Taxing Power Manufacturing Gained’t Decrease Fuel Costs

LOS ANGELES, CALIFORNIA – High gas prices are displayed at a downtown Chevron station in Los … (+) Angeles, California. The national average price of one gallon of regular self-service gasoline rose to a record $5.09 on June 16 amid the Russian invasion of Ukraine. (Photo by Mario Tama/Getty Images)

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Faced with soaring gas prices that have now hit $5 a gallon, President Joe Biden is under tremendous political pressure to appear part of the solution instead of the root of the problem. But rather than supporting policies that incentivize energy production and alleviate supply shortages, his administration continues to punish energy producers as part of a baseless narrative about profiteering.

This week President Biden sent a letter to oil executives demanding they increase production of refined products to combat high prices, saying the industry’s high profits are “worsening the pain” Americans are feeling at the pump. That’s his solution to address demand that is outpacing supply. But the message from the administration has given hope to some progressive Democrats willing to go one step further and implement a punitive tax policy to provide relief to consumers.

Massachusetts Senator Elizabeth Warren has repeatedly called for punishing American energy producers … (+) for high gas prices, recently tweeting that Congress must tax “Big Oil” to “crack down on corporate price gouging.” (Photo by JOSH EDELSON / AFP) (Photo by JOSH EDELSON/AFP via Getty Images)

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U.S. Senate Finance Committee chair Ron Wyden is introducing legislation that would place a surtax on oil company profits. Similarly, Sen. Sheldon Whitehouse and Rep. Ro Khanna have introduced a similar bill, and legislation from Rep. Adam Schiff would tax corporate revenues in place of the federal gas tax. Sen. Elizabeth Warren piled on, tweeting that Congress must tax “Big Oil” to “crack down on corporate price gouging.”

How would such a tax work? According to reports, Wyden’s bill would mandate a 21% additional tax on the excess profits of oil and gas companies with more than $1 billion in annual revenue.

Pointing the finger at energy producers might make for good retail politics, but it lacks any foundation in reality. It could actually worsen the current energy crisis, discouraging long-term investment in energy production. It also does nothing to lower gas prices or address demand. As President Ronald Reagan eloquently put it, “If you want less of something, tax it.”

First, consumers are facing high gas prices for a wide array of reasons. Increasing demand as the country emerges from COVID-related restrictions, supply shortages, and inflation, combined with the geopolitical turmoil caused by Russia’s war with Ukraine, have all conspired to drive up gas prices. Of those causes, the most fruitful course of action would be to increase America’s domestic energy production, a tactic the Biden administration has asked the industry to take but has been unwilling to support with meaningful policy.

Instead, the president has looked elsewhere for energy. In March, he sent emissaries to Venezuela to discuss lifting sanctions and getting Venezuelan oil flowing to foreign markets. In recent days, the White House confirmed that the president would meet with Crown Prince Mohammed bin Salman in Saudi Arabia this summer, a man he vowed to turn into a “pariah” on the 2019 campaign trail, partly to argue for increased oil exports.

Meanwhile, the Biden administration has erected regulatory disincentives to oil and natural gas production. This hostility toward the oil and gas industry has created serious doubt about the long-term outlook for energy producers. Consequently, investments in production, refining, drilling, and transportation projects have fallen sharply. In other words, Biden’s anti-fossil fuel agenda is leading to higher gas prices, not lower ones.

Second, the narrative of “windfall profits” is pure fiction. Today, profits from the S&P 500 energy sector stand at 10 cents on the dollar, 3 cents below the average of the overall index and substantially lower than other sectors such as information technology (25 cents), real estate (18 cents), financials (19 cents), and communications (17 cents).

We’ve been down this road before with bad outcomes. In 1980, President Jimmy Carter established an excise tax of 70 percent on the value of oil sales exceeding $12.81, a policy that resulted in lower domestic production and higher reliance on imports.

When the Arab oil boycott caused serious shortages of fuel in the United States, many citizens … (+) protested. There were long lines at gas stations and people could buy gas on only certain days of the week. In this case, people carry signs condemning Pres. Carter and his administration’s handling of the energy crisis. (Photo by © Wally McNamee/CORBIS/Corbis via Getty Images)

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With oil and gas production requiring large capital investments over a multi-decade period, establishing a new tax will only discourage more energy supply. That’s precisely what happened under President Carter’s profit tax, as detailed by a 2018 paper in the American Economic Journal that found Carter’s tax reduced the total output of American wells already in operation.

The past clearly shows that taxing energy producers as a way of helping consumers is an exercise in political grandstanding, not sound policy. Instead of lowering gas prices, it discourages investment in tomorrow’s energy supplies.

After all, though, the Biden administration has admitted that its aim isn’t really to lower gas prices but to advance America’s transition from fossil fuels. During a recent visit to Tokyo, for example, Biden argued that today’s high gas prices could be a blessing, leading to a world that’s “stronger and less reliant on fossil fuels.”

If the president wants to help consumers at the pump, the solutions aren’t complicated. We need a clear, coherent energy strategy that returns the U.S. to a long-term energy player, starting with giving the oil and gas sector more access to public resources onshore and offshore, more infrastructure such as pipelines, and clear policy signals that affirm that fossil fuels have a role in America’s future. A new tax isn’t the answer. More energy supplies are.