Hillary Clinton's Oil Company Windfall Profits Plan

Great Debates
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Full Disclosure: I am probably biased on this topic as I finance oil and natural gas companies for a living.

I have heard Clinton make references about enacting a windfall profits tax on oil companies. I have tried to look for specifics on how this would be implemented on her website, but I can only find vague references in her “Powering America’s Future” plan: http://www.hillaryclinton.com/files/pdf/poweringamericasfuture.pdf

She makes a statement that oil companies must either invest in alternative energy or pay a windfall profits fee. In speeches, I have heard her simply state that there should be a windfall profits tax for oil companies (I have no link).

I see a number of problems with this idea. As she states in her energy plan, our reliance on foreign oil leaves us vulnerable to unstable regions. She further states that she wants to cut foreign imports by 2/3rds by 2030. She lists dependence on foreign oil as one of the biggest challenges of our time. To me, it seems obvious that increasing the taxes on oil companies would only serve to limit the domestic production of oil. Higher expenses (resulting from the higher taxes) would be factored into a producer’s decision about the economic viability of project.

Clinton gives no specifics on how this tax would be implemented. I am unclear on if she would target just the major integrated oil companies like Exxon or if it would effect the large independents (Devon, Chesapeake, Apache, etc) and the small independents. It seems like Clinton is simply throwing out a vague statement that she knows will play well with her target audience without there being any actual plan to implement it.

Does anyone actually think that a windfall profits tax would be a good idea? If so, how would you implement it?

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Politically, I think it’s a great idea. Economically, not so much. But the devil is in the details, especially what constitutes a “windfall”. I have no problem getting rid of the special tax breaks we’ve given the oil companies over the years and just tax them like we do every other corporation.

An if we, as a country, think we need to invest in alternative energy research, then take it out of the general fund so that we, as a country, are paying for it. Requiring oil companies to do specific types of research “or else” is not the way to go about it.

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[QUOTE=LonghornDave]

Does anyone actually think that a windfall profits tax would be a good idea? If so, how would you implement it?
[/QUOTE]
In order to collect a windfall profit tax there needs to be a windfall profit. Never going to happen in an industry with a low profit margin.

I’m not sure why you’re surprised. Politicians propose at all kinds of stuff before they’re elected. But since the process of creating a new tax is a function of Congress it is only a proposal. That’s the beauty of politics. You can promise to suggest all kinds of things. The only thing a President has to work with upon election is a “mandate” which, when combined with $10, won’t buy a cup of coffee at Starbucks.

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[QUOTE=John Mace]
I have no problem getting rid of the special tax breaks we’ve given the oil companies over the years and just tax them like we do every other corporation.
[/QUOTE]
And the oil companies have no problem passing on the cost to the consumer.

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[QUOTE=Magiver]
And the oil companies have no problem passing on the cost to the consumer.
[/QUOTE]

Well, to be clear, I also have no problem with eliminating corporate taxes altogether, for that very reason. But I think it’s bad public policy to create a tax code that treats corporation A differently than corporation B.

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[QUOTE=Magiver]
In order to collect a windfall profit tax there needs to be a windfall profit. Never going to happen in an industry with a low profit margin.

[/QUOTE]

How soon they forget. In January 2006 Exxon/Mobil posted the largest profits of any company in history. Cite I weep for them. (Disclaimer - I own Chevron stock, and still wouldn’t mind seeing some sort of tax.)

As John said, the first thing to do is to get rid of the tax breaks. However if any exploration was going on at $80 a barrel, I can’t imagine any tax would stop exploration at $100 a barrel. (Map to the prices received for the oil coming out of these wells.)

It’s amazing how a few cent more gas tax would make the economy go into a nosedive, but a fifty cent increase in gas prices from the market has no effect. I’m really tired of you guys crying the sky is falling all the time.

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[QUOTE=Voyager]
How soon they forget. In January 2006 Exxon/Mobil posted the largest profits of any company in history. Cite I weep for them. (Disclaimer - I own Chevron stock, and still wouldn’t mind seeing some sort of tax.)
[/QUOTE]

One would assume that the “windfall” was based on profit margins, not the gross amount. They make big profits largely because they are big companies. But MSFT or INTC do much, much better, profit margin wise.

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[QUOTE=Magiver]
And the oil companies have no problem passing on the cost to the consumer.
[/QUOTE]

I don’t know about this one, but the one they were talking about back in 1974 or so specifically prohibited this. I think it only cut in after a certain level of profitability. If the oil companies are barely staying solvent, as you seem to think, they wouldn’t have to pay a dime.

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[QUOTE=John Mace]
One would assume that the “windfall” was based on profit margins, not the gross amount. They make big profits largely because they are big companies. But MSFT or INTC do much, much better, profit margin wise.
[/QUOTE]

Sure, technology companies, and especially software ones, have better margins. But the oil companies have fixed costs for refining, transportation, and drilling which don’t change much with oil prices, so a 30% increase in costs with the same margins looks like windfall profits to me. You can’t really compare commodities with software. A better comparison would be a supermarket selling milk or some other necessity, whose demand isn’t very elastic.

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[QUOTE=Voyager]
Sure, technology companies, and especially software ones, have better margins. But the oil companies have fixed costs for refining, transportation, and drilling which don’t change much with oil prices, so a 30% increase in costs with the same margins looks like windfall profits to me. You can’t really compare commodities with software. A better comparison would be a supermarket selling milk or some other necessity, whose demand isn’t very elastic.
[/QUOTE]

Microprocessors are commodities. And oil companies have R&D costs just like IC companies do. Worse, they have exploration costs, which dairy farms typically don’t. Oil isn’t like milk.

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[QUOTE=Voyager]
I don’t know about this one, but the one they were talking about back in 1974 or so specifically prohibited this. I think it only cut in after a certain level of profitability. If the oil companies are barely staying solvent, as you seem to think, they wouldn’t have to pay a dime.
[/QUOTE]
I’m not suggesting they’re barely staying afloat. They make a nominal profit and will continue to do so. If crude oil goes up to $200 a barrel it will be processed as before and the combined cost of raw materials and production will be passed on to the consumer along with a margin of profit.

It doesn’t matter whether it’s the cost of a barrel of oil or an adjustment in the tax rate the end result is that the consumer will pay for the cost of gasoline plus profit.

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Not to mention the billions being invested to increase refining capacity in the way of new refining facilities, existing facility expansion and/or process improvements.

Engineering costs alone are almost triple what they were 10 years ago.

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[QUOTE=John Mace]
Microprocessors are commodities. And oil companies have R&D costs just like IC companies do. Worse, they have exploration costs, which dairy farms typically don’t. Oil isn’t like milk.
[/QUOTE]

They might be from the point of view of the PC maker, but not from that of Intel. Oil companies get crude, refine it, mark it up, and send it on. Almost all the value add of a processor is in the fab. (I assume you know this, but not everyone does.) Profitability at a given price point fluctuates wildly depending on yield, since taking yields from 85% to 95% is almost like printing money. Yeah, your package and test costs are a bit higher, but the cost of a wafer start is exactly the same.

There is also no OPEC. When gas prices go up, people don’t blame the oil companies, nor should they. A punitive windfall profits tax would be a bad thing, but redirecting some of the money to eliminating oil-dependence is a good thing. Unless, of course, you really believe the oil companies are going to go all out to wipe out most of their business.

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[QUOTE=flickster]
Not to mention the billions being invested to increase refining capacity in the way of new refining facilities, existing facility expansion and/or process improvements.

Engineering costs alone are almost triple what they were 10 years ago.
[/QUOTE]

They aren’t spending it in California. Process improvements, yes, but that usually pays for itself in efficiency. Engineering costs get amortized over a lot of oil. The windfall profits come from the money made when there are fixed costs and fixed margin but higher commodity prices.

To tell you the truth a better way of raising the money would be a higher federal gasoline tax, which would raise prices and thus, I hope, cut consumption. California, with its high gas prices, actually cut gas consumption in real terms, not just per capita, so it is possible.

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[QUOTE=John Mace]
Microprocessors are commodities. And oil companies have R&D costs just like IC companies do. Worse, they have exploration costs, which dairy farms typically don’t. Oil isn’t like milk.
[/QUOTE]
They do ?

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[QUOTE=Magiver]
I’m not suggesting they’re barely staying afloat. **They make a nominal profit and will continue to do so. ** If crude oil goes up to $200 a barrel it will be processed as before and the combined cost of raw materials and production will be passed on to the consumer along with a margin of profit.
[/QUOTE]
We must greatly differ on what the phrase “nominal profit” means. There are many industries that would kill for 8-11% profit margins.

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[QUOTE=Magiver]
And the oil companies have no problem passing on the cost to the consumer.
[/QUOTE]

Not necessarily. More pressure on consumers through high gas prices leads to a higher demand for an alternative, and could lead to less consumption.

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[QUOTE=Voyager]
As John said, the first thing to do is to get rid of the tax breaks. However if any exploration was going on at $80 a barrel, I can’t imagine any tax would stop exploration at $100 a barrel. (Map to the prices received for the oil coming out of these wells.)
[/QUOTE]

Pure exploration is only one aspect for upsteam oil and gas companies. What about a company that acquires properties at today’s prices. An increase in taxes could directly affect whether that acquisition is profitable or not.

It is a fallacy to think that because companies were making a profit at $40/bbl or at $4.00/mcf that at todays prices they will be making more than twice the profit. It doesn’t work that way at all. The individual circumstances need to be evaluated.

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[QUOTE=DMC]
They do ?
[/QUOTE]

I wouldn’t use yahoo finance to try to analyze the financials of a company. I would say that geological and geophysical costs are comparable to research and development costs. Additionally, a certain portion of capital expenditures would equate toward r&d. For example, drilling a test well in a new development area.

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[QUOTE=LonghornDave]
Pure exploration is only one aspect for upsteam oil and gas companies. What about a company that acquires properties at today’s prices. An increase in taxes could directly affect whether that acquisition is profitable or not.

It is a fallacy to think that because companies were making a profit at $40/bbl or at $4.00/mcf that at todays prices they will be making more than twice the profit. It doesn’t work that way at all. The individual circumstances need to be evaluated.
[/QUOTE]

Any exec who does a deal assuming that prices may not go down probably has a subprime mortgage also - i.e. he’s dumb as dirt.

Since I’d guess a lot of fixed costs get covered by $40 bbl oil, I’d suspect that $80 bbl oil would yield far more than double the profits, assuming volumes don’t change much, which they seem not to. (And inventories affect the prices anyway.) If volumes went up with rising prices, I could see more oil coming from wells that are less efficient, so the margin goes down - but is it likely for volume to increase because of higher prices?

I’d argue a windfall profits tax might help exploration. Clearly exploration costs are a legitimate expense, and comes out of profits, so a company’s taxes would decline the more exploration done. If there is some sort of trigger for the tax, it might get the company below the trigger point.
This is not unknown. When I worked for the Bell System, our profitability was capped by regulation, based on our assets. I worked for a manufacturing research lab, and every dollar Western Electric gave us was a dollar in their base which meant more profits.

The argument against taxes is that it would hurt the poor, and reduce profits. However gas consumption is amazingly inelastic, so I doubt profits would be affected much. The poor would be hurt, but unless a giant tax was slapped on, not as much as by the big increases we’ve already seen. If the money could go to funding alternative energy, in the long run they’d be better off.

I know the oil companies are doing R&D on alternative energy, but history tells us that big companies are ineffective about finding things that put them out of business. No conspiracy theory necessary for this, it’s just a mindset.