Taxing Oil Production? No Thanks. We’ve Been There Before

By Ed Hirs, Energy Economist, College of Liberal Arts and Social Sciences

President Obama’s budget proposal for a unilateral tax of $10.25 a barrel on all oil consumed for transportation in the United States will be, in effect, a direct tax on gasoline and diesel that will be passed through to the consumer at the pump.  The White House’s statement that the tax will be paid by “oil companies” is disingenuous.  But this “dead on arrival” consumer tax proposal masks the larger issue for the industry that is also in the proposed budget: the elimination of long-standing subsidies and tax credits that will make U.S. producers less competitive in the world market.  This elimination of subsidies and credits is an expropriation akin to the Crude Oil Windfall Profit Tax of 1980.

The Congressional Research Service in 2006 studied the impact of that tax, which was, like the elimination of subsidies and credits proposed by Obama, an excise tax and not based on profits whatsoever.  Its findings weren’t encouraging: The tax, which was supposed to recoup for the federal government much of the revenue that would have gone to the oil industry once price controls were lifted, made the U.S. oil industry less competitive.

The tax “had the effect of reducing the domestic supply of crude oil below what the supply would have been without the tax,” the Congressional Research Service reported. “This increased the demand for imported oil and made the United States more dependent upon foreign oil.”

It didn’t help the government as much as predicted, either. Instead of the $393 billion it was projected to produce in gross tax revenues between 1980 and 1988, it generated just $80 billion.

The latest version of the tax, the elimination of subsidies and credits, will hasten the abandonment of stripper wells which produce more than 1.0 million barrels of oil per day in the United States. Allowing these wells to continue production is in our national interest and encourages the maximum recovery of resources already tapped. It makes little sense to abandon otherwise economically recoverable crude. More importantly, the elimination of the subsidies and credits would spot foreign producers a significant cost advantage and lead to less oil and gas development as the Congressional Research Service noted in a 2012 report. And just as happened in the 1980s, it would drive down U.S. production and make the United States more dependent upon foreign crude oil.

The Windfall Profit Tax was levied specifically on domestic crude oil production. As with Obama’s proposal to eliminate subsidies and credits, it wasn’t linked to profits, but to barrels of oil produced. And if the similarity leads anyone to think energy producers are making “windfall profits” now, think again.

The U.S. oil industry has lost more than 200,000 jobs and, at a minimum, $200 billion of direct contribution to U.S. gross domestic product. Billions of dollars of capital have been lost, and the impact of this loss on GDP is yet to be felt. The elimination of subsidies and credits will simply make it worse.

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