With sky-high inflation reminding people of the economic malaise of the Carter years, it appears that some Members of Congress are actually looking back fondly on those times and are actively trying to relive those days. The latest bad idea that Congress is trying to revive is a new tax on oil profits modeled after the tax on oil profits President Carter signed in 1980. This was a bad idea in 1980 and it’s a bad idea today.
This new tax on oil appears to be predicated on two core beliefs:
- U.S. oil producers have been producing too much oil and Congress should disincentivize future oil production.
- The price of gasoline at the pump is too low.
Imposing A New Tax on the Domestic Production of Oil Will Lead to Lower Domestic Oil Production and Higher Prices at the Pump
While the Biden Administration is working to try to get more oil from other countries including Saudi Arabia, Iran, and Venezuela, they refuse to take meaningful steps to increase domestic oil production. This new oil tax bill will further harm domestic oil production.
The Congressional Research Service reports that President Carter’s crude oil profits tax reduced domestic oil production by up to 8 percent and increased dependence on foreign oil by up to 13 percent. This new bill is a bit different, but penalizing domestically-produced oil on the world market would lead to lower domestic oil production over time.
There are a few problems with this approach.
First, 77 percent of Americans would like to replace Russian oil imports with domestically-produced oil. By making domestically-produced oil more expensive, this would make it harder to replace Russian oil with additional domestic oil production.
Second, the biggest reason that global oil prices moderated from 2010 through 2020 was because of new oil production in the United States. The United States added far more to global oil production over the past decade than any other country. In fact, 81 percent of the increase in global oil production from 2010 through 2019 came from the United States.
While this proposed oil tax would make gasoline prices higher in the short term, it will lead to lower domestic oil production in the long term.
The Bill’s Sponsors Apparently Think Gasoline Prices Are Too Low and Could Benefit from a 50-cent per Gallon Increase
Everyone knows that prices increase when the government increases taxes, even Senators Whitehouse and Warren (two sponsors of this bill). This new bill would impose a tax on oil produced in the United States and oil imported into the United States for larger producers and importers. The bill calculates the tax with a formula comparing oil prices over the past few years to current prices. Americans for Tax Reform used the Energy Information Administration’s estimates in the Short Term Energy Outlook to find that the tax could be about $22.50 per barrel of oil.
This oil-price increase could lead to an increase of 50-cent per gallon at the pump. This is because, as the St. Louis Fed estimates, every “$10 rise in the price of a barrel of oil is correlated with an approximately 25-cent increase in the price of a gallon of gasoline…”
At this point, it is not clear if this tax would lead to precisely a 50-cent per gallon increase in the price at the pump, but it’s a good starting point. The problem is that the price at the pump has already increased every month since President Biden took office. Not only that, but the price of oil increased by 87 percent from Inauguration day until Russia invaded Ukraine on February 24th.
While President Biden is not to blame for the entirety of this price increase, he is to blame for being hostile to domestic oil production while encouraging despots and dictators to produce more oil. In fact, last year he and others in the White House tried to put pressure on OPEC + (in effect “OPEC +” is “OPEC + Russia”) to produce more oil.
At a time when oil prices are at historic highs, this is not the time to further increase the price at the pump. Unless, of course, higher oil and gasoline prices are the end goal of your Green New Deal, which we all know is exactly the plan.
Conclusion
Taxing the profits of oil companies was a dim-witted idea when President Carter signed it in 1980. It is no less dim-witted today. This new oil tax could translate to a 50-cent per gallon “tax” on the price at the pump and it would penalize domestic oil producers when trying to sell oil on the global market.
There is never a good time for higher energy taxes, but particularly not ones that exacerbate inflation and weaken our domestic energy security.