Thursday, June 12, 2008

Big Win for Congress - Finally

Good news out of Washington - Republicans found their backbone and blocked passage of the Windfall Profits bill. According to the Associated Press,*
The Democratic energy package would have imposed a 25 percent tax on any "unreasonable" profits of the five largest U.S. oil companies, which together made $36 billion during the first three months of the year. It also would have given the government more power to address oil market speculation, opened the way for antitrust actions against countries belonging to the OPEC oil cartel, and made energy price gouging a federal crime.

There are so many things wrong with this, that I will limit myself to the few most obvious items. Who determines "unreasonable" profits? Where, and how, is it determined that this tax revenue will be used to reduce the costs to the consumer? It is a medieval mindset that profits are evil. The modern economist recognizes that the reward of high profits draws more creativity, ingenuity, and participants into the marketplace. This decreases the profit per company, spurs innovation, decreases risk, and benefits consumers much more than government intervention. The contrary claim could be that oil is a finite resource, so additional participants will deplete the supply more quickly. But, supply does not drive demand. In contrast, you will have more companies with a vested interest in prolonging the supply or finding viable alternatives.

While it is clear that this will give more power to government, and make price-gouging a federal crime, what proof is there that this will benefit consumers? What power does the government have to limit oil speculation? The only thing that tempers rampant speculation is a clear signal that it has gone beyond the pale. For the recent housing speculation bust, the signal came when the volume of buyers was far outpaced by the number of sellers. It is difficult to tell how this signal will manifest itself with oil speculation. There are many more players, no geographic restrictions, and the ability to 'buy in' with a much lower risk. The plans to increase supply by bringing more wells and petroleum technologies online appears to be the most likely trigger to stop speculation. Attempts to use alternative sources like wind, solar, or geothermal sources have not been shown to be applicable on a large enough scale to make an impact.

Apparently a hint is given as to where the money taken from the oil companies will be spent, by pursuing antitrust actions against OPEC countries. But, there is no evidence that OPEC is responsible for the spike in prices. All this will do is anger countries with whom we already have tenuous relations. If we truly believed that this action was necessary, we would not wait to tax windfall profits before pursuing this course of action.

The peak of ignorance in the article* is the statement: "But there was nothing to lose by taking on Big Oil when people are paying $60 to $100 to fill up their gas tanks." To say something so blatantly false illuminates the fact that the writer, Josef Hebert, refuses to even consider the alternatives or unintended consequences.

Democrats are already spinning this as another loss to the Oil Companies and to the Republicans who they claim are firmly in their pocket. However, the people pushing this bill are the ones who bear the burden of proof, which they have never satisfied. They are the ones attempting to convict without a fair trial. This was clear last month, when they call the Oil Executives in to their Kangaroo Court to berate and belittle them, while never actually seeking an understanding of the situation.