When Chevron reported its highest quarterly profit in six years on July 31, 2026, it was just one detail in a larger picture: Analyst firm Wood Mackenzie estimates the global oil and gas industry is on course for a cash windfall of US$495 billion in 2026. That’s profit above and beyond what the industry expected before the U.S.-Israel war with Iran began.
Three separate bills seeking to tax those profits are now in Congress, and President Donald Trump has even said the oil companies are “making too much money.”
As an applied microeconomist, I am often asked how taxes affect economic activity. Economists have long held a more nuanced view of windfall taxes than either side of the current debate suggests. Advocates often make overly optimistic revenue projections, and opponents often overstate how much such a tax might discourage investment. A 1980s U.S. windfall-tax experiment is instructive on both counts.
In the U.K., a windfall tax on North Sea oil and gas – layered on top of existing levies to produce a combined rate of 78% on profits – is on course to generate an estimated 8 billion pounds in 2026 (about $10.8 billion), roughly double its 2024–25 revenue.
A similar European Union-wide tax imposed as a one-time measure after Russia’s 2022 invasion of Ukraine raised 26.15 billion euros ($30 billion). Five EU countries are now calling for a second one in response to the Iran war.
Many taxes are deliberately designed to change behavior. But a windfall tax is different: It goes after money that results from a company making the same production decision it was already planning to make before prices rose. The oil was going to be pumped regardless; the war just made each barrel worth more.
A textbook windfall tax would not fall on all profits, but only on the amount exceeding a baseline level. Australia’s Petroleum Resource Rent Tax and Norway’s special petroleum tax are the closest working examples. Under those, companies deduct all costs — including exploration and investment – plus a normal rate of return, before any windfall tax is owed.
In the U.S., the Crude Oil Windfall Profit Tax, enacted in 1980, was projected to raise $393 billion over its planned 10-year life. It raised about $80 billion before being repealed in 1988 – roughly a fifth of the projection. Prices collapsed after 1986, domestic production was increasingly exempted, and the tax was generating almost nothing by the time it was repealed.
The bills currently in Congress are structured very differently from the textbook design – and from each other.
A proposal by Sen. Sheldon Whitehouse of Rhode Island and Rep. Ro Khanna of California, both Democrats would levy a 50% excise tax per barrel on the difference between the current average Brent crude price and the 2025 average of $69. With a July 2026 average of $84, a company would owe $7.50 per barrel – regardless of production costs or profitability.
A second bill, the Iran War Oil Crisis Windfall Profits Tax Act by Democratic Rep. Brad Sherman of California, is more aggressive: a 100% tax on the amount by which crude prices exceed $75 per barrel. At the July 2026 average of $84, companies would owe $9 per barrel. That tax would be in effect only until hostilities end and prices fall below that threshold.
Both are triggered by prices, not by any measure of underlying profit. A third proposal, the Taxing Buybacks from Big Oil Windfalls Act by Democratic Sens. Ron Wyden, Chuck Schumer, and Michael Bennet, takes a different approach: raising the excise tax on stock buybacks from 1% to 25% for large oil and gas companies, targeting not the windfall itself but what companies do with it.
The American Petroleum Institute has argued that proposals like these “erode the certainty needed to make investment” decisions. The Tax Foundation has warned that “taxing producers is the opposite of a solution to a supply crisis.” Neither side, however, has put a specific dollar figure on how much investment would actually be deterred.
The data tells a different story. According to Wood Mackenzie, the 49 largest oil and gas companies will pocket about $272 billion of the sector’s windfall – roughly equal to 70% of their combined annual investment budgets. Yet investment spending has barely moved, stock buybacks are on course to fall, and dividends have stayed flat. The cash is simply accumulating on balance sheets.
This is exactly what economic research predicts: When a windfall doesn’t change a firm’s underlying investment opportunities, managers hold the cash and wait. In 2026, the industry is waiting for clarity on how long the war lasts, whether prices have peaked and whether Congress will pass a windfall tax. The argument that such a tax would prevent important economic activity weakens by the day.
For oil companies, the direct effect is straightforward: Every dollar paid in tax is a dollar less in earnings. The indirect effect – discouraging investment – is likely weaker than usual because the windfall isn’t being invested now anyway.
For government revenue, the 1980 experience is a cautionary tale: Projections built on current prices tend to overstate what a tax will collect.
For consumers, a tax only on domestic production is largely borne by producers, while a tax that touches imports can raise pump prices.
But the use of the revenue matters too. Both the Whitehouse-Khanna and Sherman bills rebate proceeds directly to households. The Whitehouse-Khanna proposal could give an estimated $216 a year to a single taxpayer at $100-per-barrel oil – helping offset pump prices particularly for lower-income families, who spend a larger share of their budgets on fuel.
Whether the trade-off between taxing companies’ war-driven windfall profits and the risks of market intervention is worth making depends on human values as much as on financial estimates. People differ on how fair it is to let companies keep profits that result from a war, and on the reliability of projections about revenue raised and investment lost. Those are not questions economists alone can settle.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
]]>Tibor Besedes, professor of Economics, Georgia Institute of Technology
Shelley Wunder-Smith
shelley.wunder-smith@research.gatech.edu