Whose windfall?

A million years ago when there was an election on, there was some speculation that Sarah Palin might put Maine's 2nd congressional district into play, what with her moose-huntin', snowmobile-drivin', Carhartt-wearin' ways. (She didn't.) Over at The Plank, I argued that fuel prices were much more on voters' minds than the backwoods trappings of the VP candidate, and someone countered that oil prices were dropping and becoming less of a concern. Well, yes and no.

One of the few sunny sides to the economic downturn is the fall in oil prices, which we're seeing at the pump. Heating oil is also falling quite precipitously. Since there's belt-tightening to be done, at least we won't have to worry about expensive heat this winter, right? Sadly, no.

Prudent people in Maine (as well, I would assume, in other states with similar climates) lock in their oil prices early, like the people in this article. Because winter usually drives up demand, prices rise, and people who lock in early save money.

Winslow resident Kathy White is among the many unlucky homeowners who locked in early. White pre-purchased 600 gallons from O'Brien Oil Co. in July, at a price of $4.49.


"They were predicting it going to $5 or $6," she said. "So I said, 'I better lock in.' I'll think twice next year."
This usually serves buyers well. This year, it hurt, and it's a bad year to be hurting. Contracts, sadly, are not negotiable. From the same article:

"They can't lower it, unless they want to lose money," Py said. "The dealers weren't making up the prices."

(This was also what a local priest was told when he called to inquire about trying to lower heating costs for a local church, which locked in this summer.)

So, here's my question. Someone is making out very well from all of this, because people are stuck paying well over the market price. Apparently it's not the local dealers. So who is it? How far up the oil supply line does one have to go to see the jump in profits?

I know that the idea of a windfall tax gives some people an itchy rash, but isn't this a situation where it might be justified, particularly if the tax could be used to subsidize home heating costs in states where people are hardest hit? (Or, if you prefer, subsidizing conversion to other home heating alternatives, like high-efficiency wood or pellets?) Where are the profits being made, and who has authority to tax those entities that are making out well, the states or the feds?

If only someone, somewhere could answer my questions.


  1. Well I did try and apologize for my error with this story On being wrong – the falling price of home heating oil in Maine , and Gail has written about some of the causes here . In a normal year prices reach their lowest point in the October/November time frame and then start back up. With the global drop in demand, however, this may keep prices down until the current surplus starts to be used up.

  2. Well, yes. But who makes the money from the gap between what people are made to pay, and what oil currently costs? I realize that much of the home heating oil is purchased at the market price in the summer (which means that there is no huge windfall for anyone), but if people continue to pay their locked-in prices all winter, someone will make a bunch of money. Who?

    And yes, this whole situation yields the morally unsound result that procastinators like yours truly are rewarded for their lack of prudence.

  3. In that case it would possibly be the broker, depending on how they had themselves tried to inoculate themselves against price rise, by pre-ordering. And to protect themselves many may have been caught in the same predicament.

    But oil brokers in the North East had been going through a rough time, so this may have helped keep some of them in business.

    This gives you some idea of what is going on. And gives, albeit a bit out of date, under the What consumers should know, a breakdown on how monies are divided.

  4. Dan:

    I think you run into troublesome waters when people start advocating winfall, or any ad hoc tax. For one, what do we consider a "winfall"? Is it greater than normal margins on a per cent basis, or pure EBITDA? Is it based upon a raw number, or year over year increase? Oil margins are in line with banking, light manufaturing, and other similarly sized firms (well, up until this year), so it's a bit of an apples to oranges to call this "record earnings" a winfall.

    But here is where I really see the winfall tax breakdown. If you state (codify) that we will tax at a new marginal rate a certain level of EBITDA, then the firms will either be able to shuffle accounts to increase the costs, or they will start to slow production to keep under that accelerator. Gaming the system would be too easy.

    The other thing they could do would be to simply pass off the tax bill to their direct consumers (distributors) which would either pass along downstream to the end user, or if that was not possible, get out of the business (since their margins are razor thin as it is). Either way, the tax bill results in higher prices to the consumer.

    Sorry to get all Ayn Rand on you, but I just can't get behind windfall taxes as a policy tool.


  5. Well, since you use terms like EBITDA (which is, I assume, Latin?) with authority, it seems your understanding of economics may be a wee bit greater than mine. You are not alone in either surpassing said understanding, or in opposing windfall taxes from that perspective.

    I suppose my support for one is based largely on a visceral reaction, and seeing how hard-hit people in places like Maine are this year. Our state is in terrible financial shape, and is in no position to offer much help. I worry that people are going to literally freeze.

  6. Dan:

    Sorry, you can take the guy out of the finance dept, but not the finance out of the guy. (Well, not without a retractor and a pathologist standing by).

    EBITDA stands for "Earnings before Interest, Taxes, Depreciation and Amortization". It's just a fancy way of saying, revenue less your actual cost of good sold.

    I do see your point about short term pain. I just fear the long term consequences of such solution.