One of the perverse reactions to the recent upsurge in crude oil and gasoline prices has been calls by some members in Congress, various State legislatures and the press to impose windfall profit taxes (WPT) on oil companies. These calls of course raise the question—just how profitable are oil companies compared to other sectors? The figure shows that oil (and natural gas) companies’ profit margins are actually lower than most other sectors of the economy. (Data from Business Week, August 22/29, 2005)

Imposition of WPT is bad public policy. It would keep oil in the ground when it is most needed in cars, trucks, planes, furnaces, and power plants. That, in turn, will increase prices, which will lead to further consumer unrest and political momentum for the worst quick-fix of all—price interference, albeit moral suasion or formal ceilings. The “slippery slope” of government intervention—one intervention leading to another and yet another—can be avoided by letting market forces work in emergencies as in normal times.

What would the government do with the revenues derived from the WPT—rebate it to gasoline or fuel oil buyers? Since oil demand is relatively inelastic, fuel rebates would result in higher energy demand and prices. Would the new oil tax be spent in ways to reduce overall tax burdens, or, as history teaches, would it just be spent on new pork? Government has not shown the ability to wisely spend any ‘windfall’ in tax revenues.

Energy companies were not responsible for the geopolitical events that led to 2005’s upsurge in prices, and certainly were not responsible for Katrina. Scapegoating is not good policy for oil or any other industry. Imposing WPT would start random tacking and jibing when a steady tiller is what we need.