They’re Not Sending Their Best



Sen. Sherrod Brown, lead sponsor of The Big Oil Windfall Profits Tax Act

Big oil companies are making near-record profits, while Ohioans pay more than ever for gas. This bill will crack down on Big Oil price gouging, and guarantee that consumers in Ohio and across the country get money directly back in their pockets if Big Oil continues to rake in record profits.


The price of gasoline is up for a lot of reasons. One of the very earliest Epsilon Theory notes – The Unbearable Overdetermination of Oil – is about exactly this: how there are way more explanations for a price change than any actual price change, but that doesn’t stop the human animal from coming up with more and more explanations. It’s our nature, to tell these just-so stories.

Regardless of the cause, higher gasoline prices are effectively a regressive tax on the American consumer, which means that it’s bad for our economic growth and bad for a wide swath of voters households. That means that incumbent politicians would like to a) reduce the price of gasoline, or failing that, b) ascribe blame for the higher gasoline prices onto someone else.

One of the parties to blame for a portion of the higher gasoline prices is Big Oil, as politicians call the integrated energy companies. There are a lot of moving parts in the setting of gasoline prices, and this isn’t the place for a discussion of crack spreads and upstream vs. downstream and all the rest, but I think it’s fair to say that Big Oil does, in fact, largely determine the price of gasoline at the pump. I also think it’s fair to say that Big Oil (and everyone else in the production chain) have expanded their profit margins even as the price of oil has gone up, meaning that the price of gasoline has increased more on a percentage basis than the price of oil has increased on a percentage basis.

How much have expanded margins contributed to the increased price of gasoline? No clue. If I had to take a wild guess I’d say 10%. So if your price for gasoline has gone up from $3.00 to $4.50, my guess would be that 15 cents of that $1.50 increase was due to “greedy corporations” and their “price gouging”. Maybe it’s twice that, I dunno. I’d be surprised if it were more than that.

Whatever it is, though, it’s not nothing, and I can understand an incumbent politician’s desire to undo that profit margin expansion. I don’t agree with undoing the profit margin expansion, but I understand it. For the record, the only profit margin expansion I believe a just government has any business undoing is in the case of an oligopolistic or monopolistic market structure. I think you could probably make that oligopolistic argument here (and in most modern industries, for that matter), but that is NOT what Sherrod Brown and his Senate co-sponsors are saying here. They are saying that it is wrong, period, to have a profit margin expansion. They are saying that whatever profits Big Oil was enjoying in 2019 are enough profits, and that anything more should be punitively punished with an excess profits tax.

Okay. Again, I completely disagree with the political philosophy that government should declare by fiat a socially acceptable level of profit margins, but I understand that well-meaning people can hold that view and would attempt to legislate that view with an excess profits tax.

But this is not that.


The Big Oil Windfall Profits Tax would provide consumers guaranteed relief while maintaining American competitiveness and reducing pressure on inflation by attacking corporate profiteering. Under Brown’s and Whitehouse’s bill, revenue raised from the windfall profits of big oil companies will be returned to consumers in the form of a quarterly rebate. Americans who received stimulus checks would be eligible for rebates, which would phase out for single filers who earn more than $75,000 in annual income and joint filers who earn more than $150,000. At $120 per barrel of oil, the levy would raise approximately $45 billion per year. At that price, single filers would receive approximately $240 each year and joint filers would receive roughly $360 each year.

Large oil companies that produce or import at least 300,000 barrels of oil per day (or did so in 2019) will owe a per-barrel tax equal to 50 percent of the difference between the current price of a barrel of oil and the pre-pandemic average price per barrel between 2015 and 2019, a period when big oil companies were already earning large profits. The quarterly tax will apply to both domestically produced and imported barrels of oil to ensure a level playing field.

https://www.brown.senate.gov/newsroom/press/release/sherrod-brown-oil-price-gouging-relief

This is not a windfall profits tax. This is not a tax on predatory pricing or “excessive” margin expansion. Instead, if you produce or purchase a barrel of oil, you are going to be taxed 50% of the difference between today’s price of oil and the average price of oil from 2015-2019 (right at $53 per barrel if you’re using WTI, slightly more if you’re using Brent). So if the price of oil is $100 per barrel, you are going to pay a tax of $23.50 ($100 minus $53, divided by two) on every barrel of oil you produce or purchase, regardless of whatever profit margin expansion you did or did not impose.

This is a tax on production.

Let me say that a little louder for those sitting in back.

THIS IS NOT A WINDFALL PROFITS TAX. THIS IS A TAX ON OIL PRODUCTION.

At exactly the time when supply is down. At exactly the time when we need to produce more oil.

There is NOTHING about this bill that will lower the price of gasoline, that will push Big Oil to sell more gasoline with a smaller profit margin.

On the contrary, if I’m Big Oil the obvious response to this bill is to expand my profit margins still further!

If I’m going to be taxed on the price of a barrel of oil and not the price at the pump, then I am going to capture more profit by expanding my margins and raising the price of gasoline.

On the contrary, if I’m Big Oil the obvious response to this bill is to produce less oil!

If I’m going to be taxed on every barrel of oil I bring up out of the ground, but there’s a good chance that this tax could be reversed with a GOP sweep this November or a change in the White House in two years, then I think I’ll keep as much oil in the ground as I can for now, thank you very much.

The Big Oil Windfall Profits Tax Act will raise the price of gasoline, not lower it.

The Big Oil Windfall Profits Tax Act will reduce the supply of gasoline, not increase it.

And you incumbent politicians think you’re unpopular now?

It reminds me of May 2008, when Congress passed the Ensuring Continued Access to Student Loans Act, raising the maximum unsubsidized Stafford annual loan amount by $2,000.

President George W. Bush signs H.R. 5715 into law Wednesday, May 7, 2008, during a ceremony in the Oval Office. The bill, "Ensuring Continued Access to Student Loans Act of 2008," is designed to provide continued availability of access to the Federal student loan program for students and families. Looking on are, from left: Senator Ted Kennedy, (D-MA); Congressman Ruben Hinojosa of Texas; Congressman George Miller of California; Congressman Buck McKeon of California; Senator Mike Enzi, (R-WY); Secretary of Treasury Hank Paulson; Congressman Ric Keller of Florida, and Secretary of Education Margaret Spellings. White House photo by Chris Greenberg

It took Apollo and all the other for-profit education companies about three days to raise their tuitions across the board by … [checks notes] … exactly $2,000.

Yes, that’s a Republican President signing that bill into law.

It reminds me of this:

Image

This isn’t rocket science. This isn’t higher math or advanced macroeconomics. No one has ever confused Sherrod Brown, the lead author of this legislation, with Aristotle, but you don’t have to be Aristotle to immediately grok that this bill won’t lower gas prices at all. Not at all.

So why is Sherrod Brown putting this bill forward? Is he … you know … stupid? Haha! No, I really don’t think that’s true.

I think the truth is this: Sherrod Brown and his co-sponsors know that this bill will never pass, and they don’t care if it ever does. This bill was not written to become a good law. It was written to tell a good story.

Writing and passing actual legislation is no longer the point of American government. The point of American government is to remain in American government, and the way you do that is to tell a good story.

Sherrod Brown is 69 years old, and he has never had a job of any sort outside of politics. As in literally never a job outside of politics since being elected to the Ohio statehouse at the tender age of 23.

Sherrod Brown is NOT stupid. He is a professional politician.

The bill’s co-author, Sheldon Whitehouse, age 66, has also never had a job outside of government. The bill’s other Senate sponsors are Jeff Merkley (65), Elizabeth Warren (72), Bernie Sanders (80), Richard Blumenthal (76), Tammy Baldwin (60), Jack Reed (72), Ed Markey (75), Cory Booker (52), Michael Bennet (57), and Bob Casey (61). Take a quick look to see a) how many are lawyers and b) how many have spent a day out of professional government service at any point in their loooong adult lives. Go on, I dare you to look it up.

It’s no different on the other side of the aisle, of course. For example, the ranking GOP member of the Senate Banking committee that Sherrod Brown chairs is Richard Shelby. He is 87 years old. Apart from a stint as the Tuscaloosa, Alabama city prosecutor from 1963-1971, Shelby has never held a job outside of elected politics. Take a look at the resumes of the Senate Republican leadership team – Mitch McConnell (80), John Thune (61), John Barrasso (69), and Roy Blunt (72) – and let me know how much of their loooong adult lives have been spent outside of politics.

When I say they’re not sending their best, the they is us.

How do we do better?

Take back your vote.



To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.

Comments

  1. God help me, I voted for that man once in my life.

    I do like that the solution to high prices is adding a tax, which as we all know is how you bring costs down. When someone like Brown does something like this you have to play ‘Stupid or Liar?’ and figure out what caused him to do this. I agree with your assessment, he’s not stupid. I met him a lifetime ago in a small group setting and he seemed like he wasn’t a drooling vegetable. (The same cannot be said for one of our former governors, a man that to this day I still rank as #1 in the dumb-to-job-importance ratio)

  2. Great post. As I worked for Big Oil for 2 decades, I have a definite bias where US policy and politicians are concerned. Rather than bang on about it, I’ll instead recommend John Hofmeister’s book: Why We Hate Oil Companies: Straight Talk from an Energy Insider.

    I have not read it but will.

    I met Mr. Hofmeister in 2006 when he was RDS’s country President. At a round table discussion, he asked our thoughts on public opinion of our industry here in the US. He noted I had been quiet so he asked me directly, “What do you think?” I answered:

    "The public’s negative opinion of our industry is largely our fault because of the way we handled the 1970’s Windfall Profit scandal. Our entire industry quietly and silently didn’t engage with the American public in a thoughtful way in the following decades.

    Instead, we chose not to educate citizens on all the science and engineering that has lead to the breakthroughs needed to create the quality of life, high standard of living, and all the products we love derived from the hydrocarbon molecule chain. We chose not to educate the public about all the private monies our industry donates to fund STEM education in universities across this nation, about the taxes we pay, about the size of our collective payroll, and all the good work our employees do in their communities.

    So into that information vacuum we allowed with our silence, others filled it with their misinformation, mischaracterizations, and politically driven narratives. Oil is Bad.

    Today the average American hasn’t a clue what would happen if we waved a magic wand, stripped everything made from/with hydrocarbon out of their lives. And to a certain extent, that’s on us."

    Mr. Hofmeister nodded, “Good summary.” About a yr later, a colleague texted me: Mr. H is quoting you in this video.

    I think not. Mr. H was a highly intelligent, well read gentlemen–I didn’t say anything he wasn’t already thinking, the reason he called me out was to test if I would say what was written on my face. Am looking forward to reading his book.

  3. At the retail level, gasoline margins compress as the price of oil rises as retailers try and stay competitive. When oil prices fall, retail margins expand for a period of time.

  4. When I say they’re not sending their best, the they is us.

    It is also on us when we don’t do the tiniest bit of price comparison/shopping. Especially given how much easier it is with the internet.
    When the difference in retail prices is $1 a gallon from gas stations (same brand names) less than 10 minutes from each other in a large urban area, NO ONE should be going to the higher priced gas station. Yet it is busy and profitable. And so the gas station 10 minutes away pretty quickly raises their price because their competition has gotten away with it and they realize the market (aka us) will bear it. And thus a competitive cost spiral is born.

  5. Good article, and especially today it makes me want to look harder at energy stocks and BTFD.

  6. Strong Emperor Palpatine vibes from the photo at the beginning of the article.

  7. You can buy all the ones I’m selling. But I also spent seven years in the industry, so I’m a natural skeptic.

  8. I think being alive the last few years alone has made skeptics and cynics out of all of us

  9. A view from the UK: I would like to see a requirement for anyone standing for office, at any level, to have worked in a private company, not the civil service, for a minimum of 5 years before they are eligible. Preferably no one with a degree in political science should be let near the wheels of power, unless they met the above minimum criteria.

    In my youth, it was rare to have professional politicians. Conservatives were farmers, lawyers, bankers, company directors. Labour had Union officials, and a smattering of private business owners or employees. And almost to a man or woman they represented the constituency in which they lived. They knew the local people and the issues which mattered to them.

    The rise of the political wannabe who read PPE at Oxford, then joins into a Think Tank, then becomes a Special Adviser (SpAd) before being parachuted into a safe seat, has led to a decline in the quality of debate and leadership. And a hankering after big show-off projects like Net Zero, which guarantee a decline in living standards for the average family. I’m thinking here of BoJo, my Prime Minister, a man of staggering incompetence and a serial liar who can’t keep it in his pants. But he leads the party of which I am a member …

    When did Government become about virtue signalling and not about trying to better the lives of the people of your country? How can we get back to a choice of potential politicians who have real world experience? One way would be as I suggested at the start. But I’m not holding my aged breath.

  10. This article is depressing.

    “Writing and passing actual legislation is no longer the point of American government. The point of American government is to remain in American government, and the way you do that is to tell a good story.”

    How do we change the incentives so actually governing is the point again? I would much rather have a functioning society than the interpretive dance politics we have now.

  11. It used to be that I could read the names of the politicians involved (in any project X) or see them spout their points and be able to separate the ‘wheat from the chaff’ but now, I find it impossible. In fact, these days I cannot even find a single political sentence which doesn’t seem laden with persuasion (propaganda), untruths (lies), or spin (doublespeak). Some politicians (psychosociopaths) are more equal than others, and they seem to be ‘winning’. Ideally, voting could rectify the problem, but if the choice is always a psychosociopath, then maybe not. As far as taxing Big Oil Windfall Profits, my view is that threatening huge corporations is a sure fire way to maximize political contributions, and since small businesses can never pony up, of course those will end up toast.

  12. “It is also on us when we don’t do the tiniest bit of price comparison/shopping.”

    This is an interesting framing of comparison shopping as a social responsibility. On one hand, it feels anti-capitalist. On the other hand, in a veblenized world, maybe that’s what’s needed to maintain efficient markets.

  13. Ben:

    In some fashion does this play to your previously made point that for the Nudgies the best possible world is where the voters don’t get involved and do absolutely nothing? Having the political arena as ugly as possible makes it a lot less palatable to “the best” who probably, being “the best”, have done their own comparison shopping of life options and gone elsewhere.

    As a long time fan of BS ( that’s Bart Simpson y’all) and a dedicated underachiever I certainly have not been tuning into C-Span for raising my aspirations recently.

  14. Hilarious :joy:

    We tried something similar In Australia with the Rudd - Gillard - Rudd Government’s Petroleum Resource Rent Tax. That was a decade ago.

    TL-DR Failed and was a complete waste of time.

    Was just a taste of lukewarm redistributive communist nonsense back at a time when fuel wasn’t $2.10+ per litre.

    Made a good trope for the warriors of the political left to rally around though.

  15. And Australia ought to be careful when it comes to gasoline. We’ve all seen Mad Max.

Continue the discussion at the Epsilon Theory Forum

Participants

The Latest From Epsilon Theory

DISCLOSURES

This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.