Doomed to Repeat History

June 10, 2008

At this moment, the Senate is debating a package of punitive measures against the major domestic oil companies, including a new windfall profits tax. We’ve been down this road before and to disastrous consequences.

Twenty eight years ago, President Jimmy Carter sign into law the Crude Oil Windfall Profit Tax Act (P.L. 96-223). According to a 2006 report by Congressional Research Service economist Salvatore Lazzari:

“The WPT had the effect of reducing the domestic supply of crude oil below what the supply would have been without the tax. This increased the demand for imported oil and made the United States more dependent upon foreign oil as compared with dependence without a WPT.”

In the tables below, Lazzari estimates the impact of the Act on domestic oil production and the increased reliance on foreign oil.

Table 5. Estimated Reduction in Domestic Oil Production in
Response to the Windfall Profit Tax

Eps = +.2 Eps = +.5
Million % of Total % of Million % of Total
Barrels Domestic Imports Barrels Domestic Output
Year Output
(5)
(1) (2) (3) (4)

1980 74.0 2.0 3.9 184.0 5.0

1981 77.0 2.1 4.8 194.0 5.2

1982 58.0 1.6 4.6 145.0 3.9

1983 41.0 1.1 3.4 103.0 2.7

1984 36.0 1.0 2.9 101.0 2.6

1985 35.0 0.9 3.0 71.0 1.8

1986 0.0 0.0 0.0 0.0 0.0

1980- 320.2 1.2 3.2 794.5 3.0
1986

[Table continued]

Eps = +.8
% of Million % of Total % of
Imports Barrels Domestic Imports
Year Output
(6) (7) (8) (9)

1980 9.6 294.0 7.9 15.3

1981 12.1 310.0 8.3 19.3

1982 11.4 232.0 6.2 18.2

1983 8.5 164.0 4.4 13.5

1984 8.1 161.0 4.2 12.9

1985 6.1 114.0 3.0 9.8

1986 0.0 0.0 0.0 0.0

1980- 8.0 1,268.8 4.8 12.7
1986

Source: Author’s estimates based on data published by the Department of Energy
and the Internal Revenue Service.

“These estimates indicate that the windfall profit tax caused domestic oil production losses in every year but 1986, when crude prices declined below adjusted base prices resulting in zero WPT. Over the entire 1980-86 period, it is estimated that, depending on the assumed supply curve price elasticity, the WPT reduced domestic oil production from between 320 million barrels (1.2% of domestic production) and 1,268 million barrels (4.8% of domestic production). The effect of reducing domestic oil production was to increase the level of imported oil. Columns (3), (6) and (9) show the estimated production losses caused by the WPT, as a % of the actual level of imported oil, under the assumed three supply curve elasticities range from 3.2% of total imports to 12.7% of imports for this period, depending on price elasticity.”

The full CRS report is available at: http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/b9e4d38fed6cbf7f8525745900099a55?OpenDocument


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