Biden is threatening “to pursue higher taxes on oil company profits if industry giants do not work to cut gas prices,” CNBC reported on Monday, October 31, 2022 (read story here).
This is political theater, nothing more, to make it look like he’s fighting high gas prices. It lacks substance. Congress isn’t going to slap a windfall profits tax on oil companies, and the tax would be counterproductive by hurting supply.
To be fair, Republicans are milking high gas prices for political theater, too, by blaming them on Biden. There’s no substance to that, either.
Oil companies profit from oil extraction and refining, but don’t directly set pump prices, gas stations do. It’s a competitive market — you won’t sell gas if you price it above the station across the street — and gas station margins on gasoline sales are razor-thin. They make their livings from car repair services or convenience store sales (think beer and liquor).
Crude oil prices fluctuate wildly, making oil a cyclical business, and profits are boom-or-bust. According to Value Line, Exxon’s profits were $32 billion in 2014, $16 billion in 2015, $8 billion in 2016, $14 billion in 2017, $21 billion in 2018, $14 billion in 2019, -$22 billion in 2020, and projections are for $53 billion of profit in 2022, $38 billion in 2023, and $24 billion in 2025-2027 (rounded to nearest billion).
Like other oil companies, Exxon sharply cut production investments when oil prices crashed in 2014 because of a glut caused by a Saudi attempt to drive U.S. frackers out of business. Those production spending cutbacks set the stage for today’s tight oil supply and higher prices. In addition, the Saudis are playing games with supply again (they don’t like a NATO proposal to cap the price Russia can charge for its oil, because they don’t want consuming nations setting oil prices).
Whenever gas is cheap, American consumers go out and buy gas guzzling vehicles, apparently thinking gas will stay cheap. It never does. Before buying a big pickup or SUV, you’d better consider that at some point you’ll be feeding it expensive gas, because you certainly will — it happens every time.
Oil is a global market subject to manipulation and also at the mercy of events like Russia’s invasion of Ukraine. Even if a U.S. administration restricted domestic drilling, which Biden didn’t, it would take years for that to show up at gas pumps, because you don’t drill an oil well overnight; it’s a years-long process. Today’s tight oil supply is a result of drilling cutbacks that began in 2014, forced by low oil prices; Saudi market manipulation; and the Ukraine war.
Companies like Exxon and Shell couldn’t lower pump prices even if they wanted to. They could cut their wholesale price to distributors, who could pass those price cuts on to gas stations, who could drop their pump prices accordingly. But guess what would happen then? Lower prices will encourage demand, the supply isn’t there to support higher demand, and either pump prices would rise until demand is in balance with supply, or gas stations will run out of gas because consumers are trying to buy more gas than there is (photo below).
I certainly believe corporations should pay taxes, and Exxon does. For the June – September 2022 period, it paid $5.2 billion of taxes, double what it paid a year ago (see details here); over the last 12 months, Exxon has paid over $17 billion of taxes, more than its annual profit in any year since 2014. So, while Exxon’s profits are up this year, so are its taxes. Exxon’s nominal tax rate is 25%, but $17 billion is closer to a third of its projected $53 billion profit this year, and that profit is almost certainly a nonrecurring one-time event.
I’m not defending oil company profits or high pump prices, I’m defending common sense. Biden is grandstanding, and I predict talk of raising taxes on oil companies will go away immediately after the election. Its only purpose is to make voters think he’s doing something, when there’s not much he can do. The President of the United States is not all-powerful; the market, whoever is president, determines what you pay at the pump. That’s a simple fact of economics.
Related story: Vox magazine asked 7 experts what needs to be done — and can be done — to slow inflation; read that article here.