In the run-up to the midterm elections, President Joe Biden couldn’t resist taking a shot at one of the Democratic Party’s favorite scapegoats. As Americans continued to face high prices at the pump, Biden blasted oil and gas companies for “war profiteering” off Russia’s invasion of Ukraine.
He raised the prospect of a so-called windfall-profit tax on the oil industry, which already exists in the United Kingdom and Europe. While Biden did not explicitly endorse a plan, congressional Democrats have been pushing various proposals for months. And It probably did the Democrats some good at the polls on Tuesday, since Big Oil is an effective Democratic Party boogeyman.
Biden is correct that oil and gas companies are minting money, and they do indeed seem out of touch with the impact of energy inflation on ordinary households. Consider Exxon Mobil Corp. boss Darren Woods: Announcing the company’s highest-ever, $19.7 billion quarterly profit at the end of October, Woods acknowledged the pressure to return funds “directly” to the American people. “That’s exactly what we’re doing in the form of our quarterly dividend,” he declared.
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“Can’t believe I have to say this,” the White House shot back via Biden’s Twitter account, “but giving profits to shareholders is not the same as bringing prices down for American families.”
Actually, American families can invest in a share of Exxon Mobil for a little over $110, commission free on many online sites, but the Biden White House was not about to point that out. It would rather turn these unpopular companies into political targets.
But contrary to what the White House suggests, they don’t set the price for oil. Global commodity markets set prices by factoring in war, recession, production capacity and supply shortages. And those prices can go down in a hurry, as they did during the pandemic.
The Biden administration doesn’t seem worried about details like that. The president is no friend to Big Oil, and arguably has done as much as anyone to speed the transition away from fossil fuels, including the passage of landmark climate legislation. But the current short supplies and high prices in the U.S. have as much to do with ex-President Donald Trump, who claimed to be a champion of dirty energy. The domestic industry fared a lot worse under his administration than is commonly understood.
Trump’s efforts to roll back environmental regulations were chaotic and beset by legal challenges. His rash decision to withdraw from the Paris Climate Accord was no favor to the oil industry, either. The 2015 agreement provides a useful framework for dealing with climate change, which companies like Exxon have supported by reducing emissions and investing in carbon capture and storage.
Trump reversed promises to expand offshore production, failed to revive the coal industry despite a lot of talk and perpetuated the long-standing requirement to water down motor fuel with ethanol — an anti-free-market policy beloved by farm-state Republicans because it subsidizes politically favored farmers and agribusinesses.
The perpetual undermining of Big Oil in the U.S. has discouraged investment in the domestic market. America needs these companies to be strong, so they can increase energy production and, with it, the nation’s collective security.
What will it take to stimulate domestic investment? Certainly not a government seizure of “excess profits.” Curbs on exports, another restriction reportedly under consideration, similarly would only weaken the case for U.S. production. The Biden administration’s hostility to interstate pipeline investments also is counterproductive.
The biggest factor in favor of additional investment is simple supply and demand. Short supplies and sustained high prices are exactly the conditions producers need before they can reasonably green-light large-scale capital expenditures in the U.S.
If anyone wants evidence that producing energy at home is better than trying to get it from countries that don’t share America’s national interests, consider one of Biden’s recent foreign policy gaffes. The president looked foolish when the OPEC oil cartel cut production last month not long after he begged Saudi Arabia, its de facto leader, to boost the flow.
Russia, too, has been exposed as an untrustworthy supplier after cutting off energy supplies to Europe. Even if Vladimir Putin’s war in Ukraine ended tomorrow, Germany and other countries stung by the warmongering Russian leader now recognize that they must find different sources of energy. The reality is that America and other developed economies will need fossil fuels for many years to come.
Perhaps the best argument against a windfall profit tax on the oil industry is that America already tried it, in 1980, and it didn’t work. Predictably, it increased red tape, reduced domestic production and made the U.S. more dependent on foreign oil, consequences that contributed to its repeal in 1988.
Then, and now, making U.S. producers less competitive is self-defeating and counterproductive. Let’s not make the same mistake again.