This week, Exxon Mobil (XOM) said it earned nearly $10 billion in the third quarter. Other major integrated companies followed suit, with Royal Dutch Shell (RDS.A) posting results over $9 billion, and other majors such as BP (BP), Chevron (CVX) and ConocoPhillips (COP) weren't far behind.That is a lot (a whole lot) of money for just 90 days of work. But that doesn't mean that our faithful governmental leaders should lay claim to a larger portion of the cash in the form of a windfall profits tax. In short, such a move would be detrimental to global oil and gas supply, and it amounts to nothing more than a tax on success.
If there is no economic incentive to step out and take economic risk, new sources of supply aren't likely to be explored. And if that exploration doesn't happen and demand wants to grow, energy prices will go still higher. In fact, the lack of new supply (because there is no economic incentive to explore) combined with burgeoning demand would, in theory, lead to much higher prices, likely in the form of price spikes. Spikes, in turn, would lead to a much more pronounced economic impact: hyperinflation, which would be followed by severe demand and economic contraction. If you think today's high prices are bad, think about what it would be like if there were an artificial economic disincentive -- such as a windfall profits tax -- to deter new supply. That's not something I want to think about. A windfall profits tax is misguided, ineffective and counterproductive. There isn't a single tax that has ever spurred investment. Taxes don't create incentives; they act as disincentives. The same will be true with any windfall profits tax proposal for oil companies.
The point is this: If we took half the energy Congress has spent in recent weeks bashing energy company profits and focused it on ways to improve the supply picture and our energy infrastructure, policy might actually have an impact. I will give the politicians credit on one front: So far, nobody has hidden behind the facade that the windfall profits tax is needed to help balance the budget. Rather, this time the windfall profits tax is undressed for what it really is: a tax to punish the oil companies for making too much money. Given that to be the case, should we assume the same politicians will come to oil companies' aid when oil prices return to the mid-$10s and they are losing money while still producing the energy needed to power the global economy?