Why an unexpected profit tax would be a disaster for American oil
Why an unexpected profit tax would be a disaster for American oil

Why an unexpected profit tax would be a disaster for American oil

The Biden administration has made no secret of its contempt for traditional energy sources derived from petroleum sources, and instead prefers so-called “green energy” alternatives. In fact, on the campaign track, candidate Biden was explicit in his desire to end the oil industry in America as it currently exists –

“Number one, no more subsidies to the fossil fuel industry. No more drilling on federal lands. No more drilling, including offshore. No opportunity for the oil industry to continue drilling, period, ends, number one.”


On another occasion, candidate Biden went so far as to say so he would put fossil fuel leaders in jail.

Over the past year in pursuit of their goal of forcing an energy transition to “clean energy”, the administration has implemented additional steps designed to make it more cumbersome and expensive for oil and gas producers in America. Among them-

  • Radical changes to oil and gas leasing on federal lands.
  • Vise versa Methane from the Trump era rules.
  • Canceled Keystone XL pipeline
  • Put decision-makers in place at central federal agencies (SEC, Treasury, FERC) that are biased toward the oil industry. And those who want to issue rules that impair its ability to obtain funding, or impose heavy fines, and with the use of extended CO2 impact definitions, make it impossible to obtain permits.
  • Tried to introduce CO2 price equalization in the stopped “Build Back Better” tax scheme.

Although the Biden administration has struggled to replace Russian oil and gas after banning them last week, they have consistently refused to consider contacting U.S. producers to encourage the development of new supplies. As I mentioned earlier Oil price article, the president has sent envoys to Venezuela, openly discussed buying oil from Iran and trying to exhort Saudi Arabia to increase its production. All to no visible benefit.

On a recent trip to Fort Worth, Texas, to visit veterans at the regional VA hospital, near the heart of the oil and gas country, the president chose not to meet with oil and gas executives to try to bridge part of the distance between them. Overall, the Biden antipathy towards the domestic oil and gas industry has been termed a war on fossil fuels. With legislation now being drafted, it appears to be intensifying as opposed to letting go, while America is rolling below gasoline prices, which in many cases have tripled from a year ago.

Last week, a couple of senators sympathetic to the administration’s goals began drafting a bill that would revive a decades-old tax system to expropriate what they describe as “unfortunate” gains from the current high-price era. Senators Ron Wyden-D, Oregon, and Senator Elizabeth Warren-D, Massachusetts unveiled their proposal that would remove 50% of profits from oil companies and give them back to low-income taxpayers while keeping gas prices at or above their prices. current levels. The Wall Street Journal summarized this Wind Fall Tax-WPT proposal in an article last week-

“The unexpected tax proposal shows that Democrats do not want American companies to produce more oil, so gasoline prices fall. They want higher gas prices, so reluctant consumers buy more electric vehicles. They can not say this directly because it would be politically suicidal. in an election year with the average gas price above $ 4 per gallon, so they do it indirectly through taxes and regulation. “


In the rest of this article, we will take a quick look back at the last iteration of this idea from the 1970s and 80s and draw some conclusions about what it can herald in the modern era if it becomes law.

Windfall Profits Tax of 1980

Following the Arab oil embargo of 1973, prices rose to historic highs and concerns began to rise that oil companies were making unfair profits. President Nixon introduced oil price controls in 1974, leading to the era’s famous gas pipelines from shortage. In 1980, President Carter took steps with the Windfall Profits tax to remedy the supply situation but ensure that the oil companies did not make unfair profits. As with most federal interventions in the markets, the WPT did not achieve its goals and produced further unintended consequences that harmed U.S. companies. Among its main flaws

  • It was actually an excise duty to be paid when a barrel of affected oil was produced and before any profit was taken.
  • It created oil classes in the domestic market as it really just expanded the mindset of price control.


  • Further, it discouraged U.S. production relative to global sources. Capital for drilling fled (North Sea and incipient Deepwater GoM, which had significant royalty exemption) thereafter, and will again to greener pastures.
  • Production fell below the original WPT for many reasons, and will again if this iteration grows legs and goes. Thanks to a rapid build-up of crude oil from Alaska, US production actually increased for a short period under the WPT. However, oil from Alaska peaked in 1985, and U.S. production began to decline slowly until the early 2000s, while foreign imports rose sharply. Then, with the advent of fracking and the rise of deepwater production, American production began to rise to all-time highs.



The way forward for the WPT and the implications of its passage

This tax proposal will be opposed by any Republican in the Senate subcommittee Tax and IRS supervision, where in the normal course it would first be discussed and marked, and voted out by the committee to the entire Senate. There are miles left before it can be considered, and there is shovel that it has no chance of getting out of committee. Our view is that the party in power now has another 10 months to pass it, if one counts that paralyzed-and-session and assumes that Republicans will regain control of Congress. Otherwise, they have years and will pass on everything they have dreamed of for decades. It is a long road with many turns.

We now have some of those details of this bill. It will be a nightmare to manage, and since it is modeled at higher speeds than the original 1980 version, it will bring back many of the same flaws. Like the other, it will certainly reduce production and imports to this country. Oddly enough, it tries to address the tax advantage that imports had under the old system by treating imports in the same way as domestic production.

It is very unlikely that foreign producers will allow the US government to catch an “unexpected” and will adjust their sales prices to include the tax, which will raise the final prices to consumers even higher. Expect it. We have an example to follow.

The Brazilian IPI is a good example. It scales up to 55% on imported vehicles with a displacement of more than 2 liters. The noble goal is the protection of their domestic car production, which randomly sells at import price levels, raising prices for all Brazilians. The sheikhs will do the same to protect their industry. The result will be less oil and gas for Americans and will play right into the handbook of the green new deal movement, making the final product more expensive.

On the domestic side, fewer leads will meet the thresholds of Internal Rate of Return (IRR) and Rate of Capital Efficiency (ROCE), a study under which the outlook competes for capital, meaning they will not move forward. Capital does not idle. It seeks a return and will flee. Oil companies that have learned the private equity and venture capital lesson from a few years ago will only finance what cash flow will carry. They will increasingly look beyond our shores to put their capital where it is more valued. American production will inevitably wither in this scenario.

Drivers will pay more. One of the goals of this administration is to make fossil fuels prohibitively expensive in order to accelerate the “transition to renewable energy.” Renewable energy is a hollow promise as the world learns on a daily basis. It will not deter the government from spending “confiscated” oil money on green dreams, such as “stimulus” checks.

People love stimulus checks and usually love the politicians who give them. For many with a check in hand, the link between it and higher prices on everything is intangible. Hence the current brouhaha over inflation. Pumping $ 6 trillion into the money supply in half a year made it predictable. Now that the stimulus check is gone and gas prices are at record highs, people are saddened and politicians want to soothe them. With one more check.

Your takeaway

As I have noticed in former Oil Price articles, thanks to underinvestment in upstream energy sources, we are moving into an era of less available and more expensive energy. The oil industry can produce more, but it must be encouraged to do so, not harassed. It is still unknown whether leadership can step back from the green energy narrative to engage with producers who deliver the great balance between the world’s energy sources. There was some reason for encouragement last week at CERA week in Houston, when some lower-level Biden bureaucrats met with energy people. Vinai Thummalapally, acting director and chief executive of the U.S. Trade and Development Agency commented after the meeting

“I imagine this particular situation as a fire in the kitchen, which helps finance energy projects abroad. We turn it off. It will be turned off. We must continue to handle the rest of what the house deals with in terms of all priorities. ”


If you unpack that ‘word salad’ of mixed metaphors, it does not reveal much reason for optimism, but they spoke at least. A kind of progress.

By David Messer for Oilprice.com

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