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Big Oil- The Fallacy of a Windfall Profits Tax 

Higher energy prices worrying you? Be afraid because Congress is coming to the rescue. Legislators are introducing a new bill called the "Big Oil Windfall…

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2 years ago

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Higher energy prices worrying you? Be afraid because Congress is coming to the rescue. Legislators are introducing a new bill called the “Big Oil Windfall Profits Tax Act.” The bill’s objective is to reduce the price of oil. The bill pans to tax the windfall profits of large energy companies at a 50% rate. They define windfall profits as profits above and beyond those in the year before Covid. The proceeds from the tax would be returned to consumers earning less than $75k through direct payments.

If Congresses goal is to inflate oil prices further and generate more inflation in the process, the bill, as currently written, is right on track. This article walks through the proposed legislation to better understand why it is grossly flawed. As we will discuss, the bill will not only generate higher prices at the gas pump, but the premise behind the bill, windfall oil profits, is dubious.

But first, it is worth looking beyond Russia’s effect on energy prices and reviewing another reason oil prices have been rising.

The Supply Side Backdrop

In High Gas Prices and Recessions, we discussed how the push toward Green Energy is resulting in oil supply shortfalls. To wit:

“Energy companies and their customers are increasingly under heat to reduce their carbon footprint. Assuming the push toward green energy continues, oil executives must carefully consider new long-lived projects not only from an environmental perspective but from a profit perspective. Higher taxes on oil and oil exploration and increasing sources of green energy will potentially make future drilling less profitable. Unknowns such as these result in a lack of investment into the oil infrastructure.”

Shown below is evidence that energy companies are holding back on new investments. The chart compares the number of oil rigs in operation and oil prices. If you notice, the rig count has only modestly improved since the Pandemic, yet the oil price is much higher. We should expect the rig count to be at least twice current levels based on the past.

The following quote from CNBC provides a little more context to the growing shortfall of oil: “investment in new wells has dropped 60%, causing U.S. crude oil production to plummet by more than 3 million barrels per day or nearly 25%.”

Yes, the Russian invasion of Ukraine is temporarily pushing energy prices higher. Still, the more concerning longer-term problem is the lack of a lucid transition plan from carbon-based energy to greener energy sources.

Further Disincentivizing Oil Production and Exploration

With that base macro understanding of why the supply of oil supply is and will be compromised, we can now consider how energy companies will react if the new bill passes. 

The bill disincentivizes energy companies to explore for oil and drill new wells. Exploration is expensive and can often result in losses. Now throw a 50% profit tax into their decision-making, along with more confirmation of Congressional attitudes toward “big oil”, and we must assume they will be even less likely to explore for new oil.

Similarly, some energy companies may shut down current operating wells that are not profitable enough with the tax.

Even if the bill is not passed, it further cements the rationale to reduce investment into exploration and current drilling operations. Their fear of future government actions against them is further affirmed.  

The bottom line is that even though oil prices are high, the supply of oil and investments into production and exploration will fall further because of the bill. 

More Inflation

As the bill is currently written, the proceeds from the tax are to be returned to consumers earning less than $75k through direct payments.

One of the primary reasons for the current bout of inflation is the massive pandemic fiscal stimulus programs. Unlike other periods of fiscal stimulus, the most recent sent checks directly to the public. As we saw, consumers spent this money. The extra consumption and compromised supply line problems is resulting in the greatest rate of inflation in over 40 years.

Should we expect it to be different this time?

What Windfall Profits?

The other problem with the bill is the premise that large energy companies are profiting from the recent spike in oil prices. Below we share data comparing the gross profit margins of Exxon (XOM) and Chevron (CVX) versus the oil price. The definition of gross profit margin is gross profits divided by total sales. This measure eliminates most other expenses and helps us better assess how sales affect the bottom line.

exxon xom oil profits
chevron cvx oil profit margin

As both graphs highlight, there is little to no correlation between profit margins and oil prices. Exxon’s profit margin rose in the second quarter of 2020 when oil prices fell to a negative $35 a barrel!

Energy companies hate volatility in oil prices because shareholders pay up for predictable profits and growth. To limit earnings volatility, all energy companies lock in future prices via contracts with buyers to sell oil in the future at specific prices. They also hedge with oil futures to further manage oil price volatility. The graphs above show both companies have significantly reduced the volatility of margins over the last 20 years.

Summary

The Windfall Profits Tax Bill doesn’t truly penalize energy companies. It punishes consumers with more inflation. Further, it uses a faulty assumption to help gain support from the public.

If passed, the bill will likely further amplify the growing divergence between the supply and demand for oil. The proceeds may initially help the lower-income classes but ultimately hurt them with more inflation.

Other than those in Congress seeking to boost their reelection odds, we are unsure who this bill benefits.

The post Big Oil- The Fallacy of a Windfall Profits Tax  appeared first on RIA.

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Angry Shouting Aside, Here’s What Biden Is Running On

Angry Shouting Aside, Here’s What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union…

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2 hours ago

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March 8, 2024

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Angry Shouting Aside, Here's What Biden Is Running On

Last night, Joe Biden gave an extremely dark, threatening, angry State of the Union address - in which he insisted that the American economy is doing better than ever, blamed inflation on 'corporate greed,' and warned that Donald Trump poses an existential threat to the republic.

But in between the angry rhetoric, he also laid out his 2024 election platform - for which additional details will be released on March 11, when the White House sends its proposed budget to Congress.

To that end, Goldman Sachs' Alec Phillips and Tim Krupa have summarized the key points:

Taxes

While railing against billionaires (nothing new there), Biden repeated the claim that anyone making under $400,000 per year won't see an increase in their taxes.  He also proposed a 21% corporate minimum tax, up from 15% on book income outlined in the Inflation Reduction Act (IRA), as well as raising the corporate tax rate from 21% to 28% (which would promptly be passed along to consumers in the form of more inflation). Goldman notes that "Congress is unlikely to consider any of these proposals this year, they would only come into play in a second Biden term, if Democrats also won House and Senate majorities."

Biden also called on Congress to restore the pandemic-era child tax credit.

Immigration

Instead of simply passing a slew of border security Executive Orders like the Trump ones he shredded on day one, Biden repeated the lie that Congress 'needs to act' before he can (translation: send money to Ukraine or the US border will continue to be a sieve).

As immigration comes into even greater focus heading into the election, we continue to expect the Administration to tighten policy (e.g., immigration has surged 20pp the last 7 months to first place with 28% in Gallup’s “most important problem” survey). As such, we estimate the foreign-born contribution to monthly labor force growth will moderate from 110k/month in 2023 to around 70-90k/month in 2024. -GS

Ukraine

Biden, with House Speaker Mike Johnson doing his best impression of a bobble-head, urged Congress to pass additional assistance for Ukraine based entirely on the premise that Russia 'won't stop' there (and would what, trigger article 5 and WW3 no matter what?), despite the fact that Putin explicitly told Tucker Carlson he has no further ambitions, and in fact seeks a settlement.

As Goldman estimates, "While there is still a clear chance that such a deal could come together, for now there is no clear path forward for Ukraine aid in Congress."

China

Biden, forgetting about all the aggressive tariffs, suggested that Trump had been soft on China, and that he will stand up "against China's unfair economic practices" and "for peace and stability across the Taiwan Strait."

Healthcare

Lastly, Biden proposed to expand drug price negotiations to 50 additional drugs each year (an increase from 20 outlined in the IRA), which Goldman said would likely require bipartisan support "even if Democrats controlled Congress and the White House," as such policies would likely be ineligible for the budget "reconciliation" process which has been used in previous years to pass the IRA and other major fiscal party when Congressional margins are just too thin.

So there you have it. With no actual accomplishments to speak of, Biden can only attack Trump, lie, and make empty promises.

Tyler Durden Fri, 03/08/2024 - 18:00

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United Airlines adds new flights to faraway destinations

The airline said that it has been working hard to "find hidden gem destinations."

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10 hours ago

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March 8, 2024

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Since countries started opening up after the pandemic in 2021 and 2022, airlines have been seeing demand soar not just for major global cities and popular routes but also for farther-away destinations.

Numerous reports, including a recent TripAdvisor survey of trending destinations, showed that there has been a rise in U.S. traveler interest in Asian countries such as Japan, South Korea and Vietnam as well as growing tourism traction in off-the-beaten-path European countries such as Slovenia, Estonia and Montenegro.

Related: 'No more flying for you': Travel agency sounds alarm over risk of 'carbon passports'

As a result, airlines have been looking at their networks to include more faraway destinations as well as smaller cities that are growing increasingly popular with tourists and may not be served by their competitors.

The Philippines has been popular among tourists in recent years.

Shutterstock

United brings back more routes, says it is committed to 'finding hidden gems'

This week, United Airlines  (UAL)  announced that it will be launching a new route from Newark Liberty International Airport (EWR) to Morocco's Marrakesh. While it is only the country's fourth-largest city, Marrakesh is a particularly popular place for tourists to seek out the sights and experiences that many associate with the country — colorful souks, gardens with ornate architecture and mosques from the Moorish period.

More Travel:

"We have consistently been ahead of the curve in finding hidden gem destinations for our customers to explore and remain committed to providing the most unique slate of travel options for their adventures abroad," United's SVP of Global Network Planning Patrick Quayle, said in a press statement.

The new route will launch on Oct. 24 and take place three times a week on a Boeing 767-300ER  (BA)  plane that is equipped with 46 Polaris business class and 22 Premium Plus seats. The plane choice was a way to reach a luxury customer customer looking to start their holiday in Marrakesh in the plane.

Along with the new Morocco route, United is also launching a flight between Houston (IAH) and Colombia's Medellín on Oct. 27 as well as a route between Tokyo and Cebu in the Philippines on July 31 — the latter is known as a "fifth freedom" flight in which the airline flies to the larger hub from the mainland U.S. and then goes on to smaller Asian city popular with tourists after some travelers get off (and others get on) in Tokyo.

United's network expansion includes new 'fifth freedom' flight

In the fall of 2023, United became the first U.S. airline to fly to the Philippines with a new Manila-San Francisco flight. It has expanded its service to Asia from different U.S. cities earlier last year. Cebu has been on its radar amid growing tourist interest in the region known for marine parks, rainforests and Spanish-style architecture.

With the summer coming up, United also announced that it plans to run its current flights to Hong Kong, Seoul, and Portugal's Porto more frequently at different points of the week and reach four weekly flights between Los Angeles and Shanghai by August 29.

"This is your normal, exciting network planning team back in action," Quayle told travel website The Points Guy of the airline's plans for the new routes.

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Walmart launches clever answer to Target’s new membership program

The retail superstore is adding a new feature to its Walmart+ plan — and customers will be happy.

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10 hours ago

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March 8, 2024

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It's just been a few days since Target  (TGT)  launched its new Target Circle 360 paid membership plan. 

The plan offers free and fast shipping on many products to customers, initially for $49 a year and then $99 after the initial promotional signup period. It promises to be a success, since many Target customers are loyal to the brand and will go out of their way to shop at one instead of at its two larger peers, Walmart and Amazon.

Related: Walmart makes a major price cut that will delight customers

And stop us if this sounds familiar: Target will rely on its more than 2,000 stores to act as fulfillment hubs. 

This model is a proven winner; Walmart also uses its more than 4,600 stores as fulfillment and shipping locations to get orders to customers as soon as possible.

Sometimes, this means shipping goods from the nearest warehouse. But if a desired product is in-store and closer to a customer, it reduces miles on the road and delivery time. It's a kind of logistical magic that makes any efficiency lover's (or retail nerd's) heart go pitter patter. 

Walmart rolls out answer to Target's new membership tier

Walmart has certainly had more time than Target to develop and work out the kinks in Walmart+. It first launched the paid membership in 2020 during the height of the pandemic, when many shoppers sheltered at home but still required many staples they might ordinarily pick up at a Walmart, like cleaning supplies, personal-care products, pantry goods and, of course, toilet paper. 

It also undercut Amazon  (AMZN)  Prime, which costs customers $139 a year for free and fast shipping (plus several other benefits including access to its streaming service, Amazon Prime Video). 

Walmart+ costs $98 a year, which also gets you free and speedy delivery, plus access to a Paramount+ streaming subscription, fuel savings, and more. 

An employee at a Merida, Mexico, Walmart. (Photo by Jeffrey Greenberg/Universal Images Group via Getty Images)

Jeff Greenberg/Getty Images

If that's not enough to tempt you, however, Walmart+ just added a new benefit to its membership program, ostensibly to compete directly with something Target now has: ultrafast delivery. 

Target Circle 360 particularly attracts customers with free same-day delivery for select orders over $35 and as little as one-hour delivery on select items. Target executes this through its Shipt subsidiary.

We've seen this lightning-fast delivery speed only in snippets from Amazon, the king of delivery efficiency. Who better to take on Target, though, than Walmart, which is using a similar store-as-fulfillment-center model? 

"Walmart is stepping up to save our customers even more time with our latest delivery offering: Express On-Demand Early Morning Delivery," Walmart said in a statement, just a day after Target Circle 360 launched. "Starting at 6 a.m., earlier than ever before, customers can enjoy the convenience of On-Demand delivery."

Walmart  (WMT)  clearly sees consumers' desire for near-instant delivery, which obviously saves time and trips to the store. Rather than waiting a day for your order to show up, it might be on your doorstep when you wake up. 

Consumers also tend to spend more money when they shop online, and they remain stickier as paying annual members. So, to a growing number of retail giants, almost instant gratification like this seems like something worth striving for.

Related: Veteran fund manager picks favorite stocks for 2024

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