Senators Elizabeth Warren (DMA) and Sheldon Whitehouse (DRI) are pushing for a new windfall profit tax on petroleum. It will restore the Carter-era legislation originally enacted in 1980 in response to the second oil spill. Since Congress is considering and debating a policy that has actually been implemented in the past, the first question is how well it worked in the first place. Time North is not good at all. Not just bad, but God-fearing bad.

The power crisis began in 1973, when some Arab OPEC members sought to punish the United States and our allies for supporting Israel in the Yom Kippur War. In the long run, however, the main geopolitical outcome of this war was the recapture of the Sinai Peninsula from Egypt’s Soviet orbit, which eventually led to the establishment of peaceful and normal relations between Egypt and Israel. In the early days of the conflict, an oil embargo seemed to allow Arab oil producers to show solidarity with Egypt and Syria. Sanctions directly affected Europe and Japan, which imported most of their oil from the Middle East, and less directly affected the United States. Then, as of now, the United States produces most of its oil domestically. By cutting off our allies’ traditional and cheapest oil supplies, sanctions shift European and Japanese demand to other world supplies, including US oil, which drives world prices.

Loose monetary policy under the Johnson and Nixon administrations has already led to high inflation, and President Nixon imposed his notorious wages and price controls. Although there was a shortage of goods and services across the country due to price controls, they were initially extremely popular and contributed to Nixon’s landslide re-election in 1972. As a result of the 1973 embargo, world oil prices rose from 00 3.00 per barrel to $ 12.00. In the United States, the retail price of gas has risen by about 30 percent, above $ 0.50 per gallon, although without price control it would have been much higher. After Nixon’s re-election, price control of most products was allowed to end, but they were kept in retail gasoline.

While 5 0.55 per gallon of gas may seem cheap to us today, it was not only a punitive price increase at the time, most car fuel economies in the 1970s were also very poor by today’s standards. Some full-size cars can get up to 20 miles per gallon, and many luxury cars still get less than 10 mpg. As a result, gas shortages were widespread, and Nixon’s price controls made them worse. Several states have implemented odd-even rationing, where even cars with even-numbered license plates were allowed to purchase gas on even-numbered days, and so on. As a result, motorists waste 150,000 barrels of scarce oil per day while waiting in line to buy gas. .

Then the Iranian Revolution of 1979 overthrew the Shah and disrupted Iran’s oil production, triggering a second oil spill. To make matters worse, Iraq invaded Iran in 1980, shutting down much of Iraq’s oil production. With world oil prices reaching about $ 40 per barrel, retail gas prices in the United States often exceed the unprecedented $ 1.00 per gallon. Gas prices continued to rise until 1983. President Carter was trying to push through energy control legislation through Congress, but the second oil push made the rapidly rising gas prices politically more difficult. The agreement was to phase out prices, but in return he had to support the Crude Oil Windfall Profit Tax Act of 1980. An exceptionally complex tax was applied to distinguish between the actual selling price of U.S. crude oil and the price of somewhat arbitrary removal: the 1979 base price of crude oil was adjusted for inflation and state taxes.

Since the government would occupy 15-70 percent of any oil revenue above the 1979 equivalent price, imported oil was significantly cheaper than domestic, shifting much of U.S. demand from domestic to foreign sources. Medium high market prices for crude oil will encourage producers to dig new wells and reopen closed wells when prices are still low. The windfall profit tax prevents any real expansion of U.S. domestic production, and because the tax artificially limits domestic supply, oil prices rise faster এবং and last longer যা without what they would have considered without this extraordinarily bad tax. Large quantities of domestic oil that could be pumped from existing wells were simply dumped into the ground, effectively preserving it for later periods, and very few new wells could be drilled due to unfavorable tax treatment, as the tax ensures that any oil is new well. Can produce. Something like a competitive price will not be sold.

Even the name “Windfall Profit Tax” is a misnomer. It is not a tax on profits, but also on the increase in profits due to rising market prices. Instead of an excise tax on each unit sold, it is calculated as a percentage of the change in selling price above the arbitrary reference price. If the increase in prices results in less revenue for the seller, it is too bad for them, but it will also cause a reduction in production. The argument was simply to punish the oil producers, who were seen as benefiting from the power crisis, almost like the profiteers of war. It has done nothing to increase tax supplies – instead it has reduced both domestic oil supplies and tax revenues. The rise in retail gas prices has been borne by consumers, with the poorest consumers suffering the most.

Because the windfall profit tax shifts demand to foreign producers while limiting domestic oil production, it has had a real impact on our OPEC trading partners, not just for U.S. consumers, but for motorists and consumers around the world. American producers who could help meet some of our oil needs were prevented from doing so by the destructive excise tax, which foreign producers did not have to pay. We could also raise US taxes to finance foreign aid, although the benefits in this case went to some needy beneficiaries who could be imagined.

The price of petroleum has a huge and big impact on the economy, because oil, and the electricity generated from oil, is needed to produce a variety of products. Most modern plastics are petroleum-based. Modern steel mills are generally oil-powered, and although most advanced arc and magnetic induction furnaces cannot use oil directly, in many cases the huge amount of electricity they use is generated from burning oil. The same goes for converting bauxite to aluminum, a process that requires a lot of electricity.

Furthermore, even when the manufacturing process itself is not oil-intensive, the finished products have to be transported to the final user, in trucks, trains or ships, all of which burn petroleum products. Even a relatively small rise in oil prices could trigger a recession, which we saw in 1973-1975, 1980-1982 and 1990-1991. Allowing markets to operate, and allowing producers and consumers to replace cheaper products and technologies for more expensive products may alleviate or prevent recession, but forcing wage and price controls and punishing producers of badly needed goods will prevent them from meeting market demand. Gives, and can only worsen and prolong a recession.

Oil supply and demand are not very responsive to price changes in a short period of time. In the words of playwright Arthur Miller, “It’s furniture and you’re married to it,” after buying a gas-gazing car for at least a few years. The choice of how much to drive is the only margin on which you can adjust in the face of high gas prices. Producers could drill more wells and uncap the old ones which were too expensive to pump since the price dropped, but they can’t do it right now. As time goes on, producers can adjust to increase supply, such as digging new wells and reopening closures, or employing new extraction technologies such as hydraulic fracturing.

Similarly, given enough time, consumers can adjust to reduce demand by buying more fuel-efficient cars. Together these normal market adjustments help moderate to extreme price increases, although they do take some time to work. Government intervention, such as windfall profit tax, prevents market participants, both producers and consumers, from making moderate to extreme price changes on both supply and demand. This is a proven strategy to make a bad situation worse.

Robert F. Mulligan

Robert Mulligan

Robert F. Mulligan is a career educator and research economist working to understand how monetary policy drives business cycles, creating recessions and limiting long-term economic growth. His research interests include executive compensation, entrepreneurship, market processes, credit markets, economic history, time series fractal analysis, financial market pricing skills, maritime economics and energy economics.

He is from Westbury, New York and holds a BS in Civil Engineering from the Illinois Institute of Technology and an MA and PhD in Economics from Binghamton State University of New York. He also received an Advanced Studies Certificate in International Economic Policy Research from the German Institut fuer Weltwirtschaft Kiel. He has taught at SUNY Binghamton, Clarkson University, and the University of Western Carolina.

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