Oil companies provide a good that everybody uses indirectly or directly. Our modern world needs energy and crude oil, which these oil companies provide, and are also used in instances such as transportation, foods, clothing, electronics, and everything else that requires energy to produce. The most common usefulness of refined oil is in automobiles. Cars need the oil, or also known as gas to run their engines.

            Those who invest in oil and drilling companies have received major tax deductions for it. There are some instances, a person can receive a 70% tax deduction, and a depletion allowance. Not only are investors or those who put up capital gaining from this tax break but producers as well. However, many politicians especially on a state level will impose a windfall profit tax on the oil companies. This will negatively affect the prices of oil, causing the producers to pass it on to the consumers, causing increase of gas prices. The producers will still benefit through accounting rules by offsetting the tax on the federal level. Some politicians are in talks of taking the tax collected from the same companies and giving it back to the consumers in the form of a rebate.

            There is an imbalance of supply and demand, in which there is little supply and higher demand. As prices continue to increase, the demand will go down, or at least subside to a level of where prices might go down because of it. The new tax on producers will probably upset or discourage oil and gas exploration, and only exasperate the problem of little supply. This type of good is obviously not renewable and once it is used, it is gone. If the oil companies cannot pump enough oil to meet demand, prices will have to eventually increase. If however on a hypothetical situation where there is price ceiling on how much they can charge to its consumers, the consumers will benefit in the short run. In the long run, everyone will suffer as result of an artificially suppressed price; producers will not make enough money on the margin wiping out profits and can lead to bankruptcy, which means consumers will have little supply of oil, and inevitably increase the price of oil exponentially. Why would oil companies be in business if they cannot make a profit? It is like holding beach ball underwater, sooner or later, once the pressure is let go, the ball will shoot up above the water.

            The goal is to find and strike a balance between how taxes are distributed and finding alternatives to meet the demand for energy. As the emerging markets become more in tuned with modern technology and way of life, dependency of oil will only increase and having enough to go around is crucial. There must be some form of equilibrium on the price and quantity. In time, consumers will have to find an energy source not dependent on crude oil. If that were to happen soon enough, the equilibrium would be reached and both sides, producers and consumers, can be satisfied.  The tax imposed on the consumer is already included in the price they pay at the pump, while businesses or investors who find and produce it are paying taxes as well. The difference is that producers and investors receive tax write offs as oppose to consumers. In the recent years, the only people who benefited from the increase of oil prices are the producers and investors of this good. The government seems to be on their side because the world will need more oil. In order for the public to not be enraged, if they haven’t already, government on a state level are trying to take the same tax breaks back, so they may distribute the money back to the consumers. The proposal of taking the profits from them and giving back to the consumers is only counterproductive because the same money distributed will find its way back in the producers’ pocket!

References

Bernton, H. (2008). Windfall Tax lets Alaska Rake in Billions from Big Oil. Retrieved August 31, 2008, from

http://seattletimes.nwsource.com/html/localnews/2008103325_alaskatax07.html

Williams, J (2005). Oil Company Profits and Tax Collections: Does the U.S. Need a New Windfall Profits Tax? Retrieved August 31, 2008, from

http://www.taxfoundation.org/news/show/1168.html