Posted by
Matthew Cole on Monday, June 23, 2008 3:09:56 AM
Senate Democrats were recently blocked by their Republican colleagues in an attempt to impose a 25% "windfall profits" tax on oil companies with "obscene" profits. Senator Obama wasted no time in criticizing Republicans for blocking this tax, and pointed out that it is unlikely to have any immediate effect. Nancy Pelosi was quick to play the hypocrite card when she attacked Bush's energy policies as the cause for high gas prices, although this has more to do with Bush's foreign policy..If the Democratic nominee and the Democratic Speaker of the House are any indication of where the rest of their party stands on energy policy, and so far they are doing a great job of representing Congressional Democrats, then the Democrats are clearly either detached from the reality of this issue, or see this hot-button topic as an opportunity for political demagoguery. I think it is the latter.
My first objection to this proposal is that it would most likely do the opposite of its intended purpose, which Senate Democrats claim is to reduce gas prices. The fact that they are quick to point to Exxon-Mobil's record profits at the first sign of a debate on energy policy, as if it were really that relevant, just goes to show that these policies are designed to incite outrage among the people paying high gas prices at the pump, which in turn would be a valuable electoral weapon for the Democrats in November. While Exxon-Mobil has indeed reported record profits for the past fiscal year, the issue is not so much profit, but rather profit margin. That is to say: How many cents out of every dollar is actually profit? For the oil industry, which along with healthcare is probably one of the most regulated industries in America, companies are lucky if they can get a profit margin of 10%. Would we consider a 10% profit margin to be "obscene" in other industries, such as automobile manufacturing or food-service? Since when did prosperity become "obscene" anyway? This low profit margin is becomes a huge profit when comparing only the numerical monetary value primarily because of the laws of supply and demand. When supply goes down and demand goes up, it is only natural to expect a price increase, and right now both are happening in the oil markets.
There is plenty of oil left in the world, but it is becoming harder to get to. We are having to look for reserves deeper underground. Bush recently asked OPEC to boost daily oil production, but this isn't something that we should expect to continue into the long-term. Obviously OPEC can raise the prices they can charge for oil by limiting its quantity, although international pressure has gained concessions. Most of our oil comes from Mexico and Canada, but that still leaves us with two vulnerabilities. The first is that not all of our oil comes from these countries. We still import oil from the Middle East. We are fortunate to be able to buy oil from Mexico and Canada, or else we would be even more dependent upon Middle Eastern oil, and the drastic price increases Americans have been paying in the last few years would be much higher. The second vulnerability in this arrangement is that we are not the sole customers of oil from Mexico and Canada, so we are affected by fluctuations in the demand from countries that buy from our two neighbors.
We must also take into account the increased demand in the past few years. As China and India modernize into developed countries, the demand for oil in those countries will increase drastically, as it is starting to already, due primarily from the size of their populations. Development in the Third-World will inevitably lead to a greater demand for oil, at least in the short-term, and as a result, a greater number of consumers. We must remember to think of oil importations not as purchases by a single governmental entity, but rather as collective purchases by the sum of consumers.
Another factor that we must consider is operational and production costs. Herein lies what should be the most obvious flaw with the proposed tax. Imposing a 25% percent tax on an industry with a low profit margins will almost certainly guarantee that instead of being able to absorb the costs of this tax, oil companies will have to pass that cost along to the consumers. This would certainly push gas prices up beyond $5 a gallon. When the government imposes additional taxes on corporations, it is not the corporations themselves who end up paying it, but rather the consumers. The cost of corporate taxes add to their overall operational and production costs, and as a result, the cost increase results in a price increase for the good or service being produced. Currently the average tax component for goods or services purchased by consumers in America is about 22%. Is it really a coincidence that as the government expands into the energy industry and the healthcare industry, the costs of both drastically increase? We haven't had a new oil refinery built in this country for over 25 years because it is too expensive. Instead of making oil an even more costly enterprise, why not focus on reducing production costs?
Democrats are quick to point the finger at speculators as being a main cause of high gas prices, but once again, this is a distraction from the real issues. Investor confidence is a good indicator of market stability, except in cases of deception and excess subsidization. From the profts made by oil companies, the investors are the ones who line up to collect their dividends. If government drives investors away from these enterprises, then they are damaging the industry itself. This is one area in which Republicans have contributed to high gas prices. Starting a $3-5 trillion war in Iraq, and threatening to nuke Iran does not do much to boost investor confidence in the oil market. Democrats are quick to point out a provision in the proposed tax that would exempt oil companies from this tax if they would invest 25% of their profits in alternative energy sources. This is an attempt to force a decision that goes against market signals. In a free market, investments are made where gain is to be expected. The fact that there is not already these investments pouring into enterprises such as corn ethanol should send a warning to politicians that maybe some of the ideas that come out of Washington might not be totally in touch with reality. Corn ethanol production is extremely inefficient, but lobbyists for corporate farms were able to sell the idea to Washington anyway, and politicians wanting to appear on top of this issue, were quick to subsidize these corporate farms with taxpayer money for an enterprise that will not prove to be any sort of solution for our energy crisis. Many of these corporate farmers making salaries in excess of $100,000 were not in need of subsidies, but since the federal government is now paying subsidizing them, it has become much more beneficial for them to use agricultural resources to produce corn ethanol instead of edible food. This leads me to the second part of the title of this post. By wasting agricultural resources on corn ethanol, the food supply is being diminished. As a result, the price of food is going up around the world. This is most evident in poorer countries, as food riots become more frequent. Once again, political demogoguery has led to more statism, and the unintended consequences that have resulted. It is worth mentioning that hemp is a much better and more efficient source of ethanol than corn is, but the federal government in their infinite wisdom saw fit to illegalize hemp. When debating energy policy in up coming elections, lets be a little more cautious of bright ideas from politicians.