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Windfall Profits

The enormous runup in oil prices in the spring of 2006 due to natural disasters and political instabilities brought record profits for oil companies — and eruptions of indignation over “greed” and “gouging” leading to demands for new and extravagant taxes to force those companies to disgorge their “windfall profits”.

This letter was submitted to The New York Times as an attempt to point out one fallacy in such thinking. It was not published.

28 April 2006

To all those who want to impose an extra tax on the “windfall profits” being enjoyed by the oil companies:

Right now there is high demand for oil and high uncertainty over oil supplies. As a result oil companies are making huge profits on the resulting high prices — a “windfall” in the highly emotional (and predictable) rhetoric of liberal partisans, one that must be stripped away in the name of fairness.

But the oil business, like all businesses, goes through cycles of highs and lows. Profit “excesses” during today’s boom offset profit “shortfalls” they experienced during the last bust — and will experience during the next one.

Would those calling now for confiscation of that “excess” through a windfall profits tax be equally willing to to make up the “shortfalls” through a windfall loss subsidy during the next down cycle? That would be “fair”, if perhaps unproductive. But I don’t remember any of them being in favor of that in the past. And I can’t imagine it happening in the future.

Rather, in their lexicon “fairness” seems, at least with regard to business, to mean “responsible for losses but not entitled to profits” — risk without reward.

(C) Copyright 2006, Augustus P. Lowell

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