Elevated oil and gas prices have foisted the prospect of windfall taxes and executive action into the spotlight. Following the release of a strongly-worded letter to big oil executives from President Biden’s office, specifically addressing refineries’ output of gasoline, the White House went even further in stating they would consider expanding the Defense Production Act that’s already been utilized to address shortages of baby formula and tariffs on solar panels. Refiners are currently running at 94% capacity.
The concept of windfall taxes on large oil and gas firms, potentially doubling their tax bill, are also gaining steam in Congress. Though prospects for passage of bills including taxes on oil profits are low in the Senate, the rising threat of emergency action from the President, and the revelation that the White House has been actively reviewing windfall tax proposals to fund a potential consumer rebate, shows these ideas cannot be written off at this point by investors.
Related ETFs: Energy Select Sector SPDR Fund (XLE), VanEck Oil Refiners ETF (CRAK), VanEck Oil Services ETF (OIH)
With benchmark oil prices now well-into triple digits for the better part of the last four months, the concept of a windfall tax on oil and gas industry profits is becoming popular among members of the US Congress and a bill is expected to be proposed soon.
The theory is that the energy industry is intentionally suppressing output in a time of international crisis to capitalize on a sudden global shortage of oil and gas, driving up inflation. Therefore, those companies should have to give up a portion of their supposed ill-gotten gains and have that capital redirected back to American consumers. While the prospect of passage for such a bill would not be particularly strong in the Senate, President Biden appears prepared to step in on his own to enact new measures aimed at reigning in profit margins and expanding gasoline output.
“At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable,” Biden said in a letter sent Wednesday to top oil companies. The letter went on to say that the President was considering “all reasonable and appropriate Federal Government tools and emergency authorities to increase refinery capacity and output in the near term.” Bloomberg reports the letter was sent to a laundry list of companies including Marathon Petroleum Corp., Valero Energy Corp., Phillips 66, BP Plc, and Shell Plc.
In a press conference the same day, White House Press Secretary Karine Jean-Pierre added that the administration is willing to use the Defense Production Act it invoked to increase the production of baby formula and bolster solar manufacturing to boost the nation’s supply of gasoline. She did not elaborate on what measures could be taken if the Defense Production Act was enacted by Biden.
It was only a matter of time before the White House got involved in the controversy surrounding the energy industry and high gas prices as it was reported early this month that the White House was reviewing congressional proposals that could tax oil and gas producers’ profits in order to provide a rebate to consumers struggling with higher energy prices.
Oil executives contend that a windfall tax would damage the domestic industry financially and constrain any incentive to drill more or develop new technologies to make drilling more efficient. It is worth noting that energy firms have returned some $9.51 billion to investors in the first quarter, according to energy consultancy Wood Mackenzie, but that comes after a 13-year period (2006-2019) where the top 50 US oil producers…
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