Some members of Congress appeared to be shocked to learn that oil companies would have record-setting profits this year, some $100 billion, collectively, for Exxon Mobil, BP Amoco, Royal Dutch Shell and ChevronTexaco. Soon they began thinking aloud about a windfall profit tax, with Senator Judd Gregg, Republican of New Hampshire, saying that the oil companies had "taken advantage of the trust of the American people."
A windfall tax is a good idea. But justifying it by demonizing the oil companies only perpetuates Americans' false belief that high energy prices are primarily the fault of Big (Bad) Oil. They're mainly due to supply and demand, so consumers' insatiable oil thirst plays a major role. The oil companies are indeed reaping profits from hurricanes and other events, and a strong case can be made for taxing those windfalls. But outsized consumer demand made those external events so profitable.
To be effective, a windfall tax should be part of a strategy to reduce oil dependence. Such a strategy would depend on reducing consumption.
Top executives of the world's biggest oil companies will appear today at a Senate hearing. Lawmakers would be wise to stress why a windfall tax is both fair and necessary. In brief, for consumers, oil price increases are like a tax with no public benefit. Americans have deep national interests in reducing oil demand, but oil companies have little incentive to invest their windfall profits in ways that would advance those interests.
Properly structured, a windfall tax would generate money for mass transit and alternative fuels, for helping carmakers move from sport utility vehicles to energy-efficient models, and for other ways to cut demand. It would bring in so much money - more than $24 billion this year, if it was set at 50 percent of the profits on oil sales above $40 a barrel in 2005 - that some could also be used to help consumers cope with the current high prices, including providing a few billion dollars for home heating aid for the poor.
But using all of the revenue to provide consumer rebates - as some lawmakers propose - would be counterproductive because that would foster only more consumption.
The windfall tax would also make it easier for Congress to take the more difficult but necessary step of raising the federal gasoline tax. Money from the windfall tax could pay for the initial investments encouraging conservation. Then, as higher gasoline taxes took effect, some consumers would have alternatives to long commutes in gas guzzlers. When the windfall taxes dried up, the gasoline tax money would be available to continue investments in an oil-independent future.