Soaring oil and gas prices are causing a lot of pain at the pump for consumers in the U.S. and around the world. For Chevron (CVX 0.44%) and other oil giants, however, the tight energy market has brought a big boost in profits and impressive share-price gains.
President Joe Biden says those profits are excessive, and he just told that directly to the leaders of Chevron and six other companies with extensive refining operations. In a letter to them, Biden emphasized the fact that gasoline prices have risen at an even faster pace than crude prices, a situation which he described as "not acceptable." His public rebuke signals the potential that Washington may bring back a legislative response first used on the oil industry more than 40 years ago.
What Biden told energy companies
Biden's letter was directed specifically to the heads of energy giants Chevron, ExxonMobil (XOM 0.02%), Shell (SHEL 0.49%), and BP (BP 0.13%), as well as Marathon Petroleum (MPC -0.26%), Valero Energy (VLO -0.32%), and Phillips 66 (PSX -0.66%), which are focused more extensively on refining operations. In it, he referred to the fact that gasoline prices have risen by more than $1.70 per gallon since the beginning of 2022, and he pointed to Russia's invasion of Ukraine as a substantial contributing factor.
Yet Biden also focused on the higher spreads between refined product prices and crude, compared to past oil price spikes. Even in the mid-2010s, when oil prices were in their current range of around $120 per barrel, gasoline and diesel prices were between $0.75 and $0.90 per gallon lower than they are today.
Biden recognized that the shortage of refining capacity is a global issue and the COVID-19 pandemic has exacerbated adverse conditions. Citing a time of war, though, the president called on refiners to take action to fight high prices on gasoline, diesel fuel, and other refined products in order to offer support to American consumers.
Stopping short of calling for a windfall profits tax -- for now
Biden's letter didn't provide an "or else" explanation of what would happen if Chevron and the other major oil companies didn't take the actions he requested. Already, though, lawmakers in Congress have been clamoring for more direct ways to penalize the oil companies that they believe are taking advantage of world events to boost prices unfairly.
In late March, Sen. Sheldon Whitehouse (D-R.I.) led a group of Democratic lawmakers in the House and Senate in proposing the Big Oil Windfall Profits Tax bill. The stated purpose of the bill is to take a portion of the money that oil companies have made from higher energy prices.
In practice, though, its provisions would be a blunter instrument, simply imposing a 50% excise tax on the increase in the price of crude oil above its average price from 2015 to 2019. That money would be returned directly to U.S. taxpayers via a claimable tax credit, with the now-standard limits of $150,000 for joint filers and $75,000 for single filers. The size of those credits would depend on how much money the windfall tax raised.
Using 1980s-era tools to fight 1980s-like inflation
As inflation has hit levels last seen in the early 1980s, it's not surprising to see some lawmakers suggesting that it's time to deploy the tools used to fight it back then. A similar windfall profits tax became law in 1980, imposing a 70% excise tax on the amount by which oil prices exceeded $12.81 per barrel.
Opponents of the current measure point to the consequences of the 1980 law. The tax discouraged domestic oil and gas companies from investing in new production, which led to higher imports and reduced energy investment within the U.S. By the time the law was repealed in 1988, oil prices were back to extremely low levels.
Biden's approach looks to avoid the frontal assault on big oil that a windfall profits tax would represent. It also likely acknowledges the political reality that passing such a tax bill would be difficult in the current climate in Washington.
For Chevron and its peers, the big question is how best to address the concerns of President Biden in light of the longer-term economic challenges of investing in adding refinery capacity. There's much uncertainty about what fossil-fuel demand will look like decades into the future, and this won't be the last time that these companies have to adjust their balance between looking to develop more sustainable energy sources for that future and helping to manage the complex transition period along the way.
