so do the Middle Eastern governments. If only there were a way to keep the oil flowing for the benefit of the world without benefiting the current crop of Middle Eastern governments.

All companies in the US receive a subsidy from the government in the form of courts and police. Any company that trades overseas benefits from a subsidy in the form of the State Department. Just about every company benefits from the subsidy of the Interstate Highway system. The government benefits lots of people in lots of different ways. None of that really explains why it's okay to arbitrarily take profits away from one industry just because they are making some money. It's not really a moral issue, IMO, it's an economic issue. It's hard to make any kind of plans if the government periodically and arbitrarily takes profits that are "too high" without any consistent definition of "too high" or how much they take.

EI

Posted by Earnest Iconoclast | September 18, 2007 9:50 AM

Njorl says

Our European allies face no threats.

You did notice how their natural gas supply from Russia got shut off as a byproduct of russia's dispute with georgia? It was turned back on but the idea that they face no threats (particularly energy security threats) is incorrect.

It is cheap to deter the Chinese from crossing oceans.

That misses my earlier point that the US has agreed to defend Taiwan against an invasion by China.
.
That defense would require a very large military including a massive naval force.

Posted by TJIT | September 18, 2007 8:32 PM