October 28, 2005
A bad idea whose time has come (again)
By Jim Dallas
I speak, of course, about serious discussions about imposing a new Windfall Profit Tax on oil producers. Although such a tax might curb big oil's rapacious profit seeking, I worry that it will disincentivize oil exploration just when we need those incentives the most. I suppose the real issue is whether a new WPT would be tiered like the Carter-era WPT, which taxed newly-discovered oil fields at a lower rate than "old" oil.
At any rate, the profitability of Big Oil shocks the conscience of even those who would not normally consider, you know, profitability to be shocking to the conscience. Call it too much of a good thing.
Posted by Jim Dallas at October 28, 2005 01:09 PM
| TrackBack
Profits are good. Profits such as those reported in the past few days by the oil companies are extortionate.
The first Windfall Profits Tax was poorly defined, and a new one would probably be worse. As an IT professional I helped administer the WPT back in 1981-82 -- it was what brought me to Houston -- and it was a mess. It was a jobs program for programmers! Instead, we need to have some incentives for major reinvestment in alternative energy sources.
I think that the government should levy more gas taxes (with commensurate low income tax credits). The market price will not fluctuate much with the additional taxes, since most of the increase would actually be absorbed by the current profit margin. Also, the slew of oil subsidies just passed needs to be rescinded. Funny how these "market forces" people always claim that the most lucrative markets always need more help.....but of course expecting the crooks, that get currently get promoted in our system, to be self-consistent is like expecting your cat's next turd to taste like strawberry shortcake.
I'm waiting to see the reaction to the higher utility bills. The ones quite a few won't be able to pay. So much for deregulation.
As for the price at the pump not going up as taxes go up, you must be joking. The price will go up any time the oil companies can find a good reason to raise it. Including tax increases.
Some of the oil companies are reinvesting in alternative fuels. I suspect the only alternative fuel some others are investing in is martinis. Toasting the Bush administration.
In reality, again, we are running out of oil and the oil companies are going to squeeze every last they can out of every last drop of oil.
Baby Snooks,
I'm not joking about the price increase due to a tax not being as large as the tax itself....this is of course contingent on the tax not being larger than the profit margin.
As it is right now, the cost of gas has nothing to do with the cost of its manufacture. It's cost has risen far above what it takes to produce it due to "scarcity", hence the huge windfall profits for the oil guys. This price is essentially stable...it's what consumers will pay for it. If a tax is included, it essentially ends up being a "manufacturing cost" eating into the profit margin. The price certainly will go up as the oil companies reconfigure to maximize total profits. However, for large profit margins, the new equilibrium will absorb most of a modest tax increase into the margin itself. How much is absorbed into the margin is dependent on the size of the tax relative to the profit margin. The margins are huge right now. It's possible to squeeze a pretty large gas tax into the system and not see much of a jump in price.
Of course, the primary caveat is that the leadership of the oil companies are profoundly sleazy. They certainly will attempt to claim that the taxes disproportionately contribute to pump price increases....and people are going to believe them.
Bottom line of taxing the oil and gas industry at this point in time is that it Congress knows better than to bite the hand that feeds it.
In an ideal world, perhaps. But the ideal world came to a screeching halt in 2000 when the Supreme Court allowed the coronation of our first king and created our first royal family.
