With just eight days before a high-stakes midterm election, President Biden has a proposal to address inflation and high energy prices – higher taxes.
On Monday, following record earnings from oil majors, the President gave a press conference criticizing oil companies’ profits and encouraging Congress to levy additional taxes on American energy companies, ignoring his own agency’s forecast of record production.
Here are three things you need to know about the President’s tax proposal:
- President Biden said that energy companies aren’t working to bring down gas prices. That’s categorically false.
In his press conference, President Biden made the remarkable claim that domestic energy companies haven’t stepped up to address the domestic and international energy crisis:
“Americans across the country have stepped up and done the right thing. But not everyone stepped up. The oil industry has not. It has not met its commitment to invest in America and invest in the American people.”
The President’s claim has no backing. Earlier this month, the Energy Information Administration reported that U.S. crude oil production is forecasted to hit an average of 11.7 million barrels per day in 2022 and 12.4 million barrels per day in 2023, with the latter estimate surpassing the domestic production record set in 2019.
Last week’s earnings reports showed that domestic energy giants Chevron and ExxonMobil doubled down this year on production in the Permian Basin, with both companies reporting record quarterly production in the resource-rich basin.
To meet the demand for gasoline, domestic refiners are also running at near-peak capacity. ExxonMobil’s earnings call detailed how the company operated its refineries at record levels in the third quarter, and at the same time, continued to invest in new refinery capacity:
“We boosted overall refinery throughput to its highest quarterly level since 2008, responding to tight market conditions, and we continued to make progress on the Beaumont refinery expansion, which will increase capacity by about 250,000 barrels per day in the first quarter of 2023.” (emphasis added)
Domestic refineries are also running overtime to meet demand for diesel, which is essential for industrial and agricultural economic activity. Just this week, CNBC reported that East Coast diesel refineries have been operating at or over 100 percent of capacity since the late summer.
- Confusing – and antagonistic – policy disincentivizes oil and natural gas companies from making big bets on domestic production.
In his speech, and in a follow-up tweet, President Biden presented energy companies with a confusing ultimatum:
The oil industry has a choice.
Either invest in America by lowering prices for consumers at the pump and increasing production and refining capacity.
Or pay a higher tax on your excessive profits and face other restrictions.
— President Biden (@POTUS) October 31, 2022
First, as described above, American energy companies are investing in additional production and refining capacity.
But more importantly, if energy companies weren’t investing in domestic production to the degree the President wants, why would the threat of a windfall profit tax lead to more investment? As the Financial Times editorial board pointed out when the United Kingdom debated its own windfall profit tax proposal, a corporate tax code must be consistent and predictable in order to encourage investment and innovation:
“Yet, however appealing it might seem to force oil companies to fund a form of compensation, windfall taxes are a bad idea. … A good tax system should clearly set out, in advance, how an individual or entity will be taxed. Stability is key to promoting both investment and spending — both of which drive economic growth. Predictable and constant regulations are identifiers of a society governed by the rule of law.” (emphasis added)
Even without the threat of an arbitrary and punitive tax, energy companies have good reason to be judicious with their spending in new oil and natural gas producing and refining. On the campaign trail, President Biden said that he planned to “end fossil fuels.” And this month, the International Energy Agency published its World Energy Outlook report, which said that Russia’s invasion of Ukraine cannot “justify a wave of new oil and gas infrastructure” in a world that aims to meet its net-zero emissions targets.
But just this week, U.S. energy envoy Amos Hochstein told energy officials in Abu Dhabi that he hopes to see “increased investment in production, investment in refining capacity” around the world.
To call these statements “mixed messages” would be an understatement. The Wall Street Journal editorial board summed it up well:
“Mr. Biden and fellow Democrats simply refuse to understand the economic consequences of their assault on American fossil fuels. They have come to believe that climate is a crisis and that banishing oil and gas is urgent. But that means higher prices, which they now blame on the very companies they want to go out of business.”
- Higher taxes lead to less domestic production, not more.
From a former Obama White House economic adviser to a U.C. Berkeley economics professor, experts across the political spectrum have consistently argued that a windfall profit tax would likely cause gas prices to go up.
But we don’t need to hypothesize about the effects. As Energy in Depth has pointed out, a windfall profit tax has been tried before – and the result was lower domestic production and higher energy imports.
During the Carter Administration, Congress passed a windfall tax on oil companies in response to high profits driven by commodity prices. In 2009, the Congressional Research Service released a report analyzing the Windfall Profit Tax of 1980, finding that it did not achieve what its backers promised:
“From 1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2% to 8.0% (320 to 1,269 million barrels). Dependence on imported oil grew from between 3% and 13%.” (emphasis added)
The CRS report also shows that by 1986, the global oil market was in a “depressed state,” causing energy companies’ profits to fall and the tax to generate little to no revenue. Speaking on CNN’s Inside Politics with John King, Mark Zandi, the chief economist at Moody’s Analytics, described how the cyclical nature of the oil market makes the windfall profit tax proposal an example of particularly “bad economics”:
“You know, I don’t sense gouging. This is age old. When global oil prices go higher energy companies benefit. They make a lot of money. Conversely, when oil prices are low and go down, they lose a lot of money. That’s been the case since the beginning of time. … The other thing, John, is we need energy companies to produce more oil, so we need them to make money to be able to [produce more], and high earnings and profits to incentivize them to go out and put more rigs in the ground and produce more oil and get the oil prices down. That is the key to getting inflation lower.” (emphasis added)
As National Association of Manufacturers President and CEO Jay Timmons said:
“Raising taxes on American energy manufacturers is dangerous and destructive for the American people and the manufacturers who depend on access to reliable energy. It would disrupt domestic supply at a time of severe geopolitical uncertainty. Indeed, history has shown that this is a failed policy that could lead to more imports and even higher prices.”
Bottom Line: President Biden has found himself between a rock and a hard place where domestic energy companies seem to present both the problem and the solution. But rather than pursuing policies that make it easier for domestic energy companies to make long-term investments in American energy security, President Biden is choosing to threaten companies with taxes that would discourage investment in American oil and natural gas.
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