High oil and gas prices coupled with record-breaking profits reported by fossil fuel producers have prompted president Biden to threaten a windfall tax on oil and gas companies this week.
Defending himself as a “capitalist”, Biden said in a statement: “Oil companies’ record profits today are not because they’re doing something new or innovative. Their profits are a windfall of war – the windfall from the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe.”
The president urged such companies to make gas cheaper for Americans, adding: “If they don’t, they’re going to pay a higher tax on their excess profits and face other restrictions. My team will work with Congress to look at these options that are available to us and others. It’s time for these companies to stop war profiteering, meet their responsibilities to this country, and give the American people a break and still do very well.”
If it does go through, how will oil and gas assets fare?
“A windfall tax on oil and gas producers would be catastrophic for the economy, energy production and consumers,” claims Bernard McNamee, formerly commissioner of the Federal Energy Regulatory Commission from 2018 to 2020 and currently a senior adviser at McguireWoods consulting.
“A windfall tax will be yet another disincentive against energy producers to expand their business,” he continued, stressing that the tax is a political tool and not an economic one.
Such an assertion is shared by some economists, though the International Monetary Fund has come out in support of a permanent tax on excess profits for fossil fuel companies, claiming it would not reduce investment or increase inflation.
McNamee disagrees, stating that investors will turn away from oil and gas if there’s a cap on profits. Already, the fossil fuel industry is finding it difficult to compete for capital with renewables. “The benefits of renewables are not being passed onto consumers, but rather investors, because the marginal pricing used by the electricity market means wind and solar facilities are getting paid what oil and gas facilities are paid for energy generated, but without the costs oil and gas have to deal with in terms of production,” McNamee explained.
Last month, the European Union tried to counter this by introducing emergency legislation that would cap at €180/MWh the market revenue for infra-marginal energy production, which includes all renewables generation.
Whether or not oil and gas companies have the power to lower the price for their product evidently remains up for debate. What is not debatable is that some companies have revealed significant earnings, with Exxon Mobil’s Q3 $19.7 billion being its highest-ever quarterly profit and Chevron’s $11.2 billion its second-highest ever.
“Higher profits are primarily going to shareholders, who put their money up at risk,” McNamee said. “But long term, I’m sure oil and gas companies would want to invest that money in more oil and gas production, but right now the Biden administration is treating them like the enemy, so they won’t do that. There’s nowhere else for the money to go but to shareholders.”
Countries worldwide have started implementing windfall taxes in response to what many consider price gouging. Greece, Italy, Spain, the UK and Turkey have all levied windfall taxes this year. However, such a tax would face an uphill battle to enactment in the United States Senate.