Gas prices are in the news again for all of the wrong reasons. According to data from AAA, the national average price for regular gas is now roughly $4.33 per gallon. In some states (like California), the average is as high as $5.74 per gallon. These figures represent a 51 percent increase from this time last year. Part of this has been attributed to the impact of the war in Ukraine. However, U.S. government policies toward spending and energy have no doubt been a major cause. And, the response of some members of Congress is to make the cost of gas even higher with a new tax.
U.S. Sen. Sheldon Whitehouse (D-R.I.) and U.S. Rep. Ro Khanna (D-Calif.) have introduced legislation that would impose a steep “windfall” tax on American oil companies. The proposal would create a tax on profits that oil companies make above $66 per barrel. Those profits would be taxed at the staggeringly high rate of 50 percent. The proceeds from that tax would then be used to create another stimulus check – $240 for individual filers and $360 for joint filers.
This proposal is a disaster for a number of reasons and reflects the fundamental misunderstanding many Washington policymakers have about soaring gas prices. The first is the disregard for the role government policy has had on price inflation. The U.S. federal government has spent as much money in the last five years as it did in the prior eight years. The U.S. also imposed strict sanctions after the Russian invasion of Ukraine, which impacted global supply. To attribute price hikes to “corporate greed” as Sen. Whitehouse and Rep. Khanna did, is to ignore the impact of their own policymaking and to miss the point entirely.
This view of economics supposes that the relatively low prices for a barrel of oil until now have been because of corporate altruism on the part of the same companies now being maligned as greedy. The true explanation is a tad more complex than policymakers would care to admit. Oil companies are responding to global economic forces, which at the moment are making it more costly to bring supply to the market. Prices are rising, producers are incurring greater costs and markets are anticipating the need for new sources of supply.
Another contradiction in the way Washington Democrats are approaching this issue is in their discussion of supply. In a public comment, White House press secretary Jen Psaki accused the oil industry of purposely refusing to drill so prices would go up. Psaki cited the fact that there are 9,000 permits not in use. This also misses the mark. While there are unused permits, the federal government has paused leases on federal lands for oil companies. Permits and leases are only one part of a longer production process where the federal government has erected and maintained barriers to increased production.
At a time where U.S. Energy Secretary Jennifer Granholm has pushed oil companies to produce more oil, the administration has a pause on leases and Congress is trying to further dissuade more production. Rapidly ramping up production would create millions of dollars of risk for these companies. Costs will rise, and prices usually follow. Bills like the Whitehouse-Khanna proposal would obliterate the incentive to assume such risks. The messaging is not in sync with actual policy coming from Capitol Hill.
Further, the guidelines set in the Whitehouse-Khanna bill are arbitrary at best. The $66 per barrel threshold is based on “the average price of oil between 2015 and 2019.” No justification was given for why that metric was used or why such a short window of time was used to generate it. In the midst of rampant inflation, a waning pandemic, and conflict in Eastern Europe, the current global market price sits at just under $100 per barrel. A $66 benchmark is out of touch with clear and present realities in the market.
The solution to lagging global oil supply is to incentivize production wherever possible, not to seek out ways to punish those who might. Higher prices are part of incentivizing said production. The solution to rising inflation is to cut government spending, not to create a new entitlement on the back of that aforementioned punishment.
The Khanna-Whitehouse proposal on oil “windfalls” manages to consolidate much of what has gone sideways in Washington in recent years. Not only will it fail to address the current issues, it will exacerbate those problems.
By Daniel Savickas | Taxpayers Protection Alliance – Daniel Savickas is Government Affairs manager at the Taxpayers Protection Alliance.