The answer to high energy prices is not new taxes, but new supplies
A comparison to Jimmy Carter as a person can be a wonderful compliment. But as President of the United States? Not really. Unfortunately for President Biden, a declining economy, Russian aggression and high gas prices combine to make the parallels stark.
The good news for Biden is that while Carter’s place in presidential history has been largely written, Biden still has the opportunity to shape his story. This is why the current president would do well to avoid following Carter’s approach of levying punitive taxes on the energy industry.
Seeking to do something about gas prices ahead of the midterms, President Biden and some Democrats on Capitol Hill have pointed to “excess profits” and suggested policies such as a windfall tax to reduce profits”.
The reality is that many prices – not just for energy – have skyrocketed in this economy. The average price of a new car hit a record high of $48,000 in June. Last year, General Motors posted its highest profit in more than a decade, while Ford posted its best performance since 2016, even while producing fewer cars. Yet we haven’t seen policymakers calling for new special taxes for automakers.
Likewise, we have not heard calls for additional taxes on real estate and technology, two sectors whose recent profit margins have exceeded those of oil and natural gas (where, according to an analysis by the American Petroleum Institute, the 11.5% rate of return over the past three years has been below the S&P 500 average).
Oil and gas companies might make easy villains, but the real answer to why we have higher prices is simple: a global mismatch between supply and demand.
And that is why taxes are not the solution. In fact, they would make the problem worse. After all, a rule of thumb in economics is to lower taxes on something you want more of and raise taxes on something you want less of. With not enough oil on the market, the last thing we should do is levy another tax, a market signal that could cause companies to limit production and withhold investment.
Jimmy Carter’s experience shows this clearly. According to a 2006 Congressional Research Service report, its tax – which was in effect from 1980 to 1988 – reduced domestic production (up to 8%) and increased US import dependence (up to ‘at 13%).
Changing the tax code is not the only wrong answer discussed. Calls to ban the export of U.S. oil — or refined products like gasoline and diesel — are market manipulation that will do nothing to relieve pressure on global markets while adding more volatility and uncertainty. . Global oil trade is necessary in part because of differences in refining capabilities and specifications. Moreover, these bans would play into Russian President Vladimir Putin’s hands, line his pockets with additional revenue and undermine our European allies as they deal with the effects of Russia’s invasion of Ukraine.
If we want to lower prices, taxes and protectionism are not the answers. As Lawrence Summers, U.S. Treasury Secretary under President Clinton and economic adviser to President Obama, noted in a recent episode of “Meet the Press,” the solution to dealing with high gasoline prices is an “approach global, more energy supply”.
Oil prices are high right now, but that doesn’t mean they always will be. Recall that at the start of the pandemic, the price of crude oil was negative. To solve the current problem, President Biden needs to focus on increasing supply here at home, including changing his stance on production on federal lands and supporting pipeline projects instead of blocking them. The answer is not new taxes; it’s more energy.
While there are no easy fixes or short-term answers to global supply and demand imbalances, solving the problem often starts with figuring out what not to do. In this case, that means not following the path set by Jimmy Carter.
Jeffrey Kupfer, former acting undersecretary of energy in the George W. Bush administration, is president of ConservAmerica and assistant professor of politics at Heinz College at Carnegie Mellon University.