April 28, 2006


Well, Well: You don't have to hate oil companies to want an excess-profits tax (Michael Kinsley, April 28, 2006, Slate)

Taxes are not a form of punishment. And you don't need to find wrongdoing to justify a special tax on their profits. You only need a pocket calculator—to figure out how much they owe.

The math is rough, but it's not complicated. About a third of the oil consumed in the United States comes from wells in the United States. That's about 150 million barrels a month. The oil industry refers to this as "production," but a more accurate term would be "extraction." Nature produced the oil and charges nothing for it.

Oil is oil, no matter where it comes from, so the price of those 150 million barrels will go up and down with the price of the 300 million or so barrels we import every month. A year ago, that price was about $46 a barrel. Now it's more than $70 a barrel. The cost of extracting those 150 million American barrels depends a lot on how you figure it and varies well by well. But we can make a few reasonable simplifying assumptions. First, no one was forced to pump oil at gunpoint a year ago. So, however you figure it, in April 2005 it must have been possible to extract 150 million barrels of oil out of American ground for less than $46 a barrel, including a reasonable profit.

Costs change. Wells have to be pumped harder or they run dry. Gradually, we are running out and need to import more and more. But these changes are nothing like the fluctuations in the price for which oil can be sold. If 150 million barrels could be extracted a year ago for $46 a barrel, it shouldn't cost much more than that to extract another 150 million barrels in 2006.

Let's round off a bit and say that American oil extractors are getting an extra $25 a barrel. For 150 million barrels a month, that's $45 billion a year. And that's just for the oil that's extracted. The oil that remains in the ground is also about $25 a barrel more valuable. And other energy resources—used and unused—are more valuable by a similar amount.

To get this windfall, the oil companies didn't have to conspire with the Bush administration to start a war in Iraq. They didn't have to conspire among themselves to raise prices at the pump. If you own oil anywhere in the world, you didn't have to do a damned thing. Just close your eyes, make a wish, open them, and—surprise—you're getting an extra $25 a barrel.

Ordinarily, and wisely, the U.S. government doesn't try to guess what is or is not a reasonable profit and doesn't try to tax away profit that is unreasonable. As a general principle, the government tries to tax all business profits at a rate that will produce enough revenue to help cover the cost of government without unduly destroying the incentive to produce. Under Republican administrations, the government usually goes further and gives business a bunch of absurd tax breaks. The oil industry has been a special pet over the years.

Ordinarily, we shouldn't want the government to decide when profits become "excess." But the case of huge profits from the run-up in oil prices is different for two reasons.

Actually, taxes are inevitably a form of punishment which is why they effect social engineering whether you want them to or not. So the simple question here is which is more desirable for our society, cheaper gas and increased dependence on the petrostates or more expensive gas with the corresponding reductions in its use. If you want the former then, by all means, tax profits but accept the consequences and stop whining about war for oil, but if you want the latter then tax the sale of gas itself at a higher rate.

Posted by Orrin Judd at April 28, 2006 11:58 PM


Posted by: Brad S at April 29, 2006 11:47 AM

To stick with his thinking, when world oil prices are below the cost to pump US oil, the oil companies have to eat the loss. They don't fire everyone and stop pumping. Oil profits are around 9 cents a gallon but oil taxes in WA are around 6 times as much. My liberal friends seem shocked when I explain we would get a larger decrease in gas prices by reducing the gas taxes by 10% than by cutting profit in half.

Hey OJ - is the high price of gas worth losing seats in the House and Senate along with the Presidency?

Posted by: Patrick H at April 29, 2006 12:38 PM


If they gain control over prices they lose their emotional impact. People don't mind the price, they're properly sacred by the uncertainty.

Posted by: oj at April 29, 2006 12:42 PM

"Gasoline is too expensive! Let's fix things by raising taxes on oil companies!"


Posted by: PapayaSF at April 29, 2006 2:15 PM

Nature produced the oil and charges nothing for it.

Said by someone who thinks oil bubbles out of the ground when you shoot into it. Not surprising, since it seems to be the same source of his economic and social ideas, too.

Posted by: Raoul Ortega at April 29, 2006 3:22 PM

When we buy things from Walmart, we look at Walmart's price. When we pay at the check-out counters, we pay the price of goods and sales taxes. All gas prices at the pump should list the actual gas prices and the taxes separately, so the consumers know what they are paying for, and who is to blame for the price increase. They should also throw in how much it costs to buy a gallon of water from grocery stores.

Posted by: ic at April 29, 2006 6:00 PM

Brilliant idea. What's to stop big oil from doing the smart thing-- wasting money on perks, illadvised aquisitions, and poor drilling practices?

Kingsley seems to thing investors are benefiting too much.

Posted by: MF at April 29, 2006 9:29 PM