Not from Atlas Shrugged

The Hill: Six House Democrats, led by Rep. Dennis Kucinich (D-Ohio), want to set up a “Reasonable Profits Board” to control gas profits.

The Democrats, worried about higher gas prices, want to set up a board that would apply a “windfall profit tax” as high as 100 percent on the sale of oil and gas, according to their legislation.

…The Gas Price Spike Act, H.R. 3784, would apply a windfall tax on the sale of oil and gas that ranges from 50 percent to 100 percent on all surplus earnings exceeding “a reasonable profit.” It would set up a Reasonable Profits Board made up of three presidential nominees that will serve three-year terms.

And here directly from the proposed bill:

(4) REASONABLE PROFIT.—The term ‘reasonable profit’ means the amount determined by the Reasonable Profits Board to be a reasonable profit on the sale.

Addendum: Here is Bryan Caplan’s classic, Atlas Shrugged and Public Choice: The Obvious Parallels and here is the award-winning Atlas Shrugged app.


I know it is there are much more moral reasons for why this is awful, but don't these people get that the gas profits ultimately go to the shareholders. I'm someone who would definitely be on the side the Democrats would tend to want to transfer money to and I profit off of oil and gas stock. I imagine most universities and other endowments do as well.

Right -- it's also not like those years of high profits are what pays for all the exploratory work and capital expenditure on rigs, refineries and such

Where the benefits (or costs) ultimately go to/fall on shareholders...

no, the exploration is tax deductible

It's still money they spent, possibly in another year.

Do you think the "Reasonable Profits Board" will allocate exploration costs to each gallon appropriately?

Or is your argument that since it wasn't taxed it didn't cost them anything?

All that a "tax deduction" does for the taxpayer is alleviate the need to pay tax on that portion of income which is adjusted out of the taxpayer's gross income. A tax-deductible company excursion to the strip club merely means that the government is not confiscating 30% or so of the company's dollars which end up tucked inside the stripper's g-string.

Not entirely true.
The government is confiscating a huge chunk of the 30% or so of the company’s dollars which end up tucked inside the stripper’s g-string, just not from the company, but from the stripper afterwards. At double-payroll, consultant/self-employment rates.

"I’m someone who would definitely be on the side the Democrats would tend to want to transfer money to... "

You mean you are a Democratic Donor?

There are huge windfall profits in the natural resource extraction business and the task of a smart government is to milk these profits for all they're worth, but not more. I'm not sure the three person board is the way to go, but it's the right idea, even though it does sound like the connivance of some Ayn Rand villain.

Please define "huge windfall profits".

To paraphrase a center-right SC justice, I'll know them when I see them.

The concept of a windfall profit is a standard economic concept. A windfall profits is a profit in excess of the amount required to induce the profitable behavior--in tihs case, extraction of the resources. Figuring out what portion of the profit constitutes a windfall requires some entrepreneurial intuition, and there is no objective right answer, but it's something that all governments with natural resources do, and some do it better than others. In a world where governments need revenue, taxing extraction industries is one of the least harmful ways to collect that revenue because the resources are captive to your soil. There is a marginal oil field somewhere where the reward and the cost are about equal, and all the other oil fields are providing larger or smaller windfalls that serve no purpose as an incentive. Right now our government needs revenue desperately. As James Brown would say, "Get it! Ge it!"

So Apple owes the government an enormous windfall profits tax.

I've never seen "windfall profit" in any textbook I've ever read. This is just another made-up economic concept like price gouging and living wages. They have no economic relevance. They are only politically relevant when enough people think they will gain from it.

Apple is not in the business of extracting natural resources.

"Rahul February 17, 2012 at 12:17 am
Apple is not in the business of extracting natural resources."

Right, because all those batteries, processors, and hardware (before even mentioning generating the electricity needed to power them) are made out of pixie dust.

"there is no objective right answer"
"Right now our government needs revenue desperately"
Face palm

No, right now our government needs to stop spending desperately

Or, they could cut spending (real cuts, not to imaginary inflated baselines). Why is this idea never seriously entertained?

"Right now our government needs revenue desperately."

No it doesn't. Right now it needs to be attacked with a meat cleaver and stripped of most of its powers, employees, tax revenues, and land holdings. I won't be satisfied until it is reduced its condition in 1890 or so.

that civil rights act is nothing but trouble...

It is not so scary that Kucinich and the like are proposing this. It is much scarier that there are people like you that 1) Try to rationalize it 2) Think this is perfectly normal and acceptable.

A true Dr. Ferris, to use the Atlas Shrugged analogy.

I can see your point. What bothers me most is its arbitrary nature. It lets a panal of non-experts pick a number. That's scary.

Would you be OK with bailouts when the oil companies have a down year? Or allowing them to claw back some of those "excess" profits, whatever those are?

"Smart Government" = Dumb Comment

Odd. I would have thought the task of a smart government would be to protect my property, not to steal it from me.

"Please define “huge windfall profits”."

The intersection of the maxima of indignance with ignorance.

That's so good I may have to frame it.

Murray Rothbard would be proud

Maybe, maybe not. Why do our governments need revenue? Massive fiscal mismanagement. Some think due to tax cuts, I think the numbers show that to be ridiculous. Yes, they'd be closer to balanced budgets without the tax cuts, but they'd be insignificantly closer to solvency which is the real problem. Giving people more money does not incentivise them to fix their financial mismanagement problems. It just reassures them they can keep wasting the money. This seems to me to be a key Austrian insight, so maybe Murray would be proud after all.

It's interesting to assert that windfall profits don't act as incentives. I'd guess that that assertion comes from looking solely at the companies making the windfalls. What about the idled wells owned by other firms for example? Don't windfall industry profits increase the likelihood of firing those wells up to capture some of the windfall, and thus driving down the supply?

I predict there is a high correlation between people who support windfall profits taxes and people who support anti-hoarding laws.

"...and thus driving down the supply?"

I think I meant driving down the price by increasing the supply. This is what happens in the silver and gold market for example, I believe, as Aunt Minnie takes her junk metal to the pawn shop.

Clearly, I think we can agree that high profits and high gas prices act as incentives to populist politicians.

To be clear, I think a windfall profits tax is a stupid, stupid idea.

That said, we have spent a great deal of blood and treasure in the Middle East over the last 10 years primarily because of it's strategic importance as a source of oil. Oil companies and related suppliers have benefitted greatly from this.

It's a strategic source of oil for the US economy, but it is not a strategic source of oil for US oil companies. Big difference.

What?! Think of all the US oil service companies that do business in the Mideast.

Politicians. Just not SUBTLE.

You're right. If they were subtle they would have titled it the "Unreasonable Profits Board"

Would "Live Nudes Dancing" be much more interesting than "Dead Nudes Dancing"?

Well, I might pay to see the former, but I'd only pay to read about the latter.

This is not a serious proposal, just as most of the stuff to come from House R's the past year is not at all serious. Why write about on here? Another example of an MR meant to make the righty readers respond "arrrrghghhrrghghghg!"

Why write about on here?

You must be part of the MR Editorial Board and they failed to get your permission.

Those bastards.

"Reasonable Topics Board"?

I was thinking along these lines too. I decided, though, that we can use this opportunity to come to an understanding. I'll accept responsibility for Kucinich if righties offer a "my bad" for Joe Walsh.

So, would Ayn Rand be for the abolishment of the entire patent system?
Generic drugs from day one. Hmm. I'd like to hear John Galt's (CEO of Rand Pharma) thoughts on this.

Did you side with Napster as a bastion of free markets?
I remember everyone using the word 'theft', not 'pricing music at the lower bound'.

Help me out here?

Rand was a staunch believer in "intellectual property rights." It is not the only inconsistency in her system.

Patents and their temporary monopolies are the price we pay for having the ability to regulate content. Although I disagree with the FDA's methodologies, I much prefer temporary monopolies to having trade-secret drugs.

What's a "windfall profit" anyway? Just a profit made by someone that's politically unpopular?

This may be 100% of the profits from a company that externalizes the costs of its business operations and retains the majority of the dollars it makes.

Please exclude from this figure the costs of massive PR campaigns intended to rebuild the corporation's reputation after massive oil spills and environmental disaster.

externalizes the costs of its business operations and retains the majority of the dollars it makes.

Please share with us what percent of the costs of business operations a business will be allowed to "externalize" and "majority."

Thank you.

It is up to lawmakers, right? I recommend they pay higher taxes.

Status quo: externalize 100% of costs and keep whatever isn't taxed (i.e. taxed at < the rate mandated by corporate tax law).

100% of costs? Really? Start an oil and gas business and let me know how that's done.

...or socially. The über-rich have never been a very popular species in history.

Here is a WSJ op-ed asking what a windfall profit is (

As far as I can tell (and please someone correct me if I'm wrong), there really isn't a conceptual, let alone practical, way of distinguishing a "windfall" profit from any other; a windfall is simply a bigger profit than the speaker thinks the firm should have. This is as opposed to economic profit/supernormal profit (i.e. accounting profit minus cost of capital), which is at least an objective measure.

Looks like the Carter-era windfall profit tax on oil companies was a tax on revenue generated from the increase in the 1980 market price (i.e., post fall-of-the-Shah) versus the more "correct" 1979 market price.

I'm no lawyer, but I wonder if this Bill would stand if challenged under the "Void for Vagueness" concept of constitutional law.

The terms of a penal statute [...] must be sufficiently explicit to inform those who are subject to it what conduct on their part will render them liable to its penalties… and a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.

The "Due Process Clause" or "Rational Basis Review" might also be relevant.

It's not a penal statute, though. And it's not batty enough to fail rational basis review.

Tax law is exempt from such.

A big additional batch of money in the hands of unpopular people. The unpopular part makes it politically possible to take a bunch of it. The big additional batch of money part means taking it probably won't drive the targeted businesses into bankruptcy or anything.

Ayn Rand - PRO-CHOICE!?!?

File under : Things GOP faithful should know?

Um, yeah, how about you learn the difference between conservatives and libertarians (or objectivists, for that matter, since Rand didn't consider herself a libertarian). You might also want to read about how the mainstream of American conservatives (e.g. National Review) thought about Ayn Rand.

I wasn't aware the GOP was an 'ism' separate from all others? What 'ism' did I mis-represent in my comment?

I do know that a very prominent Republican policymaker is a very big fan - Paul Ryan said Ayn Rand is the reason he entered politics and he requires all staff and interns to read her books. Is he mainstream enough of a member of the GOP? Or do you have other references? I hear Ron Paul has a first generation copy of "AS" signed by Alan Greenspan. Rush Limbaugh speaks very highly of Ayn Rand, as I recall.

Who, pray tell, in the GOP has come out strongly against Ayn Rand for her lack of belief in God and her strong belief in abortion?

in any event, if you were not aware that Rand -- like many libertarians -- was pro-abortion, and like all libertarians, was against many facets of social convervatism, you're not really very knowledgeable about this stuff.

Conservatives very much do not like Ayn Rand.
They find her philosophy abhorrent. The agreement on economics is merely coincidental.

Rand, wrong about hairstyles...and abortion.

"An embryo has no rights. Rights do not pertain to a potential, only to an actual being. A child cannot acquire any rights until it is born. The living take precedence over the not-yet-living (or the unborn)."

Not necessarily wrong in the conclusion, but this argument starts with an obviously incorrect premise. Being born is not when something is arbitrarily deemed to be living.

"Remember also that a potentiality is not the equivalent of an actuality—and that a human being’s life begins at birth."

Here's the crux of it. The potentiality assertion has problems. I could kill you and claim that your 5 minute from now self is just a potentiality and that your corpse doesn't have a right to life in the future. Silly I know, but that's off the top of my head. And the birth assertion has problems too. Birth can happen any time the fetus is viable and increasingly before it is viable. Abortions are in fact births. That's probably why live births are called "live births." The fact that the fetus cannot simply be absorbed requires some form of violence to the mother. If the procedure is the essentially the same to take the fetus alive or dead, then what are we talking about- the right of the mother to decide if a viable human lives or dies just because the mother may or may not want an offspring?

By the way, if the implication is that Rand being wrong on abortion has some bearing on how I feel about her other ideas or her novels that has always been an odd contention to me. Most people I meet are usually wrong about almost everything. Rand is simply less wrong about some things.

I can also see how her being consistent would make her wrong here as she maintains consistency. This is better than being consistently wrong on everything.

My god. If you cannot see the difference between mainstream American conservatism and Randian objectivism (or other hardcore forms of libertarianism), you are clearly not very familiar with either.

Of course there is a pro-libertarian stream within the GOP -- but (a) it's more lip-service than anythign else, and (b) it's more than counterbalanced by large parts of the GOP that abhor her.

Taking National Review as the house publication of American conservatism, how about this recent selection:

"Objectively, Ayn Rand Was a Nut" (

"Christmas Atheists"
( - talks about how the morally nihilistic atheism that communists and fascists promoted is the same "kind of atheism that Ayn Rand commended" )

For that matter, read what the leading American conservative thinker of the post-war decades, Russell Kirk, thought of Ayn Rand.

Andrew - mispost, my comment directed at Daniel, not you.

You know, for someone so put off by other peoples arrogance, you sure are one arrogant sob.


Because Paul Ryan seems to support her very much (see my comment above or google it). And I believe you can also find Rush Limbaugh singing her praise. Are they not conservatives?

You're really a first-class nitwit.

I'm always perplexed about the so-called "liberal" commitment to evaluating people and ideas not by their content, but by the politics of those who associate with them. Its a heuristic that substitutes for critical thinking.

You're a world class foo if you think that's a liberal phenomenon.

Newsflash: you don't have to swallow all of Objectivism to like a few parts of Atlas Shrugged.

I've tried figuring out what Objectivism is. Not enough I guess, probably more than most. I have no clue.


I think you're getting the comments that you're getting because you don't know enough about either Rand or the GOP for the guilt-by-association you're attempting to make to stick.

Rather than being a monolithic entity, the GOP is (in simplified form) a coalition of evangelicals, militaristic imperials, and free-market types. Rand appeals only to that third set.

It's not the GOP that would be upset by Rand's pro-abortion stance, it's the evangelicals. Then again, the evangelicals would be much more upset by her atheism, which you didn't mention (possibly because you were unaware of it?).

The thing here is: SOME members of the GOP coalition find agreement with SOME aspects of Rand's philosophy.

While you're probably right that some GOP members might be somewhat ignorant of Rand's positions, you seem to be ignorant of both Rand AND the GOP.

Yeah, she wasn't absolutely 100% compatible in worldview with evangelical Christians in other areas, either.

Next time my wife falls asleep on my arm I'm going to posit "Damn this potential rational being, why must I sacrifice myself when I could just sever the neck to free my arm!?!"

There's no one right answer to abortion for a libertarian (although libertarians often spend a lot of time arguing with each other about what is the one right answer). The rights of two beings are in conflict. Do you side with the being that clearly exists and is sentient, or do you side with the being that is facing a much more drastic curtailing of its rights? A reasonable person arguing for maximum liberty can arrive at either answer. The same goes for IP rights.

But then again, we are talking about the people who think it's too much of a burden to walk across the corner to the other drug store rather than allowing the other pharmacist his conscientious objection.

Two responses to this:

1) Just because you agree with someone on a particular set of principles and policies doesn't mean you have to endorse their entire platform wholeheartedly. That's true for Objectivist thought the same as for anything else, Ayn Rand's protestations to the contrary.

2) You do realize this was completely beside the point...right?

And just to be clear, I'm a different Demosthenes from the one upthread. Unfortunate...

about time

hopefully they will set their eyes on Apple so I can get an Ipad for a fair price . . . .

Nationalization of profits? There's an app for that!

Which of course will totally motivate Apple to create the next iPad...

I'm a long-standing member of the Reasonably Bored Prophets Board. Keep in mind that a long-standing member can indicate a serious medical condition.

Gas and cars are one of the areas where both parties take leave of their senses--I'm reminded of the perennial idiocy over the strategic petroleum reserve. Have you seen the GOP's transportation bill, though? It's Robert Moses to a T.

So when are we going to tax Apple?

But Apple's is making technological advances that are much more socially useful than Exxon. Apple lets you store music and video and review restaurants on your phone, Exxon just makes oil and gas which is like not even green. And I'm not even sure what an investment bank is, so we should shut them down altogether.

- chairman of the Windfall Profits Board

Apple is already taxed, same as any other corp...

It seems to me that the most efficient manner of handling a "Reasonable Profits Board" would be to run it by profit margins.

So, according to Yahoo Finance, the average profit margin for American businesses is 7.8%. Oil & Natural Gas companies are right about there: 7.9%. So, if Oil & Natural Gas must face a Reasonable Profits Board, does that mean publishing (53% profit margin), silver (41%), brewers (20%), and candy-makers (11%) should face these boards, too?

Also, if my industry has especially low profits, will I be subsidized? I mean, the only reason my profits could be low is because I am an honest businessman who puts his consumer and employees first and not because of my terrible business decisions.

Every time an oil company drills a dry well they should be subsidized by the profits of an oil company who has just drilled a successful well. Also, oil spills should be subsidized heavily because they eat into profits.

Yes, all of them. It would simply be best to move towards a centrally regulated method of production for all industries.

It's worked so well before.

Yeah well enough - I absolutely think this is the way we should be heading.

Where exactly has it worked 'well enough'?

Which model of nationalized production do you favor, CBBB? The Soviet or the North Korean? Or perhaps there's another that you are thinking of when you said it "worked well enough?"

Corporate waste and bloat is already a terrible problem in America. Capping profit margin would kill any incentive to stop being wasteful. I'm sure there is a large segment that would consider this to be a "feature".

"Government waste and bloat is already a terrible problem in America"


SIx house Democrats? Who controls the House? Getting worked up about this is ridiculous. This is a talk radio tactic to get support for libertarianism, you find the most extreme example of something from the other side to make your position look reasonable. This country was not founded on Ayn Rand's values. Of course, this is coming from a professor at a university dedicated to a man who wouldn't even sign the Constitution of the United States.

The country was founded by folks that owned slaves. The original Constitution makes no provision for women voting, a tax on income, or an elected Senate. Things change, some for the better, some for the worse.

I agree with the fact that it's fallacious to take Kucinich's crazy and generalize it by calling it a Democratic Party crazy, but the attack on Rand through founder's intent or on Tyler's university just seems silly.

The profits on the opening weekends of blockbuster movies also look suspiciously unreasonable.

This gets to the heart of the issue. The movie business is much like oil exploration in that its profit comes from a handful of big blockbusters that make them scads of money, which pays for the numerous attempts to make blockbusters that fail. If you taxed the huge profits a blockbuster film makes as being 'excessive', there would be no money or incentive left to make all the movies that don't succeed.

Another example is drugs - the drug companies spend billions on R&D for drugs that never make it to market. They can tolerate this because of the large profits on the successful drugs. Take away those profits, and the whole model of drug R&D and manufacture breaks down.

Speaking of drugs... Is it a coincidence that congress passed a law limiting the annual increase of drug prices, and now we're starting to see shortages of critical but low-margin drugs? Good news, though: Congress is also considering a new panel to 'control' drug shortages by managing supply from Washington.

How about a Reasonable Government Spending Board first?


The reasonable '+1' board has determined that +9000 is a windfall '+1' and therefore subject to higher rate of taxation.

An eternal lament of anyone who works on the hill: You can introduce (and likely get passed) ANYTHING in the House.

It is funny, then, when people discuss dispensing with the antiquated Senate.

Yes, this is a truly idiotic idea, but it's also kind of funny how the story makes libertarians wet their pants and start frantically scribbling in the margins of Atlas Shrugged. Like we really need Ayn Rand to tell us this is stupid?

I dunno, I always find it useful to shed light on the idiocy of our elected officials. Sooner or later, the fact might trickle through to the general public.

I don't even own a copy of Atlas Shrugged, and if I did there's no way in hell I'd scribble in the margins.

>Like we really need Ayn Rand to tell us this is stupid?<

No - rather you need something this stupid to make Rand seem vaguely sensible.

Nixon, big lefty socialist he was, didn't even bother with the reasonable profits part - he just went straight to wage and price controls. (Nice if shallow overview at the wiki - )

As often stated, this was the reason the Libertarian Party was formed.

Well, yeah, he was a pretty big statist, wasn't he? Just because he was a Republican doesn't mean he was some small government, free markets lover.

Yah, one of the worst presidents we ever had.

Worst quote - "We're all Keynesians now."

I enjoy seeing just how much American frameworks shift over time - Richard Nixon, though less reactionary than Goldwater, was about as far on the right as you could go and still hope to win national election. Or to govern - Americans weren't being led by the elites when things like the EPA were founded or Medicare expanded - they were the minimum bones that could be tossed to the electorate to let the Republicans retain power.

And these days, Nixon is considered, what, a RINO? A closeted socialist? Makes one wonder about what Americans have become that make the past seem like an illusion. Going to the moon was a statist enterprise also - fortunately, at least in the eyes of some Americans, we are no longer seemingly capable of such government waste - well, actually, we aren't capable of even putting people into LEO, waste or no waste.

"well, actually, we aren’t capable of even putting people into LEO, waste or no waste."

SpaceX could put seven people into orbit tomorrow. It has already flown its dragon capsule into orbit and back, and had it been filled with people, they would have been fine. SpaceX is already flying space missions for a fraction of the cost of NASA's flights, and within a couple of years will be flying a rocket larger than anything since the Saturn V, and which will be capable of putting massive tonnage of material into orbit for about 1/6 the cost per pound of NASA's best attempts.

"...led by Rep. Dennis Kucinich (D-Ohio), want to set up a “Reasonable Profits Board” to control gas profits."

Geez. So even Democrats get really f-ing stupid ideas from reading Ayn Rand.

Kucinich is as big a fringe-player embarrassment to Democrats as Scott Walker, Rand Paul, or Eric Cantor must be to Republicans.


Err... Walker, Paul, and, particularly, Cantor are well within the Republican mainstream.

Oil company profits will increasingly come under pressure. Keep in mind that virtually all increased profits have come from increased prices, not volumes. Most the oil majors are post peak wrt to oil production.

Oil prices at present are above the carrying capacities of the OECD countries--most of whom (with the notable exception of erractic Japan)--are reducing oil consumption at a good clip. I don't think China has much demand growth left in the tank either at recent prices. Their consumption is now at levels achieved during 2011. So at $110 Brent, that's about as much as the global economy can carry (ie, China and non-OECD gains offseting OECD losses). As a result, the opportunity to increase oil prices from here will be limited, probably to global GDP growth plus dollar inflation, call it 6% per annum. (This does not preclude periodic oil prices spikes, though.)

At the same time, oil company costs have been rising at 18% per annum. So oil companies' profits are going to be squeezed. We can see this already with the likes Exxon and CNPC. This in turn implies that, far from being able to raise taxes, governments will see the value of their oil in the ground fall or the rate of extraction reduced. Alaska serves as a good case in point. It has plenty of oil but punitive taxation, and production has been tailing off for years. The oil companies are beginning to push back. BP is complaining about taxes on viscous crude at Prudhoe Bay. Also, see ConocoPhillip's presentation on the matter here (from slide 18):

Notwithstanding Rep. Kucinich's initiative and all the assertions of excessive "subsidies" to oil companies, industry economics will be pushing to decrease the government's share of oil revenues, whether as production sharing, royalties, severance taxes, or corporate taxes of various sorts. That's the reality of the global oil supply today.

Why should we be particularly concerned if production tails off?

If production falls off, the price goes up. That pesky supply demand thingamajig.

Ah, finally prior_approval hits on the real point here.

Believing that these is some real merit in this sites' POV I am saddened to see the extent of denial about windfall profits in these comments. There are obvious and easily definable.

The basic definition: Profits arising from an increase in the market price of a staple good where the costs of production and other inputs do not increase concomitantly. What does this mean? If the price of gasoline were to shoot up because the government imposed onerous new regulations on refineries there is no windfall - this is run-of-the-mill government market interference with the consumers paying the price. On the other hand, if the price of gasoline shot up because major refiners bought out independent refineries and shut down their (productive, operating) refineries in order to constrain supply (this happened in the Western US PADDs in the late 90s) then they have used market power to earn windfall profits and government can exercise its' duty to police market failures to impose a windfall profits tax. In general it is an alternative form of anti-trust enforcement. If done correctly it leads to more efficient free markets, if done hamhandedly, or with political motivation, it's just another way to tax the unpopular. Prior Approval ID's the non-market way of dealing with this sort of misbehavior - regulating market prices by Fiat, which is less efficient and more harmful to both an economy and democratic principles.

A previous poster mentioned externalities. Certainly, if a gold mining company is able to realize extraordinary profits by mining a deposit and dumping the resulting waste in a river rather than containing and remediating it, there could be cause for a windfall tax - but that is an equally extraordinary failure of basic environmental regulation - a windfall tax will be unlikely to pay for the losses suffered by other users of the river and so is really a case of closing the barn door after the horse has escaped.

The correct gov't action would be to break up the monopoly rather than itself become a monopolistic rentseeker by extension.

In this case there does not seem to be collusion by refineries. The problem is that capacity has been constrained.

It seems like you are suggesting that every positive demand shock without an accompanying change in supply should be met with a punitive tax. If so, there may be some things you have not quite thought through.

you use the terms without understanding them. A "positive demand shock" involves a sudden increase in the demand for good, in the case of an industry artificially constraining supply there is no increase in demand, just an increase in price due to an industry induced-decline in supply efficiency in that market. Most importantly, the costs to the producers had not changed in any way - in a traditional demand shock (the most common type being a tax cut) the inflation caused by increased demand has an impact on producer prices (raw materials and wages) as well as consumer prices - a windfall profit occurs when only consumer prices increase while producer costs are unchanged.

I would say that this particular proposal is both ham-handed and politically motivated.

Ah, "literally... all of the time" well great, then it should be easy for you to outline a few examples that don't involve market failure.

I wasn't really responding to your point about the supply of oil in the western US PADDs in the 1990s, but the more significant one about how an increase in price without an increase in costs justifies a windfall profits tax. You've given no reason for this. Why are profits due to increases in price illegitimate if they aren't accompanied by an increase in costs? What if prices increase and costs FALL? Is that doubly bad? Why do you choose to define windfall profits in this way? Is it because a firm hasn't "earned" those profits unless it has invested in its operations in some way?

P.S. I understand that you are confused why I brought up demand when you were talking about supply. The reason is that demand shocks (or increases in general) are more relevant to a discussion of windfall profits than the example you used. The most recent windfall gas tax discussion happened in 2008, when prices were high due to demand issues. I have no idea if increased horizontal integration among refineries accounts for the moderately higher prices in PADDs IV and V compared to the rest of the country. It seems plausible that those prices could just as well be due to CARB gasoline requirements plus California's relatively limited pipeline access ( I expect we can all agree that future rises in oil prices are likely to be increases in demand and not a reduction in supply.

I mentioned demand shocks (as opposed to just increases) because of the argument that oil prices increased rapidly from 2003-2008 due to a series of demand shocks. Here is one paper that suggests that:

"if done hamhandedly, or with political motivation, it’s just another way to tax the unpopular"

Are you saying that "hamhanded" and "politically motivated" don't describe the “Reasonable Profits Board” proposal? They seem like perfect descriptors to me.

...this happens in literally every single industry all of the time. The unintentional comedy of the chaotic insanity of any attempt at implementing your ludicrous and outlandish ideas is their only merit.

Oh, well they said the profits will be reasonable so I'm sure everything will be fine.

I'm Hugo Chavez, and I approve of this Board.

Populism = policies that make no logical sense. It applies equally on the left and the right.

Drool cup wearers alert phrase: " led by Rep. Dennis Kucinich"

Libertarian dog-whistle.

But on the other hand from 1970 to 2010 the only time US domestic oil production rose was when the windfall profits tax was in effect.

As soon as the tax was removed in 1985 domestic oil production fell every year for the next 25 years.

Interesting cause and effect.

I guess it it like the minimum wage. The only time minimum wage employment rises in the US is when the minimum wage is raised. Every year the minimum wage is unchanged, US minimum wage employment falls.

I'm going to assume this was brilliant irony as opposed to an ignorance of tax policy responses to oil prices and minimum wage policy responses to labor market conditions.

Spencer -

You're confusing cause and effect. The US oil supply peaked in 1970, and since then has tended to decline at about 2% per year. An exception was the post-1979 period, during the Second Oil Shock. At this time, OPEC--and principally Saudi Arabia--elected to keep prices high. They did so by reducing production, from 10 mbpd in 1979 to about 3 mbpd in 1983. (Should be about right; I'm doing this from memory.) High prices created high profits and encouraged domestic production. I recall the windfall profits tax as Carter era, so figure 1979. These high prices brought on production from the Gulf of Mexico and North Sea in a big way. At the same time, high prices crushed demand. By 1983, global demand had fallen 6 mbpd to 54 mbpd; and supply had increased by 7 mbpd. Thus, the market had a supply overhang equalling 25% of consumption just four years after the beginning of the Second Oil Shock! This overhang took a generation to absorb, with traditional supply and demand balances being restored only around 1998 (notwithstanding the oil price crash that year).

This overhang meant that the oil industry really did not hire people for a generation; thus there is a big gap in the 40 year old range at most oil companies and oil field services firms today, and they are unhappy to see their senior guys (hired pre-shock) beginning to retire.

The windfall tax was withdrawn because oil had become a lacklustre industry post-1983. There was just too much excess capacity.

Now fast-forward to 2004 H2, when the oil supply stalls out and is no longer able to match demand growth. Since that time, now 7+ years ago, oil prices have been high. And what has been the supply response? Recall, in just four years, we were able to create 25% spare capacity after 1979. So what is it now? Pretty close to zero. The Saudi's claim to have 2-3 mbpd, but that certainly didn't show in the Libyan crisis. And we're spending $600 bn on upstream this year. That's huge, and it will net us 0.3 mbpd increase (0.4% of supply) to the end of 2012 (with much of that NGL's and not crude!).

This is the brutal reality we're facing. If you read my two comments here together, it's not particularly hard to think we might hit economic peak oil in 2012 or 2013, barring a blowout performance from shale oils. And that in turn means that at least some governments will find that their oil is not worth what it used to be. Either quantity or unit value is likely to be lower. That's the crux of the argument in Alaska, for example.

So, we can talk all day long about a windfall tax. But the sobering reality is that the cost of extraction is rising rapidly, and that means the government's take--either through price or volume, and either above or below the line--is going to decline.

You are perfectly correct.

But that still does not negate the point that the windfall profits did not cause oil output to fall.

That's right. A windfall profits tax is situational. Whether it matters depends on the context.

That's because output increased due to the significant economic factors listed above. If I push a pencil one way across a table but you, a much stronger fellow, push it from the other direction, it wouldn't be surprising that it moved back towards me.

It makes sense to you that multiple forces might be acting on any given variable at the same time, right? That correlation does not equal causation?

An windfall tax on profits over “a reasonable profit” is undoubtedly a bad idea for all kinds of reasons. But talking about this from a public choice perspective may be just as misguided.

Demand for oil is still down, so why is the price rising? Some think it's speculation in the oil markets. (Go find your own sources) If it is, then maybe going after the speculators and/or the structure of the markets that allows speculators to force the price of oil higher is a better target.

This, of course, is not a public choice argument (public choice apparently assumes government is just unworkable). Instead, it is a market failure argument, which won't win many friends on this website.

Now, if the price for all is rising for other reasons than speculation, than we have many more things to be worrying about.

Demand for oil in the OECD is down, because we're being priced out. Remember: Inherent demand growth (the rate at which supply must grow to keep prices constant at, say, $80) is 2.4-2.8 mbpd / year by our estimate. (This is well above any international agency; on the other hand, they don't know what "inherent demand" is.)

The oil (petroleum liquids) supply is increasing in the 0.8-1.8 mbpd / year range, depending on the year. So demand growth is regularly outstripping supply growth, with the result that prices have risen for oil every year since 2003--with the exception of 2008.

So how do we reconcile the mismatch between supply and demand growth? Well, the high growth countries--China, chief among them--bid away the oil supply of the incumbent OECD consumers. Since the beginning of the recession, non-OECD oil consumption is up about 6 mbpd; OECD consumption is down 4 mbpd. Thus, 2 of every 3 barrels of China's oil incremental oil consumption is coming from OECD consumers, not oil producers! There used by a saying about oil companies "drilling for oil on Wall Street" (ie, purchasing rather than drilling for additional reserves). Right now, China is drilling for oil on Main Street.

That's what going on. That's why vehicle miles traveled in the US continue to decline, why airline departures are down 15% (!) since 2005. We are energy--specifically, transportation fuel--constrained.

Do you think that might make it harder to restart the economy?

"Do you think that might make it harder to restart the economy?"


Doesn't the idea that speculators have market power necessitate that they are (on average, in the long-run) right? So "prices driven up by speculators" is essentially code for "market is incorporating new information (faster)".

There has been little evidence of speculation in general. To me, "speculation" is primarily linked to inelastic demand; thus, prices must rise above long-term sustainable prices to catalyze demand reductions. (There's a paper to be written here.) The US is currently characterized by elastic demand. This is historically anomalous.

Arguably, we do have speculation at the moment. There's a large inventory build in January, which could be caused by i) stock building in fear of a war with Iran, or ii) unexpected drops in demand which traders are mistakenly thinking of as temporary, rather than permanent. But this is an exceptional period. Normally, we do not see speculation (specifically, hoarding and related price manipulation) in oil markets.

So your problem is that the peons keep voting the commissars in to office to beat down the rich for $$$ or did I miss something that has to do with reality in your comments?

I have to cede to libertarians the pathos and validity of the comparison. I myself might be considered a liberal. I am not so much appalled that Kucinich would attempt to impose an excise tax on energy profits, as appalled by the fact that he would introduce such flimsy and moronically flawed legislation pursuant to that goal. I wish I could believe that this was a hoax or a parody.

I am reading The Vampire Economy: Doing Business Under Fascism right now. It is about doing business in pre-WWII Germany. One of the first things the Nazi's did was set up a price board for critical resources. It was a disaster.

History repeats itself with more statist nonsense.


I know i'm let to the party here, but Australia has had a 'super-profits tan on offshore oil and gas for three decades, and recently proposed a similar tax regime for onshore energy and mineral resources. I'm not sure why everyone is getting so emotional about it.

Let's put a reasonable profits tax on how much politicians earn from books and speeches.

Its incredibly hard to keep a trade secret these days. Back in the 1800's if you made a elixer it'd be very very hard for me to reverse engineer it. No more.

If Congress can impose profit controls on corporations then the next step would be to ensure each company has adequate revenues to sustain the required political contribution minimums. Nobody can hold a candle to Congress when it comes to legislating money laundering.

I am so fucking sick of hearing about greedy oil companies.

Exxon mobiles gross profits least year were 9%
Apples gross profits last year 44%

NY state as an example collects $.52 from every gallon of gas sold
profit margin: 100%

Because they don't have to do a fucking thing except take
what the didn't explore for, drill for, pump, transport or refine.

A "windfall profit" is defined as "any profit made by a company that hasn't donated to the Barack Obama re-election campaign."

You all just wait til that board gets to decide what is a reasonable profit for YOU to make.

They will not stop with the oil companies.

Once they get a taste of this, and come up with all sorts of new programs to support all those Occupy brats who don't want to pay their college loans off because it might cut in to their iPhone money, they will need still more tax revenue, and small businesses will then be told what a Reasonable Profit is.

Given that the owners of the company take the risks of whatever business practices lead to the windfall profit and the government does nothing but wait until there is a profit then skim off of it. In the interest of fairness, would it be appropriate to set up a "disasterous loss" board that would bail out the oil companies in the event that they suffer the opposite of a windfall profit?
If you're going to take the profits, it's only fair that they take the risks.

Gas stations only make a tiny net profit on sales of gas, 1% or less. They make their money on soda and snacks, on which there may be as much as 50% profit. The government makes far more profit on a gallon of gas than the gas station.  So, shouldn't this reasonable profits board find the taxes unreasable and reduce them?

I thought we were a nation of laws and not men. It seems the profits deemed "reasonable" should be reasonable regardless of the business enterprise. Why would water sold in little bottles at a 5000% profit be allowed but gas at 3% is unreasonable. I feel the same about taxes, etc. We should not be carving out exceptions to rules. The law should be applied evenly whatever your status or endeavor.

I wonder if the authors of that bill would be willing to toss some money at the oil companies in those years when their profits are less than reasonable.

Somehow I doubt it.

Oh wait! That would be a bailout, wouldn't it?

Mining and crude oil 11.5%, although I'd like to see it split as separate categories. Guess what funds new exploration? Let's see oil profits in 2004 of $42.6 billion and gas taxes of $58.4 billion.

Of course, all consumers see is retail gas and fuel oil prices. Refining and distributing are low margin business, akin to grocery stores. All of the majors are divesting themselves of these as quickly as they can. Their big (windfall!?) profits come from exploration and development. Something tells me that if the oil companies were bad at that, oil prices would be much much higher. But then, I'm not an expert.

Comments for this post are closed