An Assessment of the Effects of the Windfall Profits Tax on Crude Oil Supply

Most economic assessments of the recently enacted crude oil "windfall profits tax" (P. L. 96-223) have concluded that the tax will reduce the economic incentive to produce crude oil and will therefore have a negative impact on U.S. oil production.' This article disagrees with that view. Instead we show that the tax offers incentives to producers on existing properties that exceed those offered by a free market. Furthermore, based on estimates of these incentives, we conclude that the tax will1. See, for instance, Mead (1979) Wall Street Journal (1980), and Friedman (1980). Support from grants to the program on business and government relations at the School of Organization and Management at Yale University is gratefully acknowledged. Extraordinary assistance from Edward Erickson and Linda Scotten in improving the exposition of this paper is also gratefully acknowledged. The author assumes full responsibility for any errors.