How Windfall Tax on Energy Producers Could Backfire on Biden

President Joe Biden on Monday said energy corporations can either increase oil refining and producing capacities or face paying a tax on their excess profits—but experts warned such a tax could backfire.

Biden railed against energy producers who have pocketed "outrageous" record profits in recent months even as U.S. consumers face high gas prices. He called on the corporations to act "beyond the narrow self interests of their shareholders" and accused them of profiting off of the Russia-Ukraine war, which has sent gas prices soaring since February.

"If they don't, they're going to pay a higher tax on their excess profits and face other restrictions," Biden said.

The demand comes just eight days before the midterm elections and as Democrats face pain at the polls over gas prices and inflation. Biden has sought to alleviate gas prices by releasing millions of barrels from the Strategic Petroleum Reserve, though gas prices are generally determined by global factors.

Experts warned Biden's latest plan to lower gas prices could backfire.

Boston University professor Cutler Cleveland, who serves as the associate director of the Institute for Global Sustainability, told Newsweek that a windfall tax would likely be perceived by oil companies as an increase in the cost in producing oil and could lead to reduced domestic production of oil. This could add "upward pressure" on gas prices.

"There's no plausible arrow you can draw from a windfall profits tax and lower gasoline prices," Cleveland said.

Patrick De Haan, an analyst for Gas Buddy, tweeted: "This is an extremely bad idea that will nearly guarantee to result in curbed desire to increase capacity in oil production and refining capacity and result in even higher prices in the years ahead."

De Haan added that oil producers will "likely use it to maintain lower spending on raising production, citing uncertain political impacts in the years ahead."

Cleveland—who also condemned oil companies for "reaping absurd profits" in recent months—added that the windfall tax could also deter new investment in oil production and impact the U.S. relationship with the world oil market.

"To do something that will actually push our import/export balance in the opposite direction seems a bit crazy," he said.

Still, a windfall tax could have benefits outside of the oil market, Cleveland said. He pointed to a previous bill proposed by Senator Sheldon Whitehouse, a Rhode Island Democrat, that would use windfall profit taxes to support renewable energy to counter climate change and help low-income communities pay utility bills.

He also praised the Biden administration's Inflation Reduction Act, which includes funding for green energy. He said investments in renewable resources will "make us less vulnerable to events outside of our control" that determine gas prices while reducing greenhouse gas emissions.

Newsweek reached out to the White House for comment.

Update 11/1/22, 3:50 p.m. ET: This story was updated to clarify Cutler Cleveland's title.