Why the oil windfall is different (and shouldn’t be taxed)
With gasoline prices soaring, there are now more and more calls for the oil industry to pay an additional “windfall” tax on their profits. As a card-carrying granola eating, metropolitan loving liberal, I should be all for this. However, I think this windfall is different.
DISCLAIMER: I currently own a very small amount of stock in an oil company (20 shares). I don’t believe this is influencing me, but you should be aware.
This windfall is different because of the long term future of oil. Before I bought my 20 shares in an oil company, I was reading articles about gas car bans, calls for banks to divest their holdings in oil and gas and the increasing sales of EVs. All of these articles are framing a future of much smaller oil companies within 10–20 years.
Part of being an executive at a company is protecting the shareholder’s equity in the company. By law, they can not just say, “We want to help stop climate change, so we are shutting down.” That would be a breach of fiduciary duty (the requirement that business leaders make decisions that would profit their companies). If the oil leaders are looking at a future where oil is much less desirable and their earnings and profits would fall dramatically, they need to protect shareholders. If they can’t figure out a way to change those distant future issues, the only solution is to focus in on the short term: cut costs, boost profits. Indeed, that’s what they’ve done.
“Some 1 million bpd of refinery capacity in the U.S. has been shut permanently since the start of the pandemic, as refiners have opted to either close losing facilities or convert some of them into biofuel production sites. Globally, refinery capacity is also stretched thin, especially after Western buyers — including in the U.S. — are no longer importing Russian vacuum gas oil (VGO) and other intermediate products necessary for refining crude into gasoline, diesel, and jet fuel.”
From: oilprice.com
On top of their cost cutting, they are benefiting from current market conditions that are unlikely to continue: rapid post-pandemic economic growth and the sanctions on Russia reducing oil production.
It may sound like I’m now making a case for a windfall tax, but let’s put all of these factors into a broader context. In fact, let’s compare it to another beneficiary of short term spikes: Clorox. Clorox sales took off at the beginning of the pandemic as people bought extra supplies of cleaning products to fight the spread of the virus. Profits were up and Clorox stock shot through the roof. Long term though, Clorox sales are returning to their pre-pandemic sales numbers. Oil is different. Like I pointed out at the beginning of this article, we know that oil demand will decrease (assuming politicians have the will to hold the course against climate change). Oil companies aren’t imagining a future where they return to normal, but rather a future where they really may be out of business.
Therefore, if oil companies don’t boost short term profits, their stocks will slide. If they continue to be low profit, they’ll cut more investment, which will start a vicious circle of less and less oil on the market driving prices up anyway.
On the other hand, if we do tax these short term profits, how might the companies react? They will probably react by cutting investment to buoy their profits and protect their shareholders. That would also start a vicious circle of less oil on the market and higher prices.
As I see it, we are damned if we do and damned if we don’t, so we shouldn’t waste energy on making a windfall tax that ultimately will hurt us in the medium term.
