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Donald Scarinci, founding partner of Scarinci Hollenbeck. (Photo: Donald Scarinci.)

Scarinci: High Gas Prices As War Profiteering

By Donald Scarinci, June 27 2022 10:38 am

OPINION

Russia’s invasion of Ukraine dramatically increased the volatility of the global oil market, with gas prices soaring across the United States. At the same time, the world’s largest oil companies are generating record profits.

Skyrocketing energy costs have sparked criticism over whether oil companies are doing enough to help lower prices for consumers. Some critics, including White House officials, have even speculated that the companies may be guilty of profiteering — taking advantage of the Ukraine crisis to make excessive profits.

Long-History of Profiteering During Wartime

While profiteering can occur during peacetime, it is far more common during times of crisis. For every person willing to sacrifice for the good of the country, there is another who is willing to exploit the opportunities that come with war. In the earliest days of our country, Boston merchants faced angry mobs who accused them of hoarding precious goods like coffee and sugar in order to drive up prices. More recently, military contractors have faced criticism over inking lucrative contracts.

During the Civil War, both the North and the South were plagued by profiteers. The problem was more challenging in the Confederate states where essential goods were in shorter supply, which prompted one of country’s first laws seeking to limit excess profits. In 1863, the Confederacy enacted a statute placing a special 10 percent income tax on profits from the sale of war materials; one year later, a special 25 percent tax was levied on all profits in excess of 25 percent.

While the North had greater access to funds and supplies, businesses still sought to capitalize on the war to make significant profits. In one scandal, a contract for the construction of five forts totaled $191,000, of which $111,000 was profit. In another scandal, ships were purchased for double their value only to later sink at sea due to their shoddy construction.

During both World War I and II, profiteering was again a significant concern. In 1915, Du Pont, which manufactured smokeless gunpowder, doubled its price and saw its annual profits jump from $5 million to $82 million. In response, Congress enacted laws designed to ensure that companies could not unfairly profit from the war. Some laws established price controls, while others imposed taxes on excess profits. As President Woodrow Wilson said in 1918, “The profiteering that cannot be got at by the restraints of conscience and love of country can be got at by taxation.”

During World War II, the tax rate imposed on so-called windfall profits reached as high as 95 percent. However, companies still managed to find ways to bolster their profits, with corporate earnings rising between 41 and 77 percent during the war.

Modern Measures to Address Big Oil’s Record Profits

As the war between Ukraine and Russia tightens the global energy supply, the oil and gas industry is under intense scrutiny. At the end of April, Exxon Mobil reported $5.48 billion in profits during the first quarter of 2022, which was more than double the profits recorded during the same period last year. Similarly, Shell’s adjusted earnings grew to $9.1 billion, which is almost triple the $3.2 billion generated in the same period last year. At the same time, gas prices have reached levels not seen since the 1970s. As of June 23, 2022, the national average is hovering around $5/gallon, according to AAA.

Democratic lawmakers have proposed a solution that is similar to the excess profit taxes imposed during World War I and II. The Big Oil Windfall Profits Tax Act, introduced in March, would amend the Internal Revenue Code of 1986 to impose a per-barrel tax equal to 50% of the difference between the current price of a barrel of oil and the pre-pandemic average price per barrel between 2015 and 2019.” According to a summary published by Rep. Ro Khanna (D-CA), “Revenue raised from the windfall profits of big oil companies will be returned to consumers in the form of a quarterly rebate, which would phase out for single filers who earn more than $75,000 in annual income and joint filers who earn more than $150,000.”

While the legislation’s prospects of passage are uncertain, the United Kingdom imposed a similar windfall tax in May. The EU is also considering measures to capture windfall profits generated by increased energy prices via taxation.

Donald Scarinci is well known to our readers.  He is the founding Partner of Scarinci Hollenbeck, one of NJ’s largest law firms, lawyer and advisor to many NJ elected officials, a Trustee of the NJ Institute of Local Government Attorneys, editor of the popular Constitutional Law Reporter https://constitutionallawreporter.com/ and author of four books.

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