Drop the "Windfall Profits" Smear
By Alex Epstein (Providence Journal, December 14, 2005; Detroit Free Press, Feb. 8, 2006; San Francisco Chronicle, May 7, 2006)
The recent announcement of record profits by ExxonMobil and Chevron is being met by widespread denunciations of oil companies' "windfall profits"--and the demand that these profits be "given back" to society via a proposed $20 billion tax. As Representative Dennis Kucinich and others say, they seek "to tax only excess profits, leaving . . . reasonable profits unaffected." Such taxation is justified because the recent low supply and high demand that led to higher profits, explains economist Dean Baker, "is kind of [the oil companies'] good luck. They didn't do anything to earn it."
But America's oil companies have earned every penny of their profits. To characterize any portion of them as an unearned "windfall"--like manna dropped from heaven--is a vicious smear. It is to evade what is truly responsible for their profits this and every quarter: the great value they create and the tremendous thought, effort, and risk-taking that goes into creating it.
Virtually forgotten in the condemnation of oil profits is that the great--and growing--global demand for oil reflects its great value. Producers and consumers have been willing to pay $70 a barrel for oil because it is worth that much to us. Oil is used by us to get quickly from point A to point B by car, train, or jet. It is used by efficient factories overseas to produce the ever-cheaper goods we get at Wal-Mart. In the event of a natural disaster, it allows us to drive to a safer place or to generate power to begin a recovery.
The critics of oil profits take all the benefits of free-flowing oil for granted--with not a word of acknowledgement to those who sell it to them at agreeable prices. They treat oil production as an effortless, risk-less task that requires little more of oil executives than shuffling paper and watching their coffers fill up with mega-profits.
But the continuous mass-production of oil, under all economic conditions, is a tremendous achievement. Oil companies invest billions on new exploration projects. They construct skyscraper-high oil rigs to extract oil from the ocean floor. They develop new technologies like 3-D seismic surveys or new extraction methods to get hundreds of billions of barrels of oil from sand deposits in Canada.
And to profit, they must do all of these things efficiently, while assuming a great amount of risk: the uncertain nature of oil exploration and R&D; the need to deal with unstable foreign governments; the new and shifting government regulations on exploration and refining; the machinations of the OPEC cartel of dictatorships.
Critics emphasize the fact that the oil companies' profits this quarter are partially due to factors that they did not anticipate or control--such as the massive increase in demand from China and India. But every business venture involves factors that its leaders do not (and cannot) anticipate or control--factors that can affect it positively or negatively. These factors are part of the risk that businesses assume. Since they undertake the risk, they deserve any losses or rewards that result. In the 1990s, the oil companies had no right to a bailout when oil unexpectedly fell below $10 a barrel. Likewise, we now have no right to seize their profits when oil unexpectedly rises to over $70 a barrel.
To earn a profit does not mean to be fully responsible for every factor that went into it; it is to take the action necessary to create a product or service--to develop the skills, to invest the time, money, and effort--and to assume the risk that others will value one's product or service, and that one will not be driven out of business by a superior competitor, a new invention, etc.
This principle applies equally to employees as to business owners. Did the many former "nerds" who made hundreds of thousands at Microsoft and elsewhere not deserve their money--should they be forced to "give" it to society (i.e., to other people)--because they had no idea that cultivating programming skills would be so profitable? No--they chose to develop those skills, they staked their livelihoods on them, and their high salaries rightfully belong to them.
Given the value oil companies create and the effort and risk involved, to call their profits a "windfall" is an intellectual crime. A "windfall profits" tax would punish producers for working hard, taking risks, and succeeding. Nothing could be more un-American than that. Let us drop the "windfall" smear, and congratulate the oil industry for a job well-done.
Alex Epstein was a writer and a fellow on staff
at ARI between 2004 and 2011.