I am a CPA and remember the last WPT. It was a disaster. I doubt Uncle Sam got any money from it as thousands of IRS agents stopped doing corporate and individual audits to work on WPT enforcement. I oppose this tax.

Your arguments miss the point.

You may not know about special financial probes the government, through the EIA, has had into oil company finances (via the Petroleum Industry Financial Reporting System - or FRS). It is very easy for the government to determine the size of the domestic and international production revenue segment in relation to the production and dd&a costs allocated to that segment by the oil companies. While the oil companies would argue about a number of issues, the government has had all the data it needs to design a proper tax, and has had it since about 1975. New FRS returns are filed annually. Yes, they are not public but we're talking about the government.

The key to the argument in favor of such a tax concerns marginal versus average cost. It is only a tiny fraction of new oil that comes to market costing anything like $120 or $140. The great majority of lower 48 US reserves were found pre-1960 and could be lifted and sold for prices of around $20 while remaining profitable. If you doubt this, go and read a commercial publication that investigates public data on the point like those produced by the specialist company JS Herold. I don't know what the consolidated finding cost of the international majors was last year but the last time I checked, two or three years ago, it was under $17/bbl.

With average costs only a fraction of incremental/marginal costs, the excess rents have the effect of detroying other sectors (e.g. planes, autos and, I'd argue, many others). They also reek regional havoc (i.e., California and the East Coast start sending all their captial flows to Texas and Wyoming just when they need it to invest in an all electric strategy). Worst of all the excess rents are not reinvested back into oil. Roughly half of the revenue stream is returned via dividends and stock purchasers to stock holders. There is nothing wrong with this other than the obvious: it produces less oil and gas than it could. While it is true that a WPT would, almost by definition, hurt capital spending plans in the industry, the effect could be mitigated by reducing the tax if reinvestments in approved energy resources were expanded.

If you started your career trying to make sense of the last WPT, I started mine in the price control agency that was in business when oil price controls were first imposed (early 70s). The agency also had a profit margin limitation. Believe me, it wasn't hard to define violations. I don't think there ever was a time when thousands of IRS agents were put on enforcing your the WPT, since as you note it wasn't a real profits tax but a form of excise tax. For a real windfall profits tax, you just get the majors to refile their FRS returns, tell them to subtract production cost line so and so from segment revenue line so and so and multiply the amount by the tax rate. The forms are available from the EIA website. It isn't hard, even for CPAs.

But the most important point is that the WPT is badly needed to rescue the economy. True, the oil companies weren't to blame, but they are reaping the benefits of OPEC production controls, can afford to pay, and should pay.

Policy Pete:

Thanks for commenting.

I should add that we never would have had a Windfall Profit Tax in the first place without President Nixon's wage and price controls.  President Carter accepted the WPT as part of a deal with Congress in early 1980 to end those price controls.

Re the administrability of the WPT now, I agree that DOE has lot's more information and computer capability now to ease the imposition of a WPT.  Nonetheless, I can assure you that the congressional taxwriting committees would complicate another WPT enough to keep the administrative burden high.

The main points remain.  A WPT would make us more dependent on foreign oil, would distort incentives to produce more at home, and would raise a lot less revenue than expected.

Pete

Pete (well, both Petes) -- The 2006 CRS analysis you linked suggests that a workable option to WPT would be a corporate income surtax on the upstream operations of crude oil producers. Wouldn't such a surtax minimize the adverse effects identified by CRS ?

I'm sorry I must be slow, but I do not follow this article at all.

One, it makes a big deal of the point that revenues were less than projected. Yes, because prices were less than projected. Big deal.

Second, the tax is on oil already expensed and being produced at a known fixed cost. So despite the attempt of this article to argue otherwise the tax did not cause the cost of producing old oil to rise.

Someone explain to me what I am missing in understanding this basic assumption of the entire article. Until I can understand how the tax caused the price of lifting old oil to go up I can not accept a single point of this article.

All I see is this article making this assertion without providing any reason to accept it.

Do not get me wrong, I am not in favor of a windfall profit tax. I think the market should allocate the windfall profits and believe the market will allocate it primarily to producing more energy.

But I still can not accept the assumptions this article makes.

I would argue that the excess rents thrown the oil companies' way show captial being mis-allocated. While I don't necessarily agree with Sen. Obama that it should all be returned to people in the form of $1000 checks, and I agree that you could never set up a WPT that would produce anything near that amount, I do think the system was paying the domestic oil industry more and more for marginal supplies that it was never going to receive. True, it was great times for the domestic production industry: everyone is out drilling, and rigs employed in the search for oil are maxed out. The trouble is that they aren't able to add significant new supplies of needed oil. The machine is broken when it keeps sending more and more folks out to drill but never gets any more oil. The real reason is that all the truly interesting prospects are abroad on other peoples turf, and they have their own thoughts about how fast it should be accessed. All the mis-allocated funds must be returned to the market to fund something which is going to produce real new energy supplies at affordable prices.

If you accept the premise of my first point, you can see that the WPT can be used to fund a reduction in dependence. There would be a cost to domestic oil and gas production during the transition but that can be reduced somewhat by going after the portion of rents used for dividends and stock repurchases rather than domestic e & p. In reality, the true chance for additional domestic supplies - bringing the gas cap from Prudoe Bay south via new pipelines through Canada has started to look a lot more feasible with recent events. And even though there is reason to think the domestic gas industry will have a tough couple of years caused by LNG imports, it should be possible to finance the pipelines without WPT revenues.

There is a need to recognize another very real danger: sudden price declines. The elasticities of oil are very strange and once enough demand has been destroyed, the price is capable of falling south and staying there, as happened after 1985. To prevent this, the WPT should be accompanied by some form of special tariff on imported oil and gas to prevent the Saudis from undercutting domestic investment in alternate energy technologies by dropping the oil price. Of course, a WPT would effectively be phased out if the price dropped considerably anyway, and a move well beyond that could have very bad consequences for domestic production. So to avoid this some type of minimum tariff imposed when prices fell too far would probably also be needed.

These are just a few thoughts on a very complex problem. Thanks for allowing me to express them.

Spencer:

You're not slow.  There are a lot of moving parts in this.

One of the main attractions of a Windfall Profit Tax is the uses to which its large estimated revenue can be put.  Senator Obama has proposed a $1,000 per family energy rebate and a $50 b. second stimulus bill. However, if oil prices drop, that revenue won't show up.  The problem is that the promised energy rebate and the second stimulus bill may not go away just because the revenue source dried up.

As you correctly point out, current oil production is already locked in assuming current costs, including taxes.  However, the incentive to produce in the future is very much up for grabs and will depend upon potential profit.  Historically, since the 1970s, oil prices have been extremely volatile.  It takes a minimum of 5 years and often much longer to bring an oil find into production.  Those long-term investments won't be made if the profit is taken away in advance with a WPT.  Note that oil companies have frequently invested much more than their cash flow when cash flow and profits have declined below expected values.  They keep investing anyway in hope that prices will rise again.  To impose a WPT would be a "heads I win, tails you lose" proposition for the oil companies.  To the extent they fail to invest, oil prices will become more volatile and tend to rise higher.  Furthermore, the WPT reduces domestic production and makes us more dependent upon foreign oil -- the opposite of what we should be doing.

The price of "old oil" that hasn't been sold yet will be set on the margin by "new oil."  There's just one price.  Retailers change their prices on oil already in their tanks based upon what they expect to pay for the next tanker.  There's a huge stock of reserves sitting underground around the world, and the issue is how quickly will governments and producers bring it to market.  When prices rise to the extent we have seen over the past year, there is an increasing incentive to leave it in the ground in anticipation of higher prices and profits.

My main point is that we should be very careful not to kill future investment in energy.  Hopefully, we can shift to renewables over time, but I haven't seen any analysis saying we can avoid major dependence on oil and coal over the next 50 years.  Therefore, let's avoid a WPT and one-time giveaways and promote sensible alternatives and conservation.

Pete

Pete -- so you agree with me that the paper is wrong to claim that the WPT caused production of old oil to fall.

That is my main point. The issue of the impact on new production and/or exploration is open to debate, but the WPT did not cause the output of old oil to fall.

I usually find the CBO studies to be high quality.

But this look like it was right out of the Wall Street Journal editorial page.