oil companies and their big profits is very popular in Congress
right now. Even some normally free-market Republicans have tried to
outdo the Democrats in anti-industry rhetoric, and bills have been
introduced proposing ways to punish the major oil companies. But
experience has shown that hurting big oil is not the way to help
consumers, and ideas like the windfall profits tax that have failed
before should not be given a second chance.
rise in already-high oil and gasoline prices sparked a number of
new energy bills. Some take the right approach, looking for ways to
remove federal restrictions on access to domestic oil production or streamlining the
regulations that have hampered refinery capacity expansions. However, many other
bills chose to target the oil industry by imposing price controls
or instituting penalties for price gouging. And a bill from Sen.
Byron Dorgan (D-ND), The Windfall Profits Rebate Act of 2005 (S.
1631), would resurrect the windfall profits tax (WPT). This tax was
first imposed by President Carter in 1980 but was repealed by
President Reagan in 1988. Such punitive bills have gained
popularity after recent announcements of record high quarterly
profits for many of the major oil companies.
The WPT is an
excise tax on oil when its price exceeds some predetermined level.
S. 1631 would impose a 50 percent tax on the price of oil above $40
per barrel. The market price of oil is currently near $60 per
barrel. This tax would be imposed in addition to the 35 percent
federal corporate income tax to which current industry profits are
already subject. Under the Dorgan bill, the proceeds from the WPT
would be rebated to the public.
assumption is that oil industry profits are excessive, especially
in light of the Katrina tragedy, and that it would be fair to
redistribute these gains.
WPT The Second Time
Of course, there
is a considerable populist appeal to taking more in taxes from big
oil at a time when they can most easily afford it and giving the
proceeds to taxpayers when they are straining to pay high energy
costs. But the last time it was tried, the WPT backfired badly. It
discouraged expansion of domestic energy supplies and led to
increased oil imports. According to a 1990 Congressional Research
Service study, the WPT in place from 1980 to 1988 "reduced domestic
oil production from between 3 and 6 percent, and increased oil
imports from between 8 and 16 percent." In effect, putting
domestic oil producers at a disadvantage had the unintended effect
of strengthening OPEC's hand. In the end, the WPT probably hurt
consumers more through higher energy prices than the increased tax
revenues helped them.
consequences were among the reasons why the WPT was repealed in
1988. In the time it was in effect, it probably served to stop some
exploration and drilling projects that would still be producing
The impact on
domestic production would be just as great or greater today if the
WPT were imposed again. Since the 1980s, the cost of oil
exploration and drilling has increased. These projects cost
billions of dollars and last for decades, over which time the price
of oil will fluctuate. Indeed, the price of oil was well under $20
per barrel for most of the 1990s, reaching a low near $10 per
barrel as recently as 1998. Needless to say, oil industry profits
were quite modest at the time, and many oil wells were operating at
a loss. If producers have to endure periods of low oil prices but
must forfeit extra proceeds to the government in times of high
prices, they will not undertake as much exploration and drilling.
OPEC and foreign oil companies would again be given a comparative
advantage relative to U.S.-based firms.
tightness in current supplies and predictions of strong future
growth in demand for energy, anything that discourages additional
oil production will inevitably hurt the energy-using public.
The goal of
federal energy policy should not be to hurt the major oil companies
per se, nor should it be to help them. The goal should be to help
the American consumer, and any impact on the oil industry should be
merely incidental. Experience has shown that the public interest is
best served by a pro-market energy policy with a minimum of federal
interference. At the very least, the government should avoid
anything that discourages the growth of energy supplies. While
vilifying big oil companies may be politically popular right now,
measures like the WPT would reduce supplies and hurt energy
consumers in the long run. Bills like S. 1631 are no solution to
the nation's energy challenges and could even make things
Lieberman is Senior Policy Analyst in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage