Key Takeaways:
Big Oil is raking in billions from the Iran war, and the political math is getting harder for the Trump administration.
US oil refiners posted their strongest margins in nearly three years in May as the Iran conflict disrupted global crude flows through the Strait of Hormuz, reigniting debate over whether the industry should face a windfall profits tax.
"The margins we're seeing reflect a market where refining capacity has been taken offline by geopolitical risk, not by any fundamental supply shortage," said Jamie Court, president of Consumer Watchdog, the advocacy group that has pushed for a California refinery penalty. "When regulators took the penalty off the table, profits went through the roof."
Brent crude, the international benchmark, settled at $83.85 a barrel Tuesday, down 2.4 percent on the day and extending a retreat from last week's spike above $102 — the highest level in two months. West Texas Intermediate crude fell 7.5 percent Monday to $82.61 before recovering slightly. The pullback came as the US and Iran paused attacks and resumed talks over navigation rights through the Strait of Hormuz, through which about 20 percent of the world's oil passes.
The political stakes are rising alongside the profits. California refiners posted a gross gasoline refining margin of $1.29 per gallon in May, the highest since mid-2023, according to data tracked by the California Energy Commission. Consumer Watchdog estimates that a state penalty capping margins at $1 per gallon — proposed by Governor Gavin Newsom in 2023 but shelved until at least 2030 — would have generated $610 million in revenue over the three months through May, money that would have been returned to drivers.
The $610 million question
The calculation assumes every dollar above the $1 threshold would be captured, an assumption that economists say is optimistic. Severin Borenstein, an economist at the University of California, Berkeley who closely tracks the state's oil market, said refiners would likely use accounting adjustments to stay under any cap.
"We don't really know how much would have fallen under this penalty," Borenstein said. "But I'm sure it's far less than all of it, which is what the calculation that Consumer Watchdog put out assumes."
Still, the margin data underscores the scale of wartime profits. The last time California refiners saw margins above $1.29 was during the 2022-2023 global energy crisis, when Russia's invasion of Ukraine pushed gasoline prices to record highs. That episode prompted Newsom to call a special legislative session, which produced the penalty law that regulators later declined to implement.
The California Energy Commission said any decision to activate the penalty "must be supported by evidence that it would benefit consumers without discouraging fuel from coming to California and ultimately driving prices higher." The agency said that evidentiary work is underway, with no timeline for completion.
National implications
The California debate is a preview of what could become a national fight. The Trump administration has so far resisted calls for a federal windfall tax, but the optics of oil companies posting record wartime profits while American households pay elevated gasoline prices are politically dangerous for a president facing reelection.
The broader market is watching. The S&P 500 added less than 0.1 percent Monday, while the Dow Jones Industrial Average rose 0.5 percent. Technology stocks weighed on the Nasdaq, which fell 0.2 percent for its fourth straight loss. Bond yields eased, with the 10-year Treasury falling to 4.61 percent Tuesday from 4.65 percent, as lower oil prices reduced inflation expectations.
For the oil industry, the risk is that political pressure translates into policy action. The last time US refiners faced a windfall tax debate was in 2022, when President Joe Biden threatened to impose a "windfall tax penalty" if companies did not increase refining capacity. No federal tax was enacted, but several states, including California, pursued their own measures.
This article is for informational purposes only and does not constitute investment advice.
