David Strom

It has become popular for politicians to advocate going after oil companies for their seemingly outsized profits. Otherwise rational people turn red-faced with anger when they think about the tens of billions of dollars flowing into the coffers of “big oil.”

The most often talked about “solution” to—really punishment of—big oil’s big profits is the imposition of a “windfall profits” tax. Such a tax would set an arbitrary limit to what oil companies can make and then slap an extra tax on profits if they exceed that limit.

Now set aside the question of whether it makes sense for politicians to determine what profits companies should earn; a belief that politicians should be the arbiters of economic rewards seems to be a continually recurring idiocy that we will have to fight indefinitely.

Also set aside the fact that oil company profits are actually much more modest than the profits in other industries, including agriculture which has seen its profits recently skyrocket faster than oil companies have. Nobody is calling for confiscating farmers’ profits, which are bolstered substantially by agriculture subsidies and mandates that would make oil company executives blush if they we offered similar treatment.

Instead, let’s just examine the immediate and discernable results from the imposition of such a tax. What, exactly, would happen in the oil markets if Washington decided to impose a windfall profits tax on oil companies?

Where is the big money in the oil business? The profit margin on refining oil into gasoline and other oil products has actually narrowed by almost 50%--because the high price of oil and a decline in gasoline consumption has made refining less profitable. Ditto for gas stations, which have seen their profit margins decline as the price of gas went up.

The fact is that the spike in oil companies’ profits comes from selling the oil that they own and pump out of the ground. And increasing taxes on pumping oil will do one thing and one thing only: make it less attractive to pump that oil. A windfall profits tax would reduce the oil production of American companies(as it did last time we imposed a windfall profits tax on oil)--and guess who would pick up the slack?

Only a small fraction of the oil on the market is actually owned by “big oil.” Most of the rest—about 90%--is actually in the hands of governments such as Saudi Arabia, Iran, Russia, and Venezuela. And if you haven’t thought of it, none of those governments or non-American oil producers would have to pay that “windfall profits” tax.

David Strom

David Strom is the President of the Minnesota Free Market Institute. He hosts a weekly radio show on AM-1280 "The Patriot" in Minneapolis-St. Paul, available on podcast at Townhall.com.

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