A windfall profit tax on oil companies would raise prices and hurt consumers
May 23, 2007 -
John Rankin, 202-224-4208
WASHINGTON – U.S. Senator Sam Brownback today argued that windfall profit and price-gouging taxes on oil companies are based on a deeply flawed understanding of the factors that determine gas prices and would harm consumers by increasing prices.
“The government already makes more off gas prices than the oil companies,” said Brownback. “In the past 30 years, federal and state governments have collected more than twice as much in gasoline taxes as the major American oil companies have earned in profits. Politicians looking at high gas prices might be tempted to punish oil companies, but this approach is out of sync with economic reality. A windfall profit tax on oil companies would hurt consumers by raising prices, limiting supply and discouraging investment in new technology.”
At a hearing of the Joint Economic Committee, Brownback cast doubt on the premise that high gas prices result from price gouging and argued that a windfall profit tax would worsen the very problem it intends to solve. Key points included:
Oil Companies Have Little Control Over Gas Prices
Crude oil prices, as determined by worldwide energy markets, play the largest role by far in determining the price of gas at the pump.
A Windfall Profit Tax Would Raise Consumer Prices by Limiting Supply
A windfall profit tax on oil companies would remove much of their profit motive and likely lead to supply reductions by making it less profitable to look for oil in locations with higher extraction costs.
Unless the government resorted to Soviet-style price controls, by simply raising prices the oil companies could recoup some of the revenue they would lose to a windfall profit tax.
The net effect would increase costs for consumers while discouraging further U.S. exploration, production and investment in new technologies and energy sources.
Gas Prices Have Declined as a Share of Consumption and GDP
The relative cost of a gallon of gasoline, as a portion of household consumption, declined 38 percent between 1981 and 2005.
As a portion of per capita GDP (a good proxy for average income), the relative cost of gasoline declined 45 percent from 1981 to 2005.
Price Increases Result from Worldwide Changes, Not Oil Company Greed
Rising demand, especially from China and India, is a driving force behind the recent rise in crude oil prices.
Additional factors include limited refining capacity in the U.S. and the requirement of a diverse mix of fuel blends to meet air pollution standards.
Oil Companies Experience Frequent Downturns
A comparison of the difference between return on investment for U.S. oil companies and all other manufacturing companies reveals that oil companies have experienced inferior returns almost as frequently as they have experienced above-average returns.
Mergers Help Consumers by Increasing Efficiency and Capacity
Consolidation and mergers in the oil industry have led to larger refineries and improved innovation and efficiency, which benefits consumers through increased supply and lower production costs.
It is remarkable that despite growing demand, and the fact that no new refineries have been built in the U.S. since 1976, gas prices have actually decreased as a portion of household consumption and per capita GDP.
Brownback is the Senior Republican Senator on the Joint Economic Committee.
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