Oh good grief Dean. Yes, I know it's election season but not even you actually believe this.

"More practically, the oil companies are making enormous profits at present because oil prices went up far beyond what almost anyone had anticipated. In other words, Exxon-Mobil, Shell, and the others had not anticipated $120 a barrel oil when they undertook their investments 10-20 years ago. They would have made a fine profit if oil had stayed in the range of the $30-$40 a barrel they anticipated when they made their investments. The gap between the return they expected and the return they are getting because of unanticipated events is what economists call a "windfall.""

People don't make multi-billion dollar investment decisions on a single point estimate of future prices. They construct scenarios. Prices might be this, they might be that. Then probabilities are assigned to each scenario. Multiplying the outcome by the probability and summing gives us the expected return. It's that expected return which investment decisions are taken upon.

Shell and Exxon would most certainly have plotted scenarios where oil would be $100 a barrel or more, just as they would have plotted ones where it fell again to $10, as has in fact happened at times.

Come on, I mean any business student would be drummed out of college for presenting a plan which depended upon a single price estimate for the future. This simply isn't a becoming argument for a trained economist.

Why are you such a socialist? You really ought to be living in some workers paradise.

Whatever happened to laissez faire? Apparently it's being attacked by you and your liberal ilk because you feel some divine right to tell other people how to conduct their economic affairs....that is, until it comes to yourself!

Wow, is this the worst written thing ever created by an economist? After reading Mankiw, Sowell, and Williams this is the literary equivalent of walking barefoot in a cow pasture.

This reminds me of learning Marxist economy while going to school in my former Eastern European country.

And by the way... so if a company make bigger profits than their investors estimated, that is windfall profits and government should tax it away, right? Doesn't that mean that if they make smaller profits than that estimation, that would be a windfall loss and the government should compensate is back?

"why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors?

Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks?

Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all."

how does ben stein come to think that a windfall profits tax is a punishment to pensioners, individul investors, and firefighters?

exactly how much money does ben stein think pensioners, firefighters, and individual investors might not realize because of a windfall profits tax?

maybe ben stein would prefer a plan to tax oil company customers the same way that
politicians are taxing tobacco company customers

My word! Where was the libertarian venom of some of the prior commentators when the oil companies were given special tax reductions, when it's become clear that they have not been using government-awarded leases. Per usual, so many seemingly smart people tout purported "free market" principles when in many respects the companies on which they focus are beneficiaries of governmental policies. Please read ALL of Hayek.

Pingry @ 9:09 AM

"Whatever happened to laissez faire?"

It didn't work.

Witness: savings and loan crisis, deregulated utilities, dot-com bubble, housing bubble, credit crisis, just to name a few examples from US experience in the last several years.

Sorry, that Anonymous was I.

More TV lies from John McSame .. .

He says, in his latest that Obama is going to raise our taxes . . . .

Sorry, Mr. Out of Touch Soon to suffer from Demenita McSame, but most people don't make over 25O K!!

Thanks, Dr Baker! I read that trash piece by Stein. It's shows complete lack of scholarship and logic . . what a sad joke.

>>
Why do oil companies receive so much of our money in the form of subsidies, to the tune of 10 billion plus????

As the much as Repubs claim to be free market advocates, can these foolish conservatives admit that our money shouldn’t be going to these companies anymore?

In fact, The BUSH administration and the Republicans have not agreed to eliminate oil subsidies, but have increased them.

Perhaps, this is because they don’t want to bite the hand that feeds them votes and money? (I.E. Texas, Wyoming, Alaska!!!)

Oil Company Subisdies: $7 billion + 2.6 billion +
By Edmund L. Andrews, NY Times, March 27, 2006

“”But last month, the Bush administration confirmed that it expected the government to waive about $7 billion in royalties over the next five years, even though the industry incentive was expressly conceived of for times when energy prices were low. And that number could quadruple to more than $28 billion if a lawsuit filed last week challenging one of the program's remaining restrictions proves successful.

“”But on Aug. 8, Mr. Bush signed a sweeping energy bill that contained $2.6 billion in new tax breaks for oil and gas drillers and a modest expansion of the 10-year-old ''royalty relief'' program.””

A) Take those royalties and put them into renewables, NOW!

B) Provide tax relief to those who most need it.

Baker man. Right on the money. I laughed my ass off as you took down the obvious now decadent and out of touch Stien.

Loved it.

Ignore your first set of posters they are obviously trolls. No one who reads Tapped is giving Ben Stein any credibility. You arguments here are devastatingly candid. Stein deserves every bit of abuse you heap on him for this most lazy proposition he attempts to sling.

Kudos!

Exxon Mobil made a $40 billion "windfall" profit in 2007. In 2008, they are investing more than $34 billion of that in drilling for more oil. I expect this liberal pinhead actually understands that, without that reinvestment of capital in new drilling, the price of gasoline would go to levels far above what we've seen this year. And that's exactly what he'd like to see happen.

Idiot.

Dean,

You really should give up. You lost all credibility with informed individuals when you claimed that refineries were operating at max capacity. In reality they never broke over 90% utilization this year except for the first week of January.

http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus3w.htm

What other industries should we tax and what's the threshold? Is ten percent too much? Plus, wouldn't this tax only hurt American companies, making us even more dependent on foreign oil? But it all makes sense, when they tax these companies, their profits will fall (well maybe, but more likely their prices will go up to cover it), people will sell stock and it will get taxed at the new, higher cap gains taxes Obama proposes!

Not to nitpick, but the air traffic controllers were in violation of their contract when they struck, and if I remember correctly, their leaders were in violation of the law when they struck. That is why they were thrown in jail.

Why didn't you mention that?

Terry,

The air traffic controllers' contract had expired, so they did not violate it by striking. They did violate a federal law that prohibits federal employees from striking. But, that just speaks to the nature of the market interventions that we are willing to allow. We also have federal laws that allow the government to prevent strikes in the airline, trucking, and railroad industries.

The boys and girls who delude themselves into thinking they support the free market are usually fine with these laws, it's only when they government might take steps to limit corporate profits or really high pay for top executives that they get concerned.

"Over the opposition of oil companies, Republican Gov. Sarah Palin and Alaska's Legislature last year approved a major increase in taxes on the oil industry -- a step that has generated stunning new wealth for the state as oil prices soared."

I think Governor Palin has better judgement than Senator McCain (Palin also supported SCHIP that McCain voted against).

Experience cannot overcome bad judgement. I think a President Palin would have better policies than McCain.

I am an environmentalist and I think a windfall profits tax is stupid.

if environmentalists were smart here is what they do. they'd pool their memebership's money and start a $1 billion fund and start buying shares of mid-size oil companies. get on the boards and influence management to go greener and invest in alternative energy.
what would be better than the Sierra Club developing oil? oil will be used anyway and this way it would be as green as possible while helping to provide the transition to the next fuel.

what if the Sierra Club bought a lot of oil company stocks, greened the company up and sold for a big profit? what could be better than that? the profits could used to develop alternatives. dividends for oil companies, some of which can be in the double digits, could be reinvested in community wind and solar projects in the form of grants.

it would be a giant off-set program. it's probably much too radical for environmentalists though.

Folks,

I was going to delete this vile exercise in name-calling and McCarthyism, but I decided that it is much better to highlight it.

I welcome conservatives to my site and I am happy to have them express their views and even call me a few names in the process. But this entry is not an argument, it is an exercise in cheap scare tactics. What relevance do Reverend Wright or Bill Ayers have for a windfall profits tax?

People with serious arguments don't have to depend on sleazy innuendos. I hope that most conservatives can do better than this.

Dean Baker

Dean - Why don't we tax Big Education and their huge endowments, or any other industry - why do Liberals, Maxists and Communist limit their windfall profit target to only BIG OIL? College education costs have risen much more in the past 20-25 yrs than the price of a gallon of gas. Mr Baker - do you know what a profit margin is? Well in the case of BIG OIL their profit margin is virtually unchanged in the past 3 yrs - in the 8-10% range. Microsoft makes 29-35 cents on each dollar of revenue - should we tax every penny from MSFT over 10% profit? If not - then this is clearly a political populist election year ploy. Warren Buffet disagrees w/ this leftist radical notion of windfall profits. Buffet unlike most who know and are IN business will vote for Obama. Obama the community organizer, who STUDIED Constitutional law - but never passed the bar, Black Separatist follower of Rev Wright, Senator for about 140 days before declaring his candidacy for prez, never ran a business, made a payroll, chaired a committee in the Senate or even the subcommitte on foreign relations that he chairs....seems like the only thing B. Hussein Obama has stuck to was his church for 20+ years and misguided Marxist beliefs - check out Rev Wright's Church's Liberation roots are founded in Marxism which was widely discredited in Central and South America - but found a nice little pocket on the south side of Chicago. Bill Ayers and Rev Wright I bet are strong supporters of a Marxist windfall profit scheme.

Wow - i guess i could have left our the zingers at the end -- but face it if ANY Conservative or Libertarian launched their political career at David Duke's house (or Sen Byrd's home both members of the KKK) or Eric Rudolf's home the abortion clinic and Atl Olympic bomber the media would be in a feeding frenzy.

I'm just curious what criteria should be used to determine "windfall" profits?

If a system that would classify "windfall" profits as any time "prices went up far beyond what almost anyone had anticipated", how exactly would that threshold be set? Would this require some new government office that sets the “windfall” profit levels? A bunch of bureaucrats sitting around determining the level of profit a company/industry is allowed perhaps? If we thought there was government corruption now, just wait until the government sets profit limits and see what kind of lobbing efforts would occur.

Wouldn’t it make a bit more sense to use more important measures such as ROI and profits as a percent of revenue (both of which EXXON fails to crack the top 50 of US firms)? A more substantive argument would have focused more on true business measures as opposed to populist talking points, thinly veiled as economic based thought.

By Mr. Baker going to the “child molester” card, it is clear his position is one of emotion and ideology that cannot be won through intellect alone. With that line the article loses all credibility and avoids a real debate.

This tidbit had me thinking
"The government has held the threat of jail over the heads of other unions that have considered or carried through strikes in situations where they were arguably exploiting their bargaining position."

Does someone know the names of the heads of the CEO unions?

Or will pingry talk with GWB for getting the law changed?

Clueless liberals. Carter tried a windfall profit tax which resulted in less production, less supply, gas shortages, gas lines, rationing. Mr. Baker arguments resonate with the uneducated and uninformed. Anyone with a fundamental understanding in business and economics(usually conservatives) understands the carnard of winfall profits.

Thinker- Where did you think that up?

Carter deregulated the price of oil which increased production. The WPT was a compromise for people who thought that deregulating oil would cause prices to skyrocket.

However, Carter also implemented conservation measures that cut oil demand by over 20%. The lower demand lowered oil prices and profits. The WPT failed to collect much revenue (about $40 billion?) because the conservation was so effective at lowering price.

The Carter WPT was unwieldy. However that does not mean that new taxes on oil have to be as unwieldy as the last WPT.

Pingry wrote, Whatever happened to laissez faire? Apparently it's being attacked by you and your liberal ilk...

Mskiles314 wrote, After reading Mankiw, Sowell, and Williams this is the literary equivalent of walking barefoot in a cow pasture.

Chris wrote, And by the way... so if a company make bigger profits than their investors estimated, that is windfall profits and government should tax it away, right?

These posters show that they don't understand basic classical economics.

The windfall Dean is referring to isn't just any old windfall. Rather, it's entirely composed of economic rent, aka Ricardian rent.

The prime example of economic rent is the return to land (minus its improvements). In economics, oil and other mineral wealth is classified as "land," as distinct from the two other factors of production (labor and capital).

So...is Dean a commie pinko for suggesting that the economic rents retained by oil companies be taxed? Let's see what some of the classical liberals had to say about the matter:

"Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them." -- Adam Smith, The Wealth of Nations

"Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title." -- John Stuart Mill

thinker wrote, Anyone with a fundamental understanding in business and economics(usually conservatives) understands the carnard of winfall profits.

The problem is that "windfall profits" is a misnomer.

The extra income from an oil field, above and beyond that due to capital investments, is scarcity rent, and can be taxed away completely without affecting incentives.

Put another way: suppose you had a large chunk of land, with oil here and there underneath. Would you give oil companies fixed rate leases, and allow them to capture the excess value when world oil prices went up?

Government already makes more on Oil Company investments than the oil companies do, and the oil companies are the ones taking the risks. In the 5 yrs ending in 2007, Exxon-Mobil net US profits were $46B; Total US. taxes were $64.7B. i.e the Government gets 58.4%!!! At some point, the oil companies will decide to pull up stakes and leave the U.S. What a shame if government coffers lose THEIR windfall.

Re: the so-called tax subsidies, read about that myth here: http://www.factcheck.org/askfactcheck/what_kind_of_tax_breaks_does_the.html

Tim Worstall wrote, People don't make multi-billion dollar investment decisions on a single point estimate of future prices. They construct scenarios. Prices might be this, they might be that. Then probabilities are assigned to each scenario. Multiplying the outcome by the probability and summing gives us the expected return. It's that expected return which investment decisions are taken upon.

Yes, but the fact remains that some fraction of returns to an oil field is not from capital, but scarcity rent. That fraction---which I claim is probably pretty high at today's prices---can be taxed away completely.

Andy wrote, ...[Obama] never ran a business, made a payroll ...

Uh huh. And what are these leading businesses that John "Son and Grandson of Navy Admirals" and Sarah Palin ran?

Liberal. You are kidding right? Flip it around. Suppose you have a chunk of land which you lease to an oil company for a fixed price. If the company did not earn any profits or incurred a loss during a given year, would you still expect them to pay the current lease obligations. Moreover, if you have a chunk of land which you are inclined to lease to an oil company, you can negotiate any terms and conditions acceptable to the parties, including adjustments based upon profitability and lossses. You people(liberals) seem as though you have no understanding as to how business operates.

One of the dumbest articles ever. I think I lost some IQ points reading it!

If 50% of the owners of oil stocks are rich, well then, 50% AREN'T!

Love this quote: "the elimination of the windfall does not affect supply."

Um, not really. LOL. If you take away the profit motive, then the company will shift to other, more profitable businesses. If increasing supply will not make you more $, then you will either leave as is, or decrease it to push up the price of oil - getting your profits back even at the higher rate.

Blah blah... windfall, blah blah.

Sure, ExxonMobile made $1400 in profits per second. Yet, nobody mentions that they paid $5000 in taxes per second.

It also doesn't include the taxes that the employees pay from their incomes and doesn't include the taxes paid on dividends.

Exxon itself, by itself, pays more taxes than the entire bottom 50% of Americans do in income taxes -- 160 million people.

They pay great wages, have great benefits. And they never asked for a bailout when they were losing money hand over fist in the 80s.

BAD, BAD, greedy oil companies. Bad dog!

If you don't like the price of oil, then BUY SOME EXXON stock! Then, YOU ARE AN OWNER.

What a moron. There's a class at your local college, it's called ECO101. You need to drop Socialist Studies 101.

"Whatever happened to laissez faire?" "It didn't work."

LOL! That's a good one! Sure, in a LF business environment, you get blow-ups now and then. It sill always happen. However, it is still the best way to create the most wealth for a country.

The opposite is the USSR. Here, we get a dot.com bust. There, their whole country goes bust. Which would you rather?

And the real estate crash? A LOT of that had to do with Government. The Fed. Government had for years been pushing (even threatening to take away business) from companies that did not loan to more at-risk borrowers.

Basically, the government encouraged the behavior. Not so L.F. to me!

"Uh huh. And what are these leading businesses that John "Son and Grandson of Navy Admirals" and Sarah Palin ran?"

Palin made payroll as a mayor and governor. She made budgets. Nobody else in the race has. Just her.

"it would be a giant off-set program. it's probably much too radical for environmentalists though."

Yeah, because they would have to work to get that done. Real work.

"Clueless liberals. Carter tried a windfall profit tax which resulted in less production, less supply, gas shortages, gas lines, rationing."

AMEN!

Those who don't learn from history....

Weird. Where did all these people come from? Do they have a Ben Stein google alert?

Among the dumbest things I've ever read.

What would be "neat," is for a windfall tax to get passed and then these companies to simply shift profits offshore and/or decide to sell their supplies in other markets, driving the price way up in the US because the remaining sellers would have zero incentive to bring supplies on line because, tada, they are 'windfalls.'

The entire profits of the oil industry, even all seized in a Cuba style action, couldn't fund the additional programs leftists want.

The federal budget is like 1.6 trillion, not counting off budget expenditures and all sorts of contingent, future liabilities for medicare and social security.

Oil and gas is one of the few industries actually growing.. Yeah, lets rip the capital out of that industry and plow it into more negative present value projects that are so worthless than the government hasn't funded them despite its 1.6 trillion a year at the federal level and god knows how much more at the state and muni level.

It seems that to be a leftist you must have an iq several standard deviations below the mean. My goodness.

Dean,

How about making some vague qualitative comments (which are in themsevles useless), why don't you tell us exactly how much we should tax XOM and its peers? At what EXACT level of profits do they become "windfall" at. Intelligent people are not interested in biblical stories but in objective analysis.
Central Planner Baker:

In the first half of 2008 XOM had revenues of $255 billion and income after taxes of $22.6 billion. How much of this should be subject to a "windfall tax" and at what rate?

*First sentence should read

"How about rather than making some vague..."

What drivel! It's obvious you don't have a clue what you're talking about.

First of all, Ben Stein understands what a windfall is perfectly well. He's an economist.

Second, you have no concept of the fact that oil drilling and exploration is a risky venture. While a windfall profits tax may not have any effect on the supply of oil TODAY, it will discourage exploration in the FUTURE.

Anyone who makes a decision under uncertainty weighs the costs vs. expected benefits. Oil companies did that. If you take away the reward for their risk after the fact, they will incorporate the risk of policy reversal in the future. That means less oil and higher prices.

Oil companies are NOT making "record" profits. Only a MORON looks at nominal profits. As a risk-adjusted rate of return to capital, oil companies earn BELOW AVERAGE profits. The enormous volume of product they sell creates profits with a lot of headliner zeroes. People like you who manipulate these figures are also a bunch of zeroes.

Apparently you need to learn a little arithmetic, economics, and finance yourself.

Finally, our Constitution prohibits ex post facto laws. Oil companies made production and exploration choices under a tax regime. Changing that regime after the fact violates the Constitution. Politicians may have gotten away with it in the past, but that doesn't mean it's right nor does it mean they'd get away with it now.

When you're learning math, economics and finance, take an American Government class too. In fact, why don't you repeat school from the 5th grade onward.

Neither you nor any other leftist were crying any tears for oil companies nor their investors when they were losing money. Why the sudden interest in their profits now?

And if half of oil stock is owned by the "rich", that is irrelevant. Half is NOT. If mutual funds, pension plans, and individuals own their stock, they will get hurt. In fact, because of declining marginal utility of income, they will get hurt WORSE than the rich.

Do yourself a favor and get an education before you dribble idiocy from the left corner of your mouth.

Call it an investment incentive tax, if the oil companies spend on R&D, say in alternatives, they pay no tax.

just wondering dean, how did that windfall tax put in by Carter work out? what other Carter policies should we put back in place since they were so successful last time?

Wow, I didn't think the concept of windfall profit taxes was so difficult. It's actually very simple folks.

ExxonMobil and friends had undertaken their investments with the expectation that the price of oil would be in the range of $30-$40 a barrel.

We know that because they are all sorts of projections showing the price of oil in this range from 10-20 years ago when they made their investment. This is something that even right-wingers should be able to figure out.

Since they could make a profit at $30-$40 a barrel, that means that the additional $75-$115 a barrel that they get when oil is between $115 to $145 a barrel is pure gravy, a windfall.

Understand -- they expected $30-$40 a barrel, they are getting $115-$145. See the difference is the windfall.

That means that if we taxed away a fraction of the profit they make on this additional sales price, their profit maximizing level of output would be the same.

There are different ways to design a windfall profit tax. I would do it as a share of the current profit compared to an average of prior years' profits [http://www.cepr.net/index.php/publications/reports/taxing-exxon-s-windfall-from-hurricane-katrina/]. That's a real simple way to construct a tax (btw, different than the Carter era tax).

Now, over a long-term, oil companies will invest less for future production if we reduce their expected profits. Anyone who bothered reading my original post would have noticed that i made this point at the onset.

Why should we give a damn if the oil industry produces a few percent less oil in 20-30 years? We have to switch to alternatives to oil anyhow.

So, the basic point is that we can take some of the windfall from the CEOs at the oil companies and their shareholders and use the money for items like subsidizing the development of alternative energy. There will be very little cost in terms of current production and some limited cost in 20-30 years.

Come on boys and girls, do you want to call me more names?

Looks like big oil has a lot of supporters on this site. Good for them. One thing worth thinking about, however, is that during WWI, WWI and Korea the government had an "excess profits" tax that was something like a windfall tax. There are many reasons why the price of oil has climbed so high lately, but clearly one reason is that there's been a major war going on in the Middle East for the past 5+ years, a war that has cost 4000+ American lives. So you'd think big oil would be happy to forego some of their recent high profits in order to help defray the cost of our adventure in Mesopotamia. You might even think it would be right and just for them to do so.

I think we should ban all economists.

Rather than address the fundamental issues (freedom of contract, individual rights, private property rights), they screw around with their little econmetric models trying to prove that private decisions are suboptimal and things would would be much more lovely if only the central planners (economists) had control.

I say abolish the fed. Abolish the economists. Allow people to succeed wildly and to fail miserably (and without bailouts!).

Let's get back to a free society.

One prior ignorant blogger wrote, "More TV lies from John McSame .. .

He says, in his latest that Obama is going to raise our taxes . . . .

Sorry, Mr. Out of Touch Soon to suffer from Demenita McSame, but most people don't make over 25O K"

As Obama stated he is going to lower taxes on 95% of earneres. Are you kidding me? Another pandering lie by Obama. Where is he going to get the money to pay for his 1 trillion in increased spending? What got us into this problem was the entitlements that Dems enacted and have grossly mismanaged. Every time an election comes the Dems are front and center promising new ways to give away hard working families money. Why do you think Dems are against a flat tax or consumption tax? Those are the only fair tax systems. Everyone pays the same. Dems have been stealing from those they deem rich for decades to buy voters. Yes oil companies are making a lot of meney but they also pay a ton in taxes. Without these taxes Dems wouldn't be able to start a new program to give my money to some poor, lazy, uneducated piece of trash to blow it on a new house they couldn't afford or a new plasma tv they couldn't afford, only to whine the government owes them a bail out. People are poor because they made bad decisions. There is not one poor person in this country who is poor because of someone else. It isn't peoples right as an American to be bailed out. And yes Dems, sometimes people can fail and they should be left to pick themselves up. Giving people things doesn't change their behavior. It only reinforces it. The average person pays 25-35% in taxes right out of their pay checks and then they get taxed another 8-10% on everything they buy. Someone explain why I give almost 35-40% of my money straight to the government and it is OK. If we shrunk the governemnt and got rid of entitlements working people would get a huge bump in income. Then they would be able to afford the extras that the poor feel is a right. And to those that have a bleeding heart you have every right to donate your money if you WANT, but don't force thoses who aren't so easily scammed to give theirs. Worthless Socialists. Go to Cuba if you hate it hear so much.

I've been paying about the same for a gallon of milk as I have for a gallon of gas. When will we starting going after Big Dairy?!!!
Mr. Baker (and that's your name so please don't take that as name-calling), the oil companies are in the business of making money from oil. Simple as that. If they want to switch to alternative fuels in the future because it's economically sound, then so be it. But to dictate how much profit any company should make or what product it should be selling goes against American principles. And because the government pulls in and inordinate amount of tax revenue from these evil corporations, it would be wise not to demand more (as they may take their toys and play somewhere we can't tax--taking many US jobs with them). By the way, I stumbled across this article from RealClearPolitics. I'm sure many others did also and figured they would present their side of the discussion.

It's very unlikely that oil companies are going to increase major investment right away because of the high current price of oil - many of the executives and planners are old enough to remember the price crash of the 80s.

A major unstated assumption of the free-marketers attacking Dean is that marginally increasing oil production in the US is a good idea, and would be beneficial in the long run. This is very questionable because a) oil will run out eventually and b) burning fossil fuels may be altering the climate. It may be better in the long run to invest in alternate sources of energy, including research on previously unknown processes. A free market does not adequately address such questions - have the oil companies and oil consumers been charged by the market for the CO2 emitted?

Government policies (e.g. depletion allowances) through the 20th century have tended to benefit the exploitation of resources, which helped to set the US and the world on the path of energy irresponsibility.

There are many reasons why oil is not a classical free market commodity, and should not be regarded as such.

It's very unlikely that oil companies are going to increase major investment right away because of the high current price of oil - many of the executives and planners are old enough to remember the price crash of the 80s.

A major unstated assumption of the free-marketers attacking Dean is that marginally increasing oil production in the US is a good idea, and would be beneficial in the long run. This is very questionable because a) oil will run out eventually and b) burning fossil fuels may be altering the climate. It may be better in the long run to invest in alternate sources of energy, including research on previously unknown processes. A free market does not adequately address such questions - have the oil companies and oil consumers been charged by the market for the CO2 emitted?

Government policies (e.g. depletion allowances) through the 20th century have tended to benefit the exploitation of resources, which helped to set the US and the world on the path of energy irresponsibility.

There are many reasons why oil is not a classical free market commodity, and should not be regarded as such.

Sorry about the double post, but the captcha is still being ornery - it rejects for no visible reason and it's not always clear what is happening. Many sites seem to get by with no captcha.

“Understand -- they expected $30-$40 a barrel, they are getting $115-$145. See the difference is the windfall. “
No, it’s not. You have to factor in the periods during which oil has returned LESS than the $30-$40 a barrel. And by your definition “windfall” profits are eliminated if the industry simply jacks up their projected profits – which is clearly absurd. Why should profit projections have anything to do with it?
Shouldn’t net profit be the barometer of “windfalls?” Oops, you won’t get the answer you’re seeking with that one (Oil earns maybe 8% net profit on sales; far less than Pharmaceuticals (25%), Tobacco (17%), and Computers (13%).
“There are different ways to design a windfall profit tax. I would do it as a share of the current profit compared to an average of prior years' profits “
This is beyond the pale of absurdity. If applied to all industry, you’d stifle economic growth because you’d put a governor on growth. If you are specifically targeting oil companies, I’ll need to hear your justification for treating them differently.
“Why should we give a damn if the oil industry produces a few percent less oil in 20-30 years? We have to switch to alternatives to oil anyhow.”
If we’d invested in more oil 20-30 years ago, we’d have more oil today – and (because of supply & demand) it would be cheaper. How can you be so certain the growth in alternative energy will offset the decline in oil production? Today, 85% of world energy comes from fossil fuels, and energy consumption grows 1.3% per year. Alternatives would need to offset both the decline in oil production and the continued growth in energy usage. That’s a mammoth amount of energy production to make up – without a known direction to getting there. Which alternatives will it be? How much will these alternatives cost? At least oil has a lot of knowns to it.
“So, the basic point is that we can take some of the windfall from the CEOs at the oil companies and their shareholders and use the money for items like subsidizing the development of alternative energy”
Full disclosure: I’m not rich, but I do own some shares in several oil companies. What gives you, or anyone else, the right to take my money? I’m fine with paying my fair share of taxes, but not in being arbitrarily singled out. Please explain your rationale for this thievery.
Let me address one item that you haven’t mentioned, but you undoubtedly have in your arsenal of criticisms: stock buy-backs by oil companies. This has been widely criticized, for various arbitrary reasons that ignore the concept of private property (it’s the company’s money, and they have the right to spend it any way they choose). But consider what stock buy-backs mean: it means they are injecting capital into the marketplace – people (and institutions) are receiving cash for their paper (shares) and are then free to re-invest this any way they like, INCLUDING in alternative energy.

Actually, the funniest thing about the Ben Stein piece in the Times was that it ran as an analysis of Obama's plan. On the Democratic side? Alan Blinder, former Vice Chair of the Federal Reserve, one of the leading macroeconomists of this generation. In support of McCain? (Well, actually, just an attack on Obama, as is all of the McCain campaign) Ferris Bueller's high school economics teacher. I understand why Stein wants as much air time and publicity as possible, but what in God's name is happening at the Times to choose this pairing?

"Full disclosure: I’m not rich, but I do own some shares in several oil companies. What gives you, or anyone else, the right to take my money? I’m fine with paying my fair share of taxes, but not in being arbitrarily singled out. "

You have singled yourself out to benefit from high oil prices?

The difference between leadership and management is the ability to change direction. Our current direction is hazardous to our well being as a global society. It takes leadership to make the hard choices on where to get the resources to initiate change. As a investor in oil, rather than alternatives you are part of the problem and therefore a prime target of public transfer policy.

“You have singled yourself out to benefit from high oil prices? “
Are you implying that YOU have a right to our profits? I’d like to hear your reasoning as to why investors should not be entitled to profit from their investments to the exclusion of non-investors. And again, are you singling out oil companies or are you suggesting the only proper economy is a purely Communist one in which all is owned by the state?
‘”The difference between leadership and management is the ability to change direction. Our current direction is hazardous to our well being as a global society. It takes leadership to make the hard choices on where to get the resources to initiate change.”
Who should lead such change? Why?
“As a investor in oil, rather than alternatives you are part of the problem and therefore a prime target of public transfer policy. “
Part of the problem?!?! Do you ride a bicycle to work and live in a hut without electricity? Oil companies are providing a commodity that we all use (including you). If the commodity becomes more scarce it will become more expensive. Is that the way you want to solve the problem? Higher oil prices will certainly make it easier for alternatives to compete, but at a significantly higher cost that we currently pay for energy – so your solution results in a lower standard of living for all.
I have a hard time seeing how my investment in oil companies somehow harms the development of alternative energy. Unless, of course, you are admitting that continued investment in oil will keep it the lowest cost alternative…Although this may be true, what’s wrong with that?
BTW: Tell me how you are investing in alternative energy development.

"Unless, of course, you are admitting that continued investment in oil will keep it the lowest cost alternative…Although this may be true, what’s wrong with that?"

You are smarter than you let on and you've done the research.

"BTW: Tell me how you are investing in alternative energy development."

I too am an investor in oil which is just one more reason or 30,000 reasons to make oil less profitable and alternatives more profitable to invest in. If society decides it is in our interest to shift from a carbon energy based economy, then a true leader will have to find a way to make you and I change the way we invest because we don't have society's interests in mind. A WPT may just do the trick.

The gap between the return they expected and the return they are getting because of unanticipated events is what economists call a "windfall."

Using the author's definition, shouldn't net income margins for Big Oil have gone through the roof? Instead, they have stayed between mid-high single digits and low teens for a while now. My definition of windfall means getting something for nothing which would suggest a skyrocketing net income margin. Where is the windfall here?

“If society decides it is in our interest to shift from a carbon energy based economy, then a true leader will have to find a way to make you and I change the way we invest because we don't have society's interests in mind. A WPT may just do the trick.”

Predictably, you failed to address any of the issues I raised, but I’ll address yours anyway. A WPT is just a tax, it is not leadership, it does not set direction, and it is not a solution. It just punishes those of us who invested in these companies – and it does so unfairly. How does it help the development of “alternative energy?” Do you think it will raise government revenue? Think again: the last WPT did not raise revenue, it simply sent more exploration and production offshore. The microeconomics is straightforward, so it shouldn’t be a surprise.

Even if a WPT were to result in greater revenues, what would the government do with it? Obama wants to use it to offset tax cuts for the poor. While this has some merits, it does nothing to develop “alternative energy” and it will result in higher oil prices and higher gasoline prices, because it raises the cost of investing in oil.

And exactly what could this hypothetical “leadership” do if it did choose to encourage “alternative energy?” “Alternative energy” is not a solution, per se, because it is vague – it means “anything but oil.” Which thing? There’s no way to know what will win out in the long run, and no amount of “leadership” can force a solution. If we knew what was going to win, investors would be pouring money into it NOW. The money entering the marketplace from stock buy-backs keeps pouring in.

In the long term, there will certainly be viable alternatives that will beat out oil as the dominant source of energy. But it will do so naturally. Trying to circumvent market forces will cause distortions with unintended consequences. Consider the subsidies for ethanol production, and the indirect effect on the price of food. The government sent us down a dead end.

“…a true leader will have to find a way to make you and I change the way we invest because we don't have society's interests in mind. A WPT may just do the trick.”

Is it in society’s interest to lower the standard of living? Artificially raising the cost of oil, to allow alternatives to better compete, will do just that. Spare us your salvation, please.

To whatever degree society elects to address anthropogenic global warming, it needs to do so at the point of consumption. Taxes on carbon USE, and related carbon trading make perfect sense. This will, of course, be costly – it makes the long term cost to the environment felt, and it does so where it makes a direct difference.

Since some folks here apparently did not realize that the oil industry is making enormous profits, you can get that data from the Commerce Department [http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=228&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2000&LastYear=2008&3Place=N&Update=Update&JavaBox=no#Mid]. It reports that industry profits went from $26.5 billion in 2000 to $79.2 billion in 2005. This is an increase of almost 150 percent even after adjusting for inflation. They have since edged down to 66.9 billion in 2007, but that still is more than twice the 2000 level.

Dean said "ExxonMobil and friends had undertaken their investments with the expectation that the price of oil would be in the range of $30-$40 a barrel.

Does he know this for a fact? As others have said, companies make projections on a range of possible price scenarios, one of which may have been $30-$40, one of which was probably less than $20, and one of which may have been quite high. A company's planning price forecast is one of its most closely-guarded bits of proprietary information. If competitors knew Exxon's price projections, then they would be able to do a pretty good job of guessing at rational investment decisions based on those projections.

Anybody who claims to know what ExxonMobil or any other oil company was assuming about future prices back in the 1990's is just making things up.

“It reports that industry profits went from $26.5 billion in 2000 to $79.2 billion in 2005…”

The magnitude of the numbers demonstrates the magnitude of the industry, and nothing else. Exxon-Mobil earned 7.6% net profit on their 2000 revenue, a poor year indeed because the price of oil was depressed at the time. Price of oil improved in 2005, leading to a net profit rate of 10% on revenue, which is hardly a standout compared to other industries. Also consider current taxation levels. In 2005, Exxon-Mobil’s net income was $36.1B. Their taxes amounted to $72.3B – government revenue is already twice corporate net profit! And still you propose taxing it more! Clearly, at some level it will become unprofitable to operate, and the oil companies could pull out, or at least, reduce their investments.

I'd have no problem with a windfall profit tax as long as Dean or whoever is proposing it gives an objective definition with numbers, in terms of percentages of gross revenue, and agrees to apply it equally to all industries.

What's appalling to me is that Dean has a PhD in economics, and yet he's harping on the magnitude of the oil industry profits, which are actually very much in line with the size of the industry. It is equivalent to saying: U.S. GDP was $13.8 Trillion Dollars in 2007, the highest of any nation in the history of the world! This is more than 3 times the next largest, Japan! Enough is enough! It's a red herring. Is Dean being disingenuous, or has he simply been too long out of school?

To Fred and his ilk.

Your sense of entitlement is acute. Reminds me of the affluent people in my country, South Africa.

They whine about how the poor black should "move on" now that apartheid's over, and that they have such a sense of entitlement, and should rather "work harder". Hasn't gotten them far, but the establishment proudly calls street vending a grand show of "innovative entrepreneurial spirit".

So the question comes to mind. What makes you or the affluent in my country any better? You go on about how ENTITLED you are to your profits. Well, the poor are more entitled to basic sustenance because that's what our ability as an advanced civilized species and the planet can provide for them. Your oil investment is destroying the planet, just as all massive scale reliance on oil technologies is. Your 'everybody for themself' attitude is typical of primitive animal life. Most of you probably don't even believe in evolution, but your behaviour serves as the best example thereof.

Now, why the hell would anyone like to go back down the evolutionary ladder and do the free market? It's been done and has failed time and again, just look at the recent financial crises because of markets not being regulated or underegulated. It has failed because it is primitive, relying on pure self-interest to get everybody ahead. But that's NOT the whole story of evolution! Synergy is!

We need progress, not a downward spiral back into the stone age. Climate change threatens to take us back even further.

It's time to let up on the faith-based social sciences and get with the real-world program.

The measure of returns is based on investment, not sales. It's understandable that the oil industry would tout revenue as the measure, but it has nothing to do with the time of day.

If anyone knows any business person who will invest money in a project that gives a very high profit as a share of sales, but very low return on investment, please give me this person's contact info (any bets that no one at the oil companies invests this way?).

As far as picking 2000 for my comparison, if you don't like profits in 2000, try profits in 1999 --$4.3 billion, how about oil industry profits in 1998 -- $8.9 billion. You can get back up to $25.3 billion if you go to 1997, but in 1996 industry profits were just $20.1 billion.

I wasn't cherry-picking, oil industry profits have exploded, that is not a disputable point.

As far as Exxon's tax payments, I don't know what they claim, but the Commerce department reports that the whole industry only paid $29.5 billion in tax in 2005. Maybe Exxon sent their tax money to wrong address.

Wynand - You are complaining about the plight of your people, and I sympathize. In a debate on another topic, I would be on your side, to a large extent. But consider what would happen if we suddenly stopped producing oil tomorrow. World wide energy production would be reduced 85%, there would be a worldwide economic depression, widespread unemployment, and many miillions more people will go hungry. The economic instability would likely cause increase political instability and war. The rich countries would surely suffer, but the poorer countries will suffer even more (as always). I've described an unrealistic extreme, but it demonstrates the necessity of continuing to produce energy. And it is absurd to think that we can wean from oil as a major source of energy any time soon without having negative economic impact. Wean we should, but if you go after the producer rather than the consumer then you risk economic impact. Better to develop alternatives and let them supplant oil than to artificially decrease production - it's dangerous.

Sure, I suggest that an investor is entitled to reap benefits from his investment. I do not preclude fair, non-discriminatory taxes - taxes provide a means for setting and implementing national policy, including policies that can help less affluent countries. But if investors cannot benefit from the profits of their investments, there will BE no investment. Without investments, there will be no economic growth, and there will be no taxes to collect to help anyone.

"As far as Exxon's tax payments, I don't know what they claim, but the Commerce department reports that the whole industry only paid $29.5 billion in tax in 2005. Maybe Exxon sent their tax money to wrong address."

Is the Commerce dept depicting all the taxes paid on oil, or just corporate income tax? Regardless,
you are overlooking that Exxon is a multinational oil company, earning income and paying taxes worldwide.

OK, you don't like revenue as the barometer - but my statement holds: the numbers are large because the industry is large. The magnitude of the numbers is irrelevant. No rational conclusions can be drawn from the magnitude alone; no valid conclusions can be drawn by focusing on a single industry; and policy should not be set without considering all the consequences. You have so far proposed imposing a WPT on a single industry, or if applied generally - you've suggested a governor to tax "too much" growth by any company in a year. Act like an economist, since you have the training, and outline all the impacts you can think of. Bottom line is that your proposal is not based on sound economics, but on emotion.

Anonymous,

go back and read by original post. I did outline all the likely impacts. That is how policy is conducted -- at least by economists.

OK, fine, instead of profit margin, how about return on equity? There are plenty of industries that have ROE equal or greater than major integrated oil companies. Aerospace, application software, personal computers, restaurants, tobacco, distilleries, etc., etc.

We can argue forever about the relative virtues of different industries, but by any measure except sheer size, oil and gas profits are well within the range of American businesses.

Dean-your original article wasn't an economic analysis, it was a superficial opinion. ". In the longer-term, there could be some modest impact, since oil companies will realize that their likelihood of collecting an extraordinary windfall in the future is lower if governments are prepared to tax it away." Have you reviewed the impact of the last WPF? Do you know what year U.S. oil production reached its peak? We are suffering today because of the mistakes of that period. You are proposing making the same mistake again, impacting your children and grandchildren, because the future seems so far away.

You also have not clarified: are you targeting oil companies, or is your concept of taxing 'too much growth' across the board? If targeting oil, please explain to this shareholder why you would treat me unfairly. Why wouldn't you go after the windfall profits of Monsanto, the worlds largest seller of seed? Why not farmers when their pork bellies or wheat are unusually high due to shortages? How would you allow for expected big growth by successful start-up companies? Are you going to make it up to us oil company stockholders by subsidizing us during the lean years (you see, we weather those years so well because they are offset by the boom years). If across the board WPT, then please consider the widespread economic impact of that.

But I think you're targeting oil companies, and your only implied reason is because the magnitude of their business is so large.

"Socialism, socialism, socialism.. communism. Socialism, socialism. Communism communism, socialism."

Gotta love a libertard attack. I find it odd, though, that this is the first, and only, such case since I've been reading this blog. Evidently, some libertard HQ somewhere linked to this article.

Fred,

I will quickly repeat what I said in the first post, but say it a bit differently so it is clearer. Even with a windfall profit tax, the oil companies will still be making a profit on their current production. This means that they have no incentive to cut back current production (look up an intro text book,if this is not clear).

Over the longer term, they may invest less in searching for new wells, since their expected return on future drilling might be lower. Since there is a long lead time between searching and producing oil (they will continue almost everything already in process, because otherwise they lose everything they invested) they may produce somewhat less oil 10-20 years down the road.

That's the way the economy works Fred-- it's called profit maximization. It's not my opinion.

Dean - You are making light of the fact that there would be less oil produced in 10-20 years. This matters.

You also make light of the fact that your proposal would impact me and others like me.
I worked for Gulf Oil, and was laid off when Chevron bought us. I retained my stock, and it now comprises 40% of my 401K. I'm not rich; I've played by the rules - but you want to change them, to my detriment.

Those are negatives you make light of, and you have not mentioned any POSITIVE consequences. Are you just lashing out at us stockholders because you're mad about the cost of filling the tank of your car (SUV?)

Bottom line, you propose an arbritray tax with no positive benefits, and clear negatives. Thank you very much.

I have a related policy question that I don't think has been addressed elsewhere: Is the US government entitled to an additional share of the roughly 80% of ExxonMobil's profits that are earned producing, refining, and marketing oil outside the USA? What about BP and Shell, which are not US-based companies?

Fred,

I can think of hundreds of useful things that can be done with the money, including giving tax breaks to low and moderate income people. I assumed that all my readers understood that useful things can be done with money. I don't have time to give the full list.

I'm sorry if it hurts your employment prospects, anything the government does or does not do will have some negative consequences.

Of course, Sarah Palin, as Governor of Alaska, raised taxes on oil companies (they go higher when profits are higher--sounds like a windfall profits tax, huh?) The tax money helps to pay rebates to Alaskans. Kind of like what Barack Obama has proposed.

Getting back to the original Ben Stein rhetoric, it can be useful to consider the “material balance” of the situation. An exogenous increase in the relative price of a commodity will mean extraordinary profits for the supplier of that commodity. In this case we see wealth redistribution to the oil companies.

But, there is no free lunch – those profits come from somewhere. They come not only out of the pocket of consumers, but also the profits of companies that directly and indirectly use oil and also those that sell to consumers who have less money to spend on their products.

So, Ben Stein’s rhetoric only makes sense for the small minority of equity owners who have an unbalanced investment heavy in oil stocks. If, like most people they have a more balanced portfolio, their gains in the oil stocks are largely balanced by their losses in their non-oil stocks. Additionally, these equity owners are also consumers and lose due to the higher consumption expenses cascading from the extraordinary increase in oil price.

If the wealth redistribution due to the oil price shock is partially reversed by some sort of windfall profits tax, then any loss to most investors will be offset by other gains depending on exactly how the tax is used. To the extent that taxes are shifted away from consumers, other company’s stock will improve with the stimulated demand among many other ways non-oil stocks would fare better under such a tax policy.

The bottom line is that Ben Stein’s rhetoric is ridiculously one-dimensional.

"Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. 'Voodoo' economics."

Actually turns out that Ferris Bueller's econ teacher was smarter than Ben Stein in real life.

"I can think of hundreds of useful things that can be done with the money, including giving tax breaks to low and moderate income people. I assumed that all my readers understood that useful things can be done with money. I don't have time to give the full list."

Dean - I like your suggestions for what could be done with increased tax revenues, but this is not a justification for a discriminatory tax. An across the board corporate tax increase would be more effective, fairer, less likely to have negative consequences, and have a more consistent revenue stream. A WPT would likely not get the revenue you expect - it didn't the last time we had one, and the odds are worse now because the oil companies are now MORE multinational than ever before - very easy to shift business to the more favorable environments. Even with the rosiest possible prediction of the revenues from a WPT you can't deny that it would be a very inconsistent source of revenue - there'd be booms and busts with the cycles in the oil market. By definition of a WPT, you'd only get the revenues during booms. Bad idea for implementing policy.

"If the wealth redistribution due to the oil price shock is partially reversed by some sort of windfall profits tax, then any loss to most investors will be offset by other gains depending on exactly how the tax is used."
Even if this is true, give a reason why oil companies should be singled out. Every commodity goes through cycles, with the up-cycles resulting in "windfalls." Corn farmers have received a windfall from corn prices, as have seed manufacturers (e.g. Monsanto). A WPT on big oil will clearly increase oil prices them in the long term and very possibly also in the short term - since it will drive out some investment. Your attempt at income distribution could backfire. Left alone, the market will lower the price of oil - in fact it already has; high prices have forced consumers to reduce consumption (despite complaints, this is a GOOD thing; this encourages conservation and also encourages alternative energy usage). It's a mistake to try and micromanage the economy - there are too many unforseen consequences. Back to my corn example: there is a substantial tax subsidy given to corn production. It seemed like the thing to do when it was enacted because it would decrease our reliance on oil. The unexpected consequences: skyrocketing food prices, and the benefit is simply not there - we're substituting for a commodity that is more expensive than oil (based on the real cost, correcting for the subsidies and comprehending that it takes energy to grow corn).

"Of course, Sarah Palin, as Governor of Alaska, raised taxes on oil companies (they go higher when profits are higher--sounds like a windfall profits tax, huh?) The tax money helps to pay rebates to Alaskans. Kind of like what Barack Obama has proposed."
Palin's maneuver will provide a short term revenue increase, but in the long run it will result in lower investment because it increases the cost of doing business in Alaska. Lower investment will eventually result in lower tax revenues. It's a great gimmick for politicians because of the 2-4 year nature of the election cycle. This doesn't make it a good long term policy for them. Alaska competes for oil-capital with every other country and state. Any company (including Oil) will invest their money where their return on investment will be greatest.

Fred - As I stated, my comment was about Ben Stein’s rhetoric.

The idea that the wealth redistribution due to oil price increases helps those without an unbalanced investment heavy in oil stocks is clearly not true. Just recognize that there is no free lunch. And, a policy that partially reverses this wealth redistribution - regardless of whether or not it is a good idea - does not stomp on the rights of everyone with an investment portfolio. Ben Stein’s hand wringing over investor’s rights considers only the down side and not the up side that every investor with a diversified portfolio actually faces.

Your point about market intervention sometimes being counterproductive is a good one - but it has nothing to do with my point about Ben Stein’s rhetoric.

Among the particular distortionary policies that I find disturbing are the drilling incentive programs we find in many petroleum producing states of our nation. This has resulted in a cottage industry of companies that drill only to access those tax dollars. These companies literally use more petroleum to drill their wells than they ever produce - they result in a net negative effect on the oil supply - but they thrive on the government dole. If we cut those ill advised programs we won’t be hurting the average investor - that is, again, the irrelevant rhetoric that Ben Stein tries to confuse us with - but we would help oil prices and cut truly wasteful government spending.

Ron- I agree with your comments. I'm simply challenging those (such as Dean) who think imposing a WPT on oil companies is a good idea - I'm still waiting for a rational justification.

One comment regarding "rights" - the government has the "right" to tax any way it chooses. However I would prefer that tax policy, as well as all other government policy, be rational, fair, and well-thought out. The current cries for a WPT have none of these attributes. I believe they are driven by emotional responses to the price of gasoline and the magnitude of oil company profits. I'm willing to be proven wrong, but so far Dean seems to fancy himself a modern-day Robin Hood, robbing from a set of rich corporations to to give to the poor. Noble motivation, perhaps, but not a defensible strategy compared to the more effective alternative I gave him.

Incidentally, I'm not familiar with the drilling incentive programs you mention - but I agree they are a bad idea - assuming you are correctly characterizing them. There is a lot of stupid tax policy.

thinker wrote, thoughtlessly,
Suppose you have a chunk of land which you lease to an oil company for a fixed price. If the company did not earn any profits or incurred a loss during a given year, would you still expect them to pay the current lease obligations.

Depends on how the lease is set up. Duh.

Moreover, if you have a chunk of land which you are inclined to lease to an oil company, you can negotiate any terms and conditions acceptable to the parties, including adjustments based upon profitability and lossses.

Of course. I'm arguing that current law governing mineral extraction is extremely unfavorable to one party---the citizens of the United States of America.

You people(liberals) seem as though you have no understanding as to how business operates.

LOL! On the contrary---I know exactly how they operate: trying to get the best deal that they can. I'm merely insisting that we citizens get the best deal for ourselves.

Fred wrote, One comment regarding "rights" - the government has the "right" to tax any way it chooses. However I would prefer that tax policy, as well as all other government policy, be rational, fair, and well-thought out. The current cries for a WPT have none of these attributes.

Devil's in the details, of course, but let's assume that the tax is on scarcity rent. That is, oil companies do get a hefty return on their investments, but the scarcity rent is kept by the US government, per the terms of a (new type of) lease.

That, in fact, is the best tax possible: a tax on natural resources. Classical economists referred to three factors of production; natural resources (as well as the value of location in urban areas) are lumped together as "land".

Taxing "land" value is the best tax because (1) it's equitable, (2) it's completely efficient.

It's equitable, because the nominal owner of the resource didn't create the resource.

It's efficient, because the supply of the resource is fixed and independent of the actions of the owner of the resource.

Adam Smith: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."

John Stuart Mill: "Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title."

Milton Friedman: "In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."

ster blithered, Love this quote: "the elimination of the windfall does not affect supply." Um, not really. LOL. If you take away the profit motive, then the company will shift to other, more profitable businesses.

Your problem, as well as that of the other similarly minded posters, is that you don't understand the terms "profit" and "rent".