NCPA - National Center for Policy Analysis


November 8, 2005

Even though pump prices for gasoline and the per-barrel price of oil are receding almost as fast as Katrina's floodwaters, it is now popular to castigate "big oil" for daring to make a profit. Meanwhile, Congress is on the verge doing something stupid -- enacting a windfall profits tax (WPT) on the oil industry, say H. Sterling Burnett, a senior fellow and Christy G. Black, a research associate at the National Center for Policy Analysis.

Though many Americans seem to feel low gasoline and oil prices are their birthright, price controls are disingenuous and counterproductive, leading to reduced investment in oil and gas exploration and possibly gasoline shortages -- the exact opposite of what consumers and the country need, explain Burnett and Black.

The WPT is a bad idea for any number of reasons:

  • It places U.S. oil companies at a competitive disadvantage in the global energy marketplace.
  • The federal government cannot tax the profits of foreign corporations, so only U.S. companies would be affected.
  • Oil companies in Venezuela, the European Union, Russia and Mexico would receive relatively higher profits than U.S. firms whose stock prices would fall.
  • Millions of individual Americans and large institutional investors holding shares of American oil companies would suffer as dividend income and portfolio values decline.

The WPT discourages investment in domestic oil production:

  • The tax tells potential investors their development dollars would be better invested overseas.
  • Additionally, profits siphoned by taxing domestic oil companies will be unavailable for new production and refining capacity investments.

Moreover, history supports concern about the negative effects of windfall profit taxes, say Burnett and Black. According to a 1990 Congressional Research Service report, between 1980 and 1987, "The WPT reduced domestic oil production between 3 and 6 percent and increased oil imports between 8 and 16 percent."

Source: H. Sterling Burnett and Christy G. Black, "Skip the gas profit tinkering," Washington Times, November 8, 2005.


Browse more articles on Environment Issues