GOP Saves Big Oil from Windfall Profits Tax

 

The Associated Press reports today that the GOP defeated a bill that would have put a 25% windfall profits tax on “Big Oil,” proving again the axiom that even a broken clock is right twice a day.

This was the correct move for any number of reasons.  From a moral standpoint, it is correct because there is nothing wrong with record-breaking profits, and from a pragmatic standpoint, those record breaking profits will draw competition in the industry, while increased taxes and red tape will work as a disincentive to new competition.

The main thrust of the argument against the “greedy oil tycoons” is essentially that profits are bad, and large profits are obscene.  But are these large profits the result of collusion, or simply the market forces of supply and demand?

World demand for oil is up.  No one disputes that.  Because of tension in the Middle East and a 30 year moratorium on domestic oil exploration that has us importing 60% of all our oil, it is no doubt that oil prices are higher than they once were.

But that doesn't mean that the oil companies are screwing us without KY.  Focusing on the total profits that the oil companies have made in a time of uncertain supply and increased demand is like looking in the bathroom when your doorbell rings – sure, its a door, but its the wrong door.  You have to look at not profits, but profit margins, to see if you are being taken advantage of.

Profit margins are, in essence, what percentage of the price of a product actually goes toward profit when you take out the costs used in bringing that product to market.  The dirty little secret that demagoguing politicians haven't shared with America is that, in fact, profit margins for the oil companies in the last year are pretty much the same as they've always been – around 8.3%.

Compare that to profit margins in other industries, like banks (18.5%), software (9.9%), the tobacco and beverage industries (19.1), and the pharmaceutical industry (18.4), and you will see that the oil companies are not even remotely guilty of gouging the American people (graph via Texas Rainmaker). 

Why isn't Congress going after “Big Banks” or “Big Beverage?”  Because there's no political hay to be made there.

A windfall profits tax would be a horrible idea, and would only lead to higher-priced gasoline, anyway.  We need to increase domestic supply to lower the price of gasoline during a time when international markets are unstable, and we can learn from the history on this.  The last time this was tried, in 1980, the result was that we decreased “domestic production by 3 percent to 6 percent, thereby increasing American dependence on foreign oil sources by 8 percent to 16 percent.”

Besides, as the Tax Foundation tells us (and shows us in the graph at left), “tax collections on the production and import of gasoline by state and federal governments are already near historic highs. In fact, in recent decades governments have collected far more revenue from gasoline taxes than the largest U.S. oil companies have collectively earned in domestic profits.”

Why can't we trust the market?  It's working.  The reason it works is that when profits become huge, it draws competition to the market, moving toward equilibrium.  Add to that the decreased consumption that occurs when prices get too high, and there are a lot of forces working to get you lower prices.  All government intervention can do to this process is slow it down and make it less efficient.

If the government wants to help, they need to decrease their intervention in energy markets, not the opposite.  They need to release the Strategic Petroleum Reserves, end the moratorium on domestic exploration, allow for the building of new refineries, end the confusing and disruptive regulations that force producers to produce different blends for every different region of the country, lower their gas tax gouging of the American people, and stop the military meddling in the Middle East.

In the short run, releasing the reserves and lowering gas taxes will have the most direct impact on the budgets of Americans, and the rest of the measures will help stabilize the market so that future international instability will be easier to absorb.