The Windfall Profits Tax (WPT) was a bad idea in the 1980s, and it is an even worse idea today in light of the tremendous capital investment that will be needed in the nation’s oil and natural gas sector to meet the long-term demand for energy in the United States and around the world. 

Read the latest study on the economic and energy sector impacts of a windfall profits tax.

Why is it a bad idea?

• The oil and natural gas industry is not earning "windfall profits." The industry’s earnings have been very much in line with other industries, and often are lower.  
  
  

• The oil industry uses its earnings to invest in new technology, new production, refining and product distribution infrastructure, and environmental and product quality improvements. According to the Congressional Research Service (CRS), before the WPT was repealed in 1988, it generated about $38 billion in net revenues ($80 billion in gross revenues)— money that could have been used by the oil industry to invest in new energy production and infrastructure.
   
• A WPT would establish a precedent that could discourage investment in domestic energy production. Studies have shown that producers will have to invest almost $1.2 trillion through 2025 to fund U.S. and Canadian natural gas exploration and production activities. Investments of this magnitude require long-term fiscal stability. 
   
• The industry must manage its business in the face of severe price fluctuations, riding out the low prices in anticipation of recovering during higher prices. Crude oil prices, which are set on the world market, and natural gas prices fluctuate substantially and unpredictably.  In fact, as recently as 1999, the domestic petroleum industry was weathering depressed oil prices of around $10 per barrel. In 2008, the price of oil dropped more than $100 in just a few months.
   
• A WPT taxes away the benefits of better times and offers no help to oil and gas companies during bad times. This discourages investment in domestic production and increases U.S. dependence on imported oil. The CRS concluded that between 1980 and 1986 the WPT reduced domestic oil production by as much as 1.26 billion barrels.

What is the Windfall Profit Tax?

The WPT was enacted in 1980 to raise revenue and to ensure that oil companies did not benefit unduly as domestic price controls were removed in a period of relatively high crude oil prices (the "Second Oil Crisis" occasioned by the Iran/Iraq war). While it failed to raise the revenues predicted due to declining oil prices in the 1980s, the WPT did drain $38 billion in industry net revenues that could have been used to invest in new oil and gas production. In fact, as much as 1.26 billion fewer barrels of oil were produced domestically due to the WPT.