Windfall Profit Tax
Full Fury But Signifying Nothing
By John D. Turner

On 7 May 2008, Senate bill 2991, the Consumer-First Energy Act of 2008 was introduced by Senator Harry Reid (D-Nev). This bill features a “windfall profits” tax on the major oil companies at a special supplemental rate of 25%. It also repeals the deduction for domestic production for the major oil and gas companies for their income on the sale, exchange, or other disposition of oil, natural gas, or any primary product thereof (approximately $17 billion over a 10 year period). It would also tighten the rule restricting the use of foreign tax credits on oil and gas related income. And, to put a nice face on all of this, all revenue collected is to be deposited into an Energy Independence and Security Act Trust Fund, which one would suppose, would be used to fund clean environmentally friendly energy sources, should such ever be found.

Please note that the “windfall profits” tax only applies to oil and natural gas production; it does not apply to profits oil companies make that are invested in clean, affordable and domestically produced renewable alternative fuels, expanded refinery capacity and utilization, or renewable electricity production.

Forget for the moment the fact that we have tried the “windfall profits” tax before and that it was a dismal failure, leading to decreased domestic oil production and increasing our dependence on foreign oil, the exact opposite of what the trust fund that the money is to be deposited in would imply. Let’s take a closer look at what the oil companies can exclude from the tax.

Would someone please define for me exactly one clean, affordable and domestically produced renewable alternative fuel?

It can’t be ethanol. Domestic ethanol production can only be made “affordable” by government subsidies. It is still more costly than gasoline; you just pay for the extra cost out of a different pocket. And it has the undesirable side effect of increasing the cost of food as land and crops are diverted from food to fuel production.

It can’t be natural gas. Natural gas is specifically mentioned as being included in the tax.

It can’t be hydrogen. Not only do we not have a national distribution system for dispensing hydrogen fuel, we don’t have any hydrogen fueled vehicles on the market. Why? They are extremely expensive. If you are a Hollywood movie star, you might be able to afford one, giving you bragging rights on how “green” you are. You would still have a problem trying to find a place to “gas” it up though.

I suppose the oil companies could set up a collection and refinery system for recycling used cooking oil from the hundreds of thousands of restaurants across the country, and turn it into diesel. If the federal government were to subsidize the operation, as they do for ethanol, it might even be “profitable” for them to do so.

And exactly how do you expect the oil companies to expand refinery capacity when we have been unable to build a new refinery in 30 years due to environmental regulation? I guess it make a twisted sort of logic; the windfall profits tax is of course a tax on profits. Since one cannot profitably build a refinery due to the environmental restrictions, it follows that you don’t have to worry about being taxed on the profit you cannot make.

The same is true of renewable energy production. Read windmills and solar power plants. We have these in Texas. And you can buy power from them. It just costs more, that’s all. But if you are an environmentally conscience American with lots of money, and are willing to tithe it to Mother Gaia, you can volunteer to pay more for electricity from your electric company in order to purchase it from these “green” sources.

Who was it who said that there is a sucker born every minute?

Electricity is electricity. Once it goes into the power grid, it doesn’t carry a label that says “this erg was produced using renewable methods.” There is no “green power” router sitting on the power line, sending packets of green energy to your house, and dirty, smelly fossil fuel energy to your neighbors. Guess what? If nobody signs up for paying higher prices for “green” energy, it will still be put into the grid, if for no other reason than federal and state governments are mandating that the power companies produce a certain percentage of their power using “renewable” methods.

I don’t know about you, but I think I am already paying enough to the power companies for the energy I am using. Between food price increases, gasoline price increases, electricity price increases, property tax increases, and trying to put six kids through college (three this year alone), I am pretty well tapped out when it comes to giving. This is another of those things that sounds good to people with lots of disposable cash. I myself don’t fall into that category.

It’s easy to be green, when you have plenty of green. For the rest of us plebeians however, a penny saved is a penny earned. And it takes an awful lot of pennies these days to amount to much.

Meanwhile, prices at the pump continue to climb. It’s too bad we can’t fuel our cars with the hot air produced by our Congress.

Ah, but the Consumer-First Energy Act of 2008 also has provisions for our pain at the pump. Never let it be said our friends in congress don’t have our best interests at heart. Title II of the act covers Price Gouging.

It would allow the President the authority to declare a temporary national energy emergency in instances where he (or she) determines that there is a threatened or actual disruption of oil, petroleum, or biofuel supplies or significant pricing anomalies which constitute a danger to the health, safety, welfare, or economic well-being of the citizens of these United States. And, having made such a declaration, it prohibits “price gouging”, making it punishable by federal civil and criminal penalties.

It doesn’t actually define what constitutes price gouging. I guess it is sort of like pornography; it’s hard to actually define, but you know it when you see it.

Believe it or not, there are some that feel Title II doesn’t go far enough. It only applies to temporary national emergencies declared by the president. Representative Bart Stupak (D-Mich) and others believe that “price gouging” should always be a federal crime. And no, they can’t define it either. But not to worry; first we pass the bill and then we worry about what it means. And take it to the bank that they will come up with some legal definition; probably couched in more vague and ill-defined terms.

Title III would end purchases of oil by the United States for purposes of filling the Strategic Petroleum Reserve until the price of oil falls below $75 per barrel. While I do not believe this will do anything to reduce the price of oil, I do agree with this provision. It makes little sense for the government to purchase oil at these prices. It makes even less sense for us to enrich our enemies abroad at these inflated prices

Title IV of the act would allow the Attorney General of the United States to bring enforcement actions against any country or company that is colluding in setting the price of oil, natural gas, or any petroleum product. This would be an amendment to the Sherman Antitrust Act.

I can understand how this could be enforced against U.S. oil companies. The Sherman Antitrust Act, enacted in 1890 was the first U.S. government statute enacted to limit cartels and monopolies, and was used in 1911 to break up the Standard Oil Company. I really don’t see how it can actually be enforced against sovereign nations however.

Title V seeks to regulate speculation in oil futures by financial traders. It requires the Commodities Futures Trading Commission to substantially increase the margin requirement on crude oil future trades within 90 days. Currently the margin requirements vary between five and seven percent. I have heard definitions of the word “substantially” in this context range between 25 and 50 percent. Again, this is fine when it comes to the US Commodities Futures Trading Commission. It does nothing to restrict futures markets abroad. While oil may be traded primarily in US dollars, the market is worldwide. Anything we do here does not affect traders in other parts of the world. What is to prevent the bulk of futures trading from simply moving overseas as much of our industry has already done?

This is the Democrat’s plan for easing the consumer’s pain at the pumps. This is their plan to reduce the cost of oil. It must be; it’s called the Consumer-First Energy Act of 2008, after all. What’s notable about this act however is that there is not one item in it that actually addresses the problem of higher oil prices. All it contains are punitive measures against oil companies and restrictions on individuals and companies that trade in oil futures. No where does it address increasing oil production, increasing oil exploration, or drilling new oil wells. Other than vague references to “alternative fuels” it does not address any increases in the development of energy resources.

There is no plan. It’s all hat and no cattle.

In fact, this plan could actually increase the price of oil. The last time a windfall profits tax was tried, it led to the capping of oil wells across the country, and an increase in foreign imports. Even if domestic wells are not capped, does anyone seriously believe that the oil companies will not simply pass on the cost of the windfall profits tax to consumers? Oil companies are not charities and they are not governments; they cannot stay in business unless they run a profit. And despite what the Democrats may say, they need to run large profits; oil development and exploration is not cheap.

Deep-sea oil drilling rigs, for example, start at around $500 million; renting one costs $550,000 per day and up, not including the crew and provisioning expenses. The new deep-sea rigs being ordered by Brazil to drill the new deep sea oilfields recently discovered off their coast are reputed to cost around $1.2 billion each. And it takes around three years to get one delivered once the contract is signed. Those “windfall profits” can get eaten up pretty fast at $1.2 billion a pop.

What the Democrats fail to mention is that in addition to the record profits currently being enjoyed by the oil companies, the government is also enjoying record tax receipts from them as well. And unsatisfied with their record tax receipts, they see the consumer’s displeasure with higher oil prices as an excuse to gain a “windfall tax profit” themselves.

In fact, states that get a cut of profits from oil sales, such as Texas and Alaska, are currently enjoying a large budget surplus. Here in Texas, the surplus is projected at a whopping $10.7 billion. As of yet I haven’t heard anything from our state legislature about passing some of that surplus back to the taxpayers. I guess it’s ok to have a windfall profit if you are a government. I’m sure they will find some way to spend the money...

What this really amounts to is congress playing politics again while Americans struggle with higher energy and food costs, and try to make ends meet; not issues that the average congress critter is personally much in touch with. Once again, we have legislation with a pretty sounding name, but which, as usual, falls in the category of being “full of sound and fury, signifying nothing.”

Look at it this way; is it in the Democrat’s best interests for the economy to be doing well or doing poorly come November? And who is it exactly who is in control in the House and Senate? Who heads the committees? Who makes the rules? Hint: it’s not the Republicans.

So while the Dems may feel your pain, but don’t expect anything but soothing balm in the form of platitudes and blame cast upon Republicans until after the elections in November.

Other Information:

“Pains at the Pump: Raise gas prices, commit a felony”
The Wall Street Journal, 28 May 2007

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