California Governor Proposes Windfall Profit Tax After Working to Shut Down State’s Oil Production

The irony is lost on Calif. Gov. Gavin Newsom (D), who is now calling for a windfall profits tax in the wake of high gasoline prices after spending much of the past two years seeking to shut down oil production in the state.

Newsom posted a video to Twitter, stating:

“Gas prices in California have increased by a record $0.84 per gallon in just over one week. That’s a $2.50 difference compared to U.S. prices. It just doesn’t add up. This disagree of divergence from the national prices has never happened before.

“… That’s why today, I’m calling for a windfall tax to ensure these profits go directly back to help millions of Californians.”

It’s All About Supply and Demand

Yet, what Newsom doesn’t say in his video is that oil companies don’t control the price of oil and gasoline stations don’t control the price of gasoline. Instead, prices for both are set by the market and supply and demand factors, as the Energy Information Administration makes abundantly clear on its website.

Newsom also doesn’t mention that he has worked to greatly reduce the supply of oil coming out of California. NPR reported in April 2021:

“California Gov. Gavin Newsom announced plans to ban hydraulic fracturing by 2024 as part of a longer-term aim to end all oil extraction in the state.

“The governor has ordered the state’s top oil regulator to implement regulation to stop issuing new fracking permits by 2024. He has also directed the state’s air resources agency to look at ways to phase out oil extraction completely by 2045.”

Just three months later, California began denying fracking permits and then in November 2021, the state joined the Beyond Oil and Gas Alliance – AKA the “We Love OPEC” alliance –a group of countries and regional governments that have pledged to end oil and natural gas production.

As Energy In Depth noted at the time, and which Newsom is now figuring out, banning California’s oil production doesn’t reduce demand for oil, it just means higher prices and increased imports from foreign countries like Saudi Arabia, Iraq, Ecuador, and Colombia.

Windfall Profits Tax is a Proven Loser

Newsom isn’t the first to propose a windfall profit tax amid this energy crisis. Fringe Democrats in Congress have sponsored legislation to implement one and even the U.N. Secretary-General has backed the idea, which has been rejected by highly respected economists including Austan Goolsbee, former Chairman of the Council of Economic Advisors under President Obama, who argued that it would make the problem worse:

“I’m not a big fan. I don’t see what that’s going to solve. I think that there’s a high chance, the way they described it in that segment, that it would lead for oil and gas prices to go up.” (emphasis added)

In fact, when former President Jimmy Carter imposed a windfall profits tax, the Congressional Research Service concluded that the idea backfired, leading to a decrease in production:

“From 1980 to 1988, the WPT may have reduced domestic oil production anywhere from 1.2 percent to 8.0 percent (320 to 1,269 million barrels). Dependence on imported oil grew from between 3 percent and 13 percent.”

Bottom Line: The prices of oil and gasoline are determined by supply and demand, yet Gov. Newsom is working overtime to restrict the supply in California while still complaining about high prices.

His proposed windfall profits tax would only make the situation worse.

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