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Rhinocrisy

27 April, 2006

Windfall

Some Democrat Senators are trying to get a windfall profits tax put in place on oil companies, and alarm bells are ringing. Especially since some Republican senators are apparently discontented as well, recognizing that high gasoline prices are going to be a significant electoral issue this year. Chris Dodd (D-Connecticut) tried to put an amendment onto the latest megalithic spending bill winding its way through Congress* taxing profits 50% on oil revenues over $40/barrel. Punishing bloated capitalists is an easy way to earn yourself points when consumers are suffering. The bill currently in play is sponsored by Byron Dorgan of North Dakota, who has tried to get such a bill passed before, post-Katrina, and includes exemptions for money reinvested in further exploration. Even Arlen Specter says it's "worth considering" a windfall tax amongst "a number of options".

A windfall profit tax is fine by me, although I do think if people are suddenly going to start taking anti-capitalist positions because of obvious market failure, they should at least have the decency to stay that way.§ And lest you have any doubts about how this is being played, there's little or no talk about oil shortage or how global demand is going to grow; that sort of talk would lead to talk of "conservation", which during an election year is verboten. Senate Democrats (e.g. Harry Reid) are talking about removing the gas tax to ease the burden on consumers. Removing the gas tax. Anything to allow Americans to continue gassing up without worry. This is bad medicine: treat the symptoms, not the disease.

Anyhow, all this talk of a windfall profit tax is bringing up the last time there was a windfall profits tax, in the early 1980s. Like the unfortunately named House Majority Leader, John Boehner (R-Ohio):
"The windfall profits [tax], when it was tried in the '80s, failed miserably because it led to less discovery. It led to less production and was a failure," Boehner said. "There is no reason for us . . . to go there again."
There's also a whole slew of papers and talking points reiterating the above line, like this Heritage Foundation article. These make basically two claims: first, that a windfall profits tax would not generate much revenue, since the one in the 1980s didn't, and second, that the tax sets an unnecessary burden on domestic producers and would depress production.

The former claim is perhaps true, since the 80s tax made a paltry $40 billion net, as opposed to the projected $369 billion. This is because the price of oil crashed in the 80s as a result of extremely good conservation measures, and eventually OPEC ramping up production again; after 1986, the price of oil dropped below the floor set for the windfall profit tax; after this point there was no more windfall to tax, and even before then declining prices made the tax untenable. If such a situation were to repeat itself, we'd have little cause for complaint - if the revenue vanishes because of a collapse in the price of oil, well and good. This, however, should be no reason not to pass the tax by itself.

The latter claim usually cites a Congressional Research Service study from 1990; in light of recent events the author (Salvatore Lazzari) published an update, available here. His argument is this: since the price of oil is determined on a global market, a windfall profits tax imposed on domestic producers means that the effective price per barrel of oil is reduced by the amount of the tax, per barrel. We may then compute, based on what we think is the price elasticity of supply for oil, the effective reduction in oil output this must have precipitated. Based on that, the study concludes that there was (depending on what the price elasticity actually was) somewhere between a 3 and 6% reduction in domestic production in the 1980s.

I'll make the caveat that my economics is for shit, here; the study's calculations are reasonable, although one might debate the price elasticity figures employed. In the original study, the lower-bound was 0.5, while in the 2006 update the author acknowledges that lower figures might be correct. I'm not qualified to debate this matter.

But what I do take issue with is the study's assumption that the full value of the tax should be deducted from the price per barrel. Lee Raymond is adequate evidence of this: capitalists eat profit. Not all of the profit is reinvested, and so we needn't assume that in the absence of a windfall productivity would suffer. It would just mean some rich people would be a little less filthy fucking rich than they otherwise would have been. This is a key assumption made by proponents of the tax and one that the study fails to acknowledge.

All of that said, I think this tax is a waste of time. And as a political dodge, it's worse than ineffective, since it distracts from actual measures that would promote real reductions in the price of oil. Giving rebates from tax revenues to customers would certainly be a popular measure, but it's, first, not going to have any impact on the price of oil, and second, couldn't possibly provide substantial relief from high gasoline prices - probably 1 or 2% at most. And since we're unlikely to see drastic increases in output from any major producers (all of whom are running basically at capacity), we're not going to see a drop in gasoline prices unless we force conservation. Anything that detracts from that is pointless.



* Which apparently has gotten George Bush's knickers all in a twist. After spending us $8 trillion into debt, he and the Senate Republic leadership have suddenly decided they are fiscal conservatives again and want to cut the porky bill from $105.6 billion down to a lean $92.2 billion. Ah, election year!

Quimby: Demand? Who are you to demand anything? I run this town! You're just a bunch of low-income nobodies!
Aide [whispering]: Election in November! Election in November!
Quimby: What? Again!? This stupid country.


Like Lee Raymond, CEO of ExxonMobil, who just retired with a $400 million golden parachute. At current gold prices, this would be a parachute weighing 20 metric tons.

Of course, in the same interview he mouths off about how he's passed legislation outlawing OPEC, which "get[s] together, reduce[s] the supply of oil, and that drives up prices," a mysterious and ignorant statement considering that (a) the Kingdom of Saudi Arabia, the major OPEC producer, most definitely does NOT connive against the U.S., and (b) OPEC has increased their production quotas repeatedly in past months, and just recently (a few days back) announced they're going to keep them at 28 Mbd total, almost at full capacity. So take what he says with a grain of salt.

§ In other words, I'm bitter because I was on the "dispossess the ruling class" wagon way before these ruling-class jerks showed up on it.

Comments

before I leave a comment with actual content, let me say that I am ga-ga over your use of daggers, double daggers and other dingbats by means of footnoting. Ooh-la-la! 

Posted by Saheli


Okay, now I've read the post.

The fundamental problem is high demand. Even if supply is high enough for now (OPEC pumping at full capacity) it's not so high and so competitive that the people who actually sell us *gasoline* (not light sweet crude. . .mmm, light sweet crude) don't have plenty of control over what they charge given our implacable concern. I filled up my tank the other day for the first time in a long, long time. I was sitting there reading my book when I looked up and noticed the price hike and I almost yelped. Yet I still filled up the tank. All the playing around with taxes and subsidies in the world wouldn't get rid of the reasons I was filling up the tank, though they might, finally have made those reasons less important than huge cost. At the point, however, that you're forcing someone like me choose not to do the things I was burning the gas for because they cost too much, you're almost certainly really mucking up the lives o a lot of poorer people. From my little point of view, the most effective way to stop spending on gas is to improve public transit--make it run more frequently, more reliably, and later at night.  

Posted by Saheli


it'd be more interesting to index a profits tax to volume of oil sold. the less oil is sold in the inefficient sectors, the lower the profit tax rate becomes. have cake later (growing market); eat cake now (high profits); not both. i'd happily reward oil companies for coming up with creative ways to shrink their own market, since that's the work we actually need done at the moment.

w/regard to mass transit: it seems as though metro areas are in a big bind on this right now. it seems like desirably profitable people are choosing where to live based on minimum cost, not ROI. unless some part of the up front costs of expanded transit system can be born outside the metro area, you risk becoming "too expensive." but because of this any state or federal resistance to paying for mass transit is the same as a tax - forcing the city to grow in the way that most benefits out-of-state industries; and thus forcing the city to spend a greater part of its overall gains on system maintenance and environmental mitigation. it's probably silly to argue that refusal to assist with developing mass transit is a "taking" - until the day finally comes that american city governments actually demand that the "grants" come a wee bit closer the tax revenue their cities generate, things are stuck, i think. even farther out is the idea that money invested to make cities more energy efficient is an big financial benefit, particularly for new industries.

there seem to be a few other obstacles to getting people really behind new public mass transit measures. tough debt maintenance pricing. unwalkable services distances. child and elder care. general traffic congestion(!). and, most of all, healthcare obscenities. all those costs need to drop to bring functional mass transit within reach. IMO w/o H, as usual. (boondoggle transit is always possible!)

it's amazing how much seems to hinge on healthcare. by proxy the earth is suffering for aetna's sins. 

Posted by hibiscus


When the majority leader's name is pronounced correctly , I don't think that it's all that unfortunate.

Until I reached the botton of this post, I thought it was authored by Hedgehog, not Saurubh.

My solution: allow everyone to telecommute. 

Posted by judevac


I'm coming a little late to this party, but there's a post on this topic  by an oil industry insider that you might be interested in reading. (If you're at all interested in energy markets I suggest reading him on a daily basis.) He discusses why it's impractical to impose a tax based on the per-barrel price of oil and why a windfall profits tax would likely only affect four companies (unless the federal government wishes to bring domestic oil exploration to a standstill). He points out that if you take away all  of the industry's profits it amounts to only 41 cents a gallon, and that a windfall tax capping profit margins at 5% would likely save only 13 cents a gallon.

As for fat cats getting fatter off these profits, it's true in many cases -- particularly in Lee Raymond's case -- but remember that the vast majority of the profit that is not reinvested goes to shareholders, and that many of those shares are held in retirement plans and mutual funds (which, in turn, are also held in retirement plans). In these days when so many people have something invested in the stock market, it's getting harder and harder to punish the fat cats without hurting the little guy too.

My personal take is that the oil companies haven't really done anything wrong. They're in a commodity-driven business, and when demand for that commidity rises faster than the supply, so do their profits. (The flip side is that they have to eat some pretty nasty losses from time to time.) High oil prices might produce high profits now, but by encouraging people to conserve or switch to another fuel altogether they're probably not good for the oil companies in the long run. Therefore, the oil companies need to either find more oil and build more refineries, or they need to diversify.

Finally, if I'm not mistaken, oil imports are down something like 8% since the price started ramping back up last February, so those mysterious market forces do seem to be working. 

Posted by Alan


diversification sounds good. with that kind of money, they could buy a whole government. or five! 

Posted by hibiscus


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