President Obama’s budget proposal for a unilateral tax of $10.25 a barrel on all oil consumed for transportation in the United States will be, in effect, a direct tax on gasoline and diesel that will be passed through to the consumer at the pump. The White House’s statement that the tax will be paid by “oil companies” is disingenuous. But this “dead on arrival” consumer tax proposal masks the larger issue for the industry that is also in the proposed budget: the elimination of long-standing subsidies and tax credits that will make U.S. producers less competitive in the world market. This elimination of subsidies and credits is an expropriation akin to the Crude Oil Windfall Profit Tax of 1980.
The Congressional Research Service in 2006 studied the impact of that tax, which was, like the elimination of subsidies and credits proposed by Obama, an excise tax and not based on profits whatsoever. Its findings weren’t encouraging: The tax, which was supposed to recoup for the federal government much of the revenue that would have gone to the oil industry once price controls were lifted, made the U.S. oil industry less competitive.
The tax “had the effect of reducing the domestic supply of crude oil below what the supply would have been without the tax,” the Congressional Research Service reported. “This increased the demand for imported oil and made the United States more dependent upon foreign oil.”
It didn’t help the government as much as predicted, either. Instead of the $393 billion it was projected to produce in gross tax revenues between 1980 and 1988, it generated just $80 billion.
The latest version of the tax, the elimination of subsidies and credits, will hasten the abandonment of stripper wells which produce more than 1.0 million barrels of oil per day in the United States. Allowing these wells to continue production is in our national interest and encourages the maximum recovery of resources already tapped. It makes little sense to abandon otherwise economically recoverable crude. More importantly, the elimination of the subsidies and credits would spot foreign producers a significant cost advantage and lead to less oil and gas development as the Congressional Research Service noted in a 2012 report. And just as happened in the 1980s, it would drive down U.S. production and make the United States more dependent upon foreign crude oil.
The Windfall Profit Tax was levied specifically on domestic crude oil production. As with Obama’s proposal to eliminate subsidies and credits, it wasn’t linked to profits, but to barrels of oil produced. And if the similarity leads anyone to think energy producers are making “windfall profits” now, think again.
The U.S. oil industry has lost more than 200,000 jobs and, at a minimum, $200 billion of direct contribution to U.S. gross domestic product. Billions of dollars of capital have been lost, and the impact of this loss on GDP is yet to be felt. The elimination of subsidies and credits will simply make it worse.
I use the term “expropriation” with deliberation. Changing the rules on an industry like this conjures what happened to U.S. producers in Russia under Vladimir Putin; to U.S. producers in Libya under Qaddafi; U.S. producers in Mexico; U.S. producers in Venezuela, and now in Israel.
It is, pure and simple, an expropriation. Imagine the United States changing the tax regime on iPhones, Microsoft Windows or aspirin.
Earlier on this blog, I called for the restoration of an oil import quota that would protect the domestic industry from the effects of predatory pricing by OPEC and also protect the consumer from the massive price hikes and dislocations caused by supply shortfalls in the world market.
Those import restrictions would accomplish conservation and encourage the development of alternatives to crude oil as a transportation fuel. Eliminating the current subsidies and credits is an excise tax, and an excise tax is a poor tool and that will cause lasting damage.
Ed Hirs teaches energy economics in the University of Houston’s College of Liberal Arts and Social Sciences. In addition, Hirs is managing director for Hillhouse Resources, LLC, an independent exploration and production company. He founded and co-chairs an annual energy conference at Yale University.
