Jae C. Hong/AP Photo
Gas prices are displayed in front of a billboard advertising HBO’s “Last Week Tonight,” March 7, 2022, in Los Angeles.
There’s a certain grimness to writing about U.S. public policy these days, in that you have to couch any prescriptions within the realities of our multi-veto-point system and a status quo preserved in amber. When the chair of the Senate Energy and Natural Resources Committee (Joe Manchin) appears to think that electric-vehicle drivers have to wait in line for a new battery every time they use up their charge, the expectations of achieving anything useful on going green must be severely downgraded.
It is in that spirit that I write about the bicameral proposal for a windfall profits tax on oil companies, which absent numerous bolts of lightning striking in Washington, D.C., isn’t going to happen. That said, what’s critical about this policy, introduced by Sen. Sheldon Whitehouse (D-RI) and Rep. Ro Khanna (D-CA), is how it actually builds on what Democrats and Republicans, on a bipartisan basis, did successfully at the outset of the pandemic to help people suffering from the economic fallout.
What’s important about that bill, in short, is not the tax; it’s the rebate. The proposed tax just finances this rebate, which the bill’s sponsors estimate at approximately $240 for every eligible single tax filer, and $360 for every eligible joint household. The rebate phases out at $75,000 in annual income for individual filers, and $150,000 for joint households.
This is certainly a small amount compared to the three stimulus checks handed out to Americans during the pandemic, which totaled $3,200 per person. But this rebate, which would go up or down depending on the price of oil, is essentially a shock absorber for inflation. When inflation is high, people would get a bigger rebate. When it recedes, the rebate would phase out.
It’s a starkly different approach to inflation than the Larry Summers/Jason Furman crowd has counseled. They have insisted that inflation is the sole product of stimulating too much demand from COVID relief among the lower and working classes, and what’s needed is monetary and fiscal austerity to push those Americans toward or back into the poorhouse, thereby stifling demand. The Summers cabal has been largely successful: We’re going to see a Federal Reserve rate hike this week, the first of several for this year, and in the deliberations going on now on Capitol Hill, everything from Child Tax Credit benefits to health coverage for the poor is being scaled back.
It’s worth questioning whether pulling away the support that millions of people need to keep up with the rising cost of living is a sound economic or moral strategy. If inflation is a by-product of the economic pain that resulted from the pandemic, then making sure people can cope with it is a far better strategy, in a way that flows up or down depending on how much pain there is.
Oil is not the only product experiencing inflation at this time, of course. But it’s the largest single factor driving up prices, and provides a good rough estimate for overall inflation. Giving people an offset to the increases in energy prices would prevent more significant cutbacks to consumer spending and an economic downturn, which incidentally would be pretty bad for oil companies along with most other businesses.
Ideally, the rebate should be higher. As the best estimate is that inflation costs households around $276 per month, the proposed rebate wouldn’t even cover two months of household inflation. But since it’s energy-focused, and that’s just a component of the overall mix, it at least comes closer to covering that particular rise in costs.
Providing funding to Americans is exactly what Congress did in 2020 and 2021 in three bills that tried to solve an economic crisis by giving people money.
The rebate is not really where the focus of discussion has been on this policy, though, either from its supporters or its detractors. But providing funding to Americans is exactly what Congress did in 2020 and 2021 in three bills that tried to solve an economic crisis by giving people money. This kept millions out of poverty and created economic security, in some cases for the first time in peoples’ lives.
Because of how it’s financed, however, the energy inflation rebate debate will be much more focused on whether oil companies are taking “windfall profits.” There are several pretty good arguments for that. First of all, while the price of West Texas Intermediate crude, the main benchmark for oil in the United States, has fallen over $20 a barrel in the space of a week, gasoline prices have spiked from $4.06 per gallon to $4.32 per gallon over the same period, according to AAA.
Second, this bill is targeted mostly at the Big Five oil companies (ConocoPhillips, Chevron, Devon Energy, ExxonMobil, and Hess)—those that produced or imported at least 300,000 barrels per day as of 2019. Those companies have consistently enjoyed high profit margins, particularly in the past year, while their tax rates have been negative, according to research from Common Wealth UK. Moreover, an astonishing $200 billion in Big Five oil company profits has leaked out to shareholders since 2015, through share buybacks and dividends.
And, of course, the source of the current profit is not oil company ingenuity but an exogenous shock constricting supply from Russia. A windfall profits tax, then, is not punishing success but transferring the wealth generating from this shock so that the public who has to pay out the bounty gets to recapture some of it.
Now, the chief complaint is that this will reduce incentives to drill at a time when we need more drilling to make up for lost Russian supply. An old Congressional Research Service report shows that Jimmy Carter’s windfall profits tax on oil ended up reducing domestic oil production by between 3 and 6 percent.
But the rebate, the financing for the rebate, and how to stimulate oil production are all separate questions. There are other options to grow the amount of available oil in the short term that complement the policy of helping people absorb high inflation.
One of the more celebrated ones, mainly because it can be done through President Biden’s own authority, comes from the advocacy group Employ America. It would use the Strategic Petroleum Reserve to guarantee demand for additional production, the Exchange Stabilization Fund to finance capital expenditures, and the Defense Production Act to prioritize production of key materials needed in oil fracking. It’s complex, so you should read the explanation at the link.
This has gotten a lot of attention in liberal wonk circles, primarily because it doesn’t depend on congressional approval, and it would reverse the current cycle of underinvestment in oil and gas due to Wall Street investors wanting to preserve high prices by curtailing production.
While this complicated series of measures is intended to reduce prices by boosting short-term production, if it doesn’t work, a backup rebate to at least compensate those being priced out of transportation or home heat is appropriate. If it does work, then the rebate phases out anyway, as the windfall profits vanish.
Ultimately, if you want the federal government to have the power to turn oil on or off like a spigot, rather than being at the mercy of oil executive decision-making, you’d need to nationalize the oil companies, a common practice around the world. This would also make it easier to eliminate the industry safely once renewables reached a critical mass. That’s probably preferable to a series of government guarantees on oil production that would prove hard to unwind politically once a powerful industry sees them as an entitlement.
The tax-and-rebate proposal doesn’t necessarily take a side in that debate, though it would make oil drilling amid high-end price spikes less lucrative. All of these possible policies need a green-transition component to make them sustainable. But only the rebate option takes the position that you can solve economic problems through giving people money to weather them.
