Shades of Windfall Profits Tax Again Stalk Energy Industry

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--In a move announced as having the goal of defending consumers vs. Big Oil, governments including the U.S., the U.K. and India are considering or have implemented windfall profits taxes on oil companies.

With oil prices currently hovering around $120 and stuck well above $100 for months now, both houses of Congress are reportedly considering legislation aimed at taxing what are considered excessive oil company revenues. Money collected from such a levy would fund rebates to taxpayers, to ease their economic pain in a time of rising inflation.

One such proposal currently before the House is called the Big Oil Windfall Profits Tax Act, aimed, as the name implies, mainly at the largest oil companies. The act would take the average Brent crude oil price between 2015 and 2019, which was $66 per barrel, and tax any corporate revenues based on prices higher than that--which are currently about double. Sponsors believe this could raise $35 billion to $40 billion per year, to be rebated to consumers.

Unsurprisingly, the industry thinks this is a bad idea, believing there are more sustainable and industry-friendly ways to drop oil prices. Blaming oil companies for how the free market works makes for strong rhetoric but is not good policy, they say. Some have stronger opinions than others.

"It's pure stupidity," says Bryan Sheffield, previously of Parsley Energy (Austin, Texas), now managing partner of Formentera Partners (Austin). In an email interview he contended that reducing cash flow from exploration and production companies (E&Ps) would "lead to less development, and that leads to even higher prices!"

Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association (Austin) added a lesson in free markets, and noted that no one wanted to help oil companies when prices went negative in 2020. "U.S. producers are subject to unique market factors, including extreme periods of volatility, and have no control over the price of oil and natural gas. There were also more than 100 oil and natural gas company bankruptcies in 2020, and U.S. producers lost tens of billions of dollars due to global demand destruction from COVID-19."

"Manipulating free market principles and instituting a politically-motivated windfall tax would set a dangerous precedent. Private sector growth and innovation relies on a tax code that is stable, predictable and not punitive," he warned.

From Russia, with Embargoes
The Biden Administration has blamed high oil prices on embargoes on purchasing oil and gas from Russia, the world's second-largest producer. Those restrictions, in reaction to the country's invasion of Ukraine, have removed millions of barrels of oil from the marketplace just as demand was starting to regain strength with the easing of COVID-caused travel bans.

And while the embargoes have indeed exacerbated the supply crunch, they're far from the only issue. During 2020, investment in new production ground to a halt as demand dried up and new ardor on the part of ESG-demanding investors shifted investments away from oil and toward renewables. With an eye toward voter concerns over inflation arising from higher energy costs, the Democrats have been accused by many of trying to buy votes with the tax-and-rebate strategy of the proposed tax bills.

Déjà Vu All Over Again
The windfall profits approach has been tried before (1980-88) and was threatened other times (2005-6). That time the tax "was a percentage of the difference between the price of oil and a base price indexed for inflation (70% for integrated oil companies; 50% for others)," according to a March 23 report by the Congressional Research Service.

The tax was imposed when crude oil price controls, which had been established in 1971, were removed. There were concerns that oil companies would profit excessively from free market trading.

On that topic, Longanecker added that the 1980 tax actually resulted in a drop in domestic production, leading to an increase in foreign imports. Plus, "The windfall profits tax enacted during the Carter Administration also raised far less revenue than promised and was ultimately repealed."

Some Governments Are Already Profiting
Oil-producing states are reeling in record taxes in 2022. Texas, for example, is reporting record revenues. "Comptroller Glenn Hegar reported that $666 million in oil production taxes was paid in April, the highest monthly amount in Texas history and 99% higher than April 2021. That was followed closely by $595 million in May, which was 64% above May 2021 collections," said the Midland Reporter-Telegram.

Roadblocks
Passage of these bills is far from certain. If enough Democrats, like Senator Joe Munchin (D-WV) from oil-producing states vote no, especially in the Senate, the bills are likely to die.

In May, the U.K. announced plans to impose a 25% windfall tax on oil and gas companies. For more information, see May 27, 2022, article - U.K. Imposes 25% Windfall Tax on Oil & Gas Companies.

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