Biden's threatened windfall tax on oil company profits could backfire and drive up crude prices, Larry Summers warns

• Ex-Treasury Secretary Larry Summers said a windfall tax on oil majors would backfire, lifting prices.
• President Joe Biden has called on energy companies to boost production or pay a windfall tax.

President Joe Biden's threatened windfall tax on oil companies could rebound and actually end up driving crude prices higher, former Treasury Secretary Larry Summers has said.

Biden on Monday called on energy companies to invest the huge profits they have made this year into increasing production, or face paying a windfall tax. The US leader believes more output will help bring down gas prices at the pump.

"I'm not sure understand the argument for a windfall profits tax on energy companies. If you reduce profitability, you will discourage investment, which is the opposite of our objective," Summers said in a said.

But Summers said in a tweet Tuesday that a windfall tax would reduce profits

the call could set a precedent that would put oil companies off investing and expanding operations in the future.

"I think the fear is that if we establish that whenever the price of oil went up substantially, we were going to impose windfall profits taxes, the incentive to drill for oil would be diminished," he said in a Tuesday interview with CNN's Wolf Blitzer.

"That's because you wouldn't feel like you could reap the full reward of your oil when it was really needed.

"I think it would discourage investment in oil — which ultimately means higher oil prices."

Biden on Tuesday called on energy companies to boost US energy production to help bring down gas prices at the pump for American drivers – or pay a windfall tax. It comes as he slammed oil giants for "war profiteering" amid Russia's war with Ukraine, in another jab towards the oil and gas industry.

Prior to that, he blasted Exxon Mobil for making "more money than God" and urged oil companies to immediately bring down prices at the pump after US gas prices reached $5 a gallon in June, mirroring surging crude prices.

Oil companies have posted bumper profits as a result of Russia's war given Western sanctions have squeezed markets and sent prices surging. Between July and September, oil giant BP reported stunning profits of $8.2 billion in the third quarter.

According to data compiled by Bloomberg, oil majors including ExxonMobil, Chevron, Shell, and TotalEnergies are on track to give $100 billion in profits to shareholders in the form of buybacks and dividends this year.

Oil prices are back on the rise again after OPEC+ slashed output in a bid to elevate declining prices in the last three to four months as fears of a global recession and China's COVID-zero policy weighs on consumer demand. Prices have risen about 12.5% since mid-September when crude prices hit around $84 a barrel – it's lowest point since early January.

Brent crude, the international benchmark, trades at $94.53 at last check Wednesday while WTI crude stood at $88.18.

In a series of tweets on Tuesday, Summers expanded on his criticism towards Biden's proposed tax plan. "I'm not sure understand the argument for a windfall profits tax on energy companies. If you reduce profitability, you will discourage investment which is the opposite of our objective," he said.

"If it is a fairness argument, I don't quite follow the logic since even with the windfalls Exxon has underperformed the overall market over the last 5 years," he added.

Exxon reported third-quarter earnings of $19.7 billion, almost matching the earnings of tech mammoth Apple. The surge in revenue comes after Exxon faced a tough 2020 where it lost $22.4 billion in the worst year for the company in 40 years.