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By Robert Rapier on Jun 10, 2008 with no responses

A Spite-Based Energy Policy

I would be remiss if I didn’t mention the latest attempt to pass a windfall profits tax on oil companies. You know, it isn’t the windfall profits tax itself that bugs me. It is the fact that it wouldn’t be applied consistently across industries, some of which have much higher profit margins. These measures would single out the oil industry for punitive measures, which just reinforces the image that oil companies are manned by people who like kicking puppies and pushing old people down stairs.

I actually spent some time digging around in the legislation to understand how they were defining windfall profits, reasonable profits, and what exactly constitutes “gouging.” You might be surprised (and I explain below). One section actually amends a section on “alcohol, tobacco, and certain other excise taxes” and throws crude oil into that mix. Glad to see that our lawmakers have such regard for the fuel that allows them mobility.

But just about the time I was knee-deep in the legislation, I read that the measure had been blocked:

Senate GOP blocks windfall taxes on Big Oil

The Democratic energy package would have imposed a 25 percent tax on any “unreasonable” profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

“Americans are furious about what’s going on,” declared Sen. Byron Dorgan, D-N.D. He said they want Congress to do something about oil company profits and the “orgy of speculation” on oil markets.

So there you have it. Americans are angry. They are paying more than they like for gasoline. Oil companies are making more money than they think is fair. So let’s base our energy policy on spite. Throw in a provision to sue OPEC and force them to abide by U.S. law, mandate a few alternative energy technologies that aren’t commercially viable, tap into our Strategic Petroleum Reserves in a short-sighted attempt to bring prices down – and you begin to understand why U.S. energy policy is dysfunctional. U.S. energy policy can be summed up as “Cheap energy for everyone, and if it isn’t cheap someone shall be punished.”

Other noteworthy comments:

“The oil companies need to know that there is a limit on how much profit they can take in this economy,” said Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, warning that if energy prices are not reined in “we’re going to find ourselves in a deep recession.”

So, Durbin obviously believes that a windfall profits tax is going to bring down oil prices. Maybe we should do that with the solar industry. Prices are still too high at $4.82/watt for solar PV to be competitive with coal. I had never considered that we might pull prices down to <$1.00/watt by slapping a windfall profits tax on solar firms. It's brilliant, and sure to work.

“We are hurting as a country. We’re hurting individually as Americans … and the other side says, `Do nothing. Don’t even debate the issue,’” complained Sen. Charles Schumer, D-N.Y. “Average citizens are scratching their heads and saying, what’s wrong with Washington,” said Schumer.

Heh. I have been asking myself what’s wrong with Schumer for a while now.

“This is a start. It will help lower prices. It will help working families make ends meet,” Democratic Senate Majority Leader Harry Reid said in a vain effort to keep the bill alive. “It is one small step on a long and uphill road to a cleaner, more affordable energy future.” The bill would have ended tax breaks for big oil companies, imposed a new tax on windfall profits and fought price manipulation by OPEC, Reid said.

Of course ole Harry knows a thing or two about windfall profits. But does he really believe that this will lower prices? Why does he think things will be different this time than last time?

Back to the legislation, though, because I think some version of it’s going to eventually pass. So it was of interest to me to wade through the language. You can find the text of the bill here: Consumer-First Energy Act of 2008.

Of particular interest to me was “SEC. 202. DEFINITIONS.” Here’s what I found:

PRICE GOUGING- The term `price gouging’ means the charging of an unconscionably excessive price by a supplier in an affected area.

Hmm. That’s not very helpful. Fortunately, they followed up with a definition of “unconscionably excessive price.”

UNCONSCIONABLY EXCESSIVE PRICE- The term `unconscionably excessive price’ means an average price charged during an energy emergency declared by the President in an area and for a product subject to the declaration, that–

(A)(i)(I) constitutes a gross disparity from the average price at which it was offered for sale in the usual course of the supplier’s business during the 30 days prior to the President’s declaration of an energy emergency; and

(II) grossly exceeds the prices at which the same or similar crude oil, gasoline, petroleum distillates, or biofuel was readily obtainable by purchasers from other suppliers in the same relevant geographic market within the affected area; or

(ii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs, including replacement costs, outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, petroleum distillates, or biofuel, and is not attributable to local, regional, national, or international market conditions.

Some interesting tidbits in there. I find that it is very important to properly define terms, especially when debating issues. Here, the legislation defines “unconscionably excessive” with terms like “unfair”, “unconscionable” (isn’t this what we are trying to define?), and “gross disparity.” The courts would have fun with this. “That’s a gross disparity! Gasoline was selling down the street for $0.20/gallon less!

I also find it interesting that biofuels would have been covered.

So let’s set the stage and play this one out. A hurricane is bearing down on the coast of Texas. There is a run on gasoline, as people hoard. The local 7-Eleven would normally respond to such increased demand by raising prices, and forcing people to decide just how much they really needed the gasoline. But, as a result of the new price gouging provision, they don’t raise prices. They simply run out of gas. That is exactly what would happen. Is that preferable to allowing merchants to raise prices? In that case, those who have a critical need can still get it. Those who don’t can wait. But due to the price gouging stipulation, even if you don’t really need it, you can buy it up and hoard it from those who do.

How about a definition of ‘windfall profit’? This one’s a gem:

For purposes of this chapter, the term `windfall profit’ means the excess of the adjusted taxable income of the applicable taxpayer for the taxable year over the reasonably inflated average profit for such taxable year.

Reasonably Inflated Average Profit- For purposes of this chapter, with respect to any applicable taxpayer, the reasonably inflated average profit for any taxable year is an amount equal to the average of the adjusted taxable income of such taxpayer for taxable years beginning during the 2002-2006 taxable year period (determined without regard to the taxable year with the highest adjusted taxable income in such period) plus 10 percent of such average.

Let me make sure I understand this. You are proposing that a publicly traded company – not a public utility, mind you – has an unreasonable profit if the profit increases by more than 10% from one year to the next? Do you hear that giant sucking sound? It is the enormous flood of money out of the energy sector and into other sectors – where a 40% year on year increase in profits is just peachy. Are you people serious?

I think it is inevitable, though, that we will try this experiment once again. I believe Obama will win the presidency, and he is all for it. I just hope he has the sense to pick a running mate who knows more about energy than he does (Hint: Bill Richardson).

Obama says he would impose oil windfall profits tax

RALEIGH, North Carolina (Reuters) – Democratic presidential candidate Barack Obama said on Monday he would impose a windfall profits tax on U.S. oil companies as he sought political gain from Americans’ pain over high gasoline prices.

I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills,” the Illinois senator said.

Doesn’t ExxonMobil already pay taxes on their “windfall profits?” Something like $30 billion last year? That windfall belongs to the government, though. I wonder if it is unconscionably excessive?