Economics 101: When the supply of a good is limited but demand is growing, prices will rise until either new supplies reach the market, substitutes for the product are found or, perhaps because of higher prices, demand declines.
Politicians and media pundits seem to understand this basic principle of economics when it applies to cigarettes and alcohol. Want to reduce smoking, raise the tax on tobacco. Want to curb drinking, raise the tax on booze.
So what makes them think that the laws of supply and demand are suspended or reversed when it comes to gasoline supplies? What else could explain congressional proposals to reinstitute a "Windfall Profits Tax" (WPT) on oil and gas companies or restrict mergers in order to reduce high energy prices?
Economist and television personality Ben Stein had perhaps the best analysis of the frenzied calls for punishing oil companies, saying: "I have this sneaking suspicion that this hatred of oil companies is largely for the same reason that our teenagers hate us, their parents. Because they’re so dependent on us, they respond with anger. But senators are not supposed to be teenagers and neither are newspapers."
Oil company collusion is not a factor in the current price of gas. Oil companies are the mercy of the global market in energy as much as anyone. Even Exxon, the world’s largest private oil company only accounts for 3% of the market, with the majority of the oil it delivers purchased at prices set on commodities exchanges in Hong Kong, London and Chicago.
If not collusion, why were gasoline prices higher in 2005 — although certainly not higher than their inflation adjusted peaks of the 1980s? It was a combination of factors: Strong demand in the U.S. and several developing nations, OPEC production and refining decisions and political instabilities in a number of oil exporting countries. Further damage to off-shore oil platforms and gulf coast ports, refineries and delivery systems from Hurricanes Katrina and Rita caused prices to spike.
Even so, profits in the oil and gas industry are much lower than many industrial sectors, such as pharmaceuticals, banks, semiconducters and even household and personal products. In fact, according to the U.S. Energy Information Agency, state and federal taxes account for a larger portion of the price of gasoline than do profits.
Congress should also note that it has contributed to the current high prices for gasoline and natural gas by placing tens of billions of barrels of oil and gas on public lands in Alaska, including the Arctic National Wildlife Refuge, the Western U.S. and on the outer continental shelf off limits to exploration and production.
I thought we wanted to be less dependent on foreign oil. Hasn’t that been the mantra over the past few years with regard to U.S. energy policy? A WPT or Sen. Arlen Specter’s newest proposal, the Petroleum Industry Antitrust Act of 2006, will do nothing to reduce prices at the pump and will increase our dependence on foreign oil.
The Petroleum Industry Antitrust Act of 2006 places restrictions on future petroleum industry mergers, allows the U.S. Attorney General to sue OPEC for colluding to increase prices, and makes it illegal for anyone to withhold oil unilaterally in order to raise prices or create market shortages.
Restrictions on mergers place U.S. companies at a disadvantage against foreign competitors. Domestic oil companies used mergers in the past to reduce refining costs in order to better compete with foreign competitors. Many non-U.S. oil companies maintain a strong competitive advantage as they are state-owned and/or heavily subsidized.
Likewise, the last time such a WPT was imposed, rather than reducing oil imports, as promised, the Congressional Research Service reported that it "reduced domestic oil production between 3% and 6% and increased oil imports between 8% and 16%."
This is not surprising since a WPT only effects U.S. oil companies, placing them at a competitive disadvantage in the global energy marketplace. The result of a new tax: oil companies in Venezuela, the European Union, Russia and Mexico would receive relatively higher profits than U.S. firms whose stock prices would fall.
Like yelling at your dad when he won’t let you borrow the family car, passing restrictive and burdensome measures might feel good at the time, but it won’t help our nation’s cause.