In response to Russia’s invasion of Ukraine on March 8, 2022, U.S. President Joe Biden imposed restrictions on the import of various energy products from Russia. These measures have led to higher gas prices and inflation in the country. The rise in energy prices is similar to a tax on the consumer, which lowers the demand for other services and goods. It also led to a rise in overall consumer prices, which reached 8.8% in March. The conflict in Ukraine has also led to a rise in oil production in the U.S., which is still significantly below its pre-crisis level. In February 2020, the country’s oil fields produced around 13 million barrels of crude per day. In March 2022, they produced less than 11.9 million barrels daily.

Industry Profits

Due to the lack of supply and the volatility in the market, gasoline prices in the U.S. have increased. According to a new report by three organizations, the country’s upstream oil and gas industry is expected to receive a windfall of up to $126 billion in 2022. Big oil companies have been experiencing record profits this year due to the rising prices of crude oil and gasoline. In the first three months of 2022, Exxon reported earnings of $5.5 billion, while Chevron and Conoco Phillips had earnings of $6.3 billion and $5.8 billion, respectively. Small and independent oil and gas companies, also known as wildcatters, have been experiencing a boost in profits. For instance, Pioneer Natural Resources reported a $2 billion profit during the year’s first quarter.

Government Reaction

The Biden Administration is urging the energy industry to increase its production and improve the efficiency of its operations to bring down the prices of oil and gasoline. In March, the president said that major oil companies planned to increase their investment and production. Senator Sheldon Whitehouse and Representative Ro Khanna of California proposed a windfall tax on the oil industry. It would require the companies to pay a tax based on the current price of oil and the difference between the pre-crisis and current prices. If the oil price continues to stay at its current level throughout the rest of the year, the proposal would impose a tax on half of the company’s profits. This would raise around $20 billion in tax revenue. However, if the profits of the companies grow by a third to meet the rising oil prices, the tax would be increased to $25 billion.

Tax Strategy

The rising profitability of oil and gas companies has allowed them to reduce their tax bills by taking advantage of the net operating losses they suffered during their operations’ early stages. Under the current tax law, most of the costs associated with developing a well can be expensed upfront. This allows companies to avoid paying taxes on the profits that they made during the initial years of their operations. The net operating losses carried over from one year to another are known as the “NOLs.” These losses can be used to offset the company’s tax liability if the company makes a profit. Although many companies have been holding these losses without benefit for a long time, they are starting to use them to offset the profits they made during the 2021 and 2022 periods.