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Tax the Windfall

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By Michael Kinsley
Friday, April 28, 2006

In, I guess, the early 1990s, when I worked for CNN, I found myself one evening at a Washington reception, chatting with an oil company executive and one from a defense contractor. The oilman said, "How's business?" How's business! Delighted and emboldened by the discovery that businessmen actually say this to one another, I arched a conspiratorial eyebrow and said, "Well, we could use another war."

The defense contractor said, "So could we."

The oilman said, "So could we -- as long as it's in the Middle East."

I was joking, and I'm pretty sure the other two were as well. Corporate executives are human beings (except for Ken Lay). They profit from war, but that doesn't mean they want it. Well, maybe a few of them have mixed feelings about that. But until I see hard evidence, I am not going to believe that American business executives would induce the government to start a war, even if they had the power to do so.

These days even President Bush is dissing the oil companies. He doesn't accuse them of starting the Iraq war, of course, but he does now favor looking into other possible misdeeds, such as antitrust violations. For Republican Sen. Arlen Specter and a chorus of Democrats, oil company misdeeds are enough to justify a tax on their "excess profits."

This hunt for a smoking gun misses the point. Taxes are not a form of punishment. And you don't need to find wrongdoing to justify a special tax on their profits. You only need a pocket calculator -- to figure out how much they owe.

The math is rough, but it's not complicated. About a third of the oil consumed in the United States comes from wells in the United States. That's about 150 million barrels a month. The oil industry refers to this as "production," but a more accurate term would be "extraction." Nature produced the oil and charges nothing for it.

Oil is oil, no matter where it comes from, so the price of those 150 million barrels will go up and down with the price of the 300 million or so barrels we import every month. A year ago, that price was about $46 a barrel. Now it's over $70 a barrel. The cost of extracting those 150 million American barrels depends a lot on how you figure and varies well by well. But we can make a few reasonable simplifying assumptions. First, no one was forced to pump oil at gunpoint a year ago. So, however you figure, in April 2005 it must have been possible to extract 150 million barrels of oil from American ground for less than $46 a barrel, including a reasonable profit.

Costs change: Wells have to be pumped harder, or they run dry. Gradually, we are running out of oil and need to import more and more. But these changes are nothing like the fluctuations in the price that oil can be sold for. If 150 million barrels could be extracted a year ago for $46 a barrel, it shouldn't cost much more than that to extract another 150 million barrels in 2006.

Let's round a bit and say that American oil extractors are getting an extra $25 a barrel. For 150 million barrels a month, that's $45 billion a year. And that's just for the oil that's extracted. The oil that remains in the ground also is about $25 a barrel more valuable. Other energy resources, used and unused, are more valuable by a similar amount.

To get this windfall, the oil companies didn't have to conspire with the Bush administration to start a war in Iraq. They didn't have to conspire among themselves to raise prices at the pump. If you own oil anywhere in the world, you didn't have to do a damn thing. Just close your eyes, make a wish, open them and -- surprise -- you're getting an extra $25 a barrel.

Ordinarily, and wisely, the U.S. government doesn't try to guess what is or is not a reasonable profit, and it doesn't try to tax away profit that is unreasonable. As a general principle, the government tries to tax all business profits at a rate that will produce enough revenue to help cover the cost of government without unduly destroying the incentive to produce. Under Republican administrations, the government usually goes further and gives business a bunch of absurd tax breaks. The oil industry has been a special pet over the years.

Ordinarily, we shouldn't want the government to decide when profits become "excess." But the case of huge profits from the run-up in oil prices is different, for two reasons. First, it is unusually clear that these profits have nothing to do with productivity. Diverting them to the Treasury would have no effect on the incentive to extract more oil from American ground. Second, some or all of these profits are directly related to a situation that is imposing huge sacrifices -- financial and otherwise -- on others: that is, the Iraq war.

Because of the war, the government is adding hundreds of billions to the burden of debt that all taxpayers, including other businesses, will have to pay off. Because of the war, American soldiers by the hundreds, and Iraqis by the thousands, are paying the ultimate tax of death by government policy. And because of the war, American oil companies are raking in extra billions in profits.

The oil companies, like other big corporations, are mostly owned by ordinary citizens, either directly or through mutual and retirement funds. Presumably some of them support the war and others don't. Do any of these shareholders, pro-war or antiwar, want to pocket $45 billion (or whatever number you choose) from a war that is costing others so much?

kinsleym@washpost.com


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