By Sterling Burnett, KERA 90.1 Commentator
http://stream.publicbroadcasting.net/production/mp3/kera/local-kera-490378.mp3
Commentary: Congress, Don't Interfere with Oil and Gas
Dallas, TX –
Congress is on the verge doing something stupid - enacting a windfall profits tax on oil industry profits. Even though pump prices for gasoline are receding almost as fast as Katrina's floodwaters, castigating "big oil" for daring to make a profit is popular.
Many Americans seem to feel that low gasoline and oil prices are an American birthright. But, enacting price controls is disingenuous and counterproductive.
A Windfall Profits Tax places U.S. oil companies at a competitive disadvantage. Only U.S. companies would be affected, so oil companies in Venezuela, Russia and Mexico would receive higher profits than U.S. firms. Millions of individuals and large institutional investors would suffer as dividend income and portfolio values decline.
In addition, the Windfall Profits Tax discourages investment in domestic oil production, telling potential investors that their money would be better invested overseas. And profits siphoned off by taxing domestic oil companies will not be available for investment in new production and refining capacity.
As evidence, a 1990 Congressional Research Service report indicated that between 1980 and 1987, The Windfall Profits Tax reduced domestic oil production between 3 and 6 percent and increased oil imports between 8 and 16 percent.
Markets are working. According to Daniel Yergin of Cambridge Energy Research Associates, investment prompted by higher oil prices should increase oil production capacity 20 percent by 2010. Indeed, in response to higher prices the number of oil and gas wells operating in the U.S. has tripled since 2000. A Windfall Profits Tax would slow or reverse that trend.
When the government wants to discourage something, it taxes is. Want less smoking, raise the tax on cigarettes. Want to reduce drinking, increase the tax on booze. Taxing oil profits will have the same effect - cutting domestic production. Only an idiot could think that less production will result in lower prices at the pump!
Instituting price controls would be even worse. If the federal government sets an artificially low price for gasoline, oil producers and marketers will ship their product to higher bidders elsewhere. Oil that could have gone to the U.S. will wind up in China or India. The result: long gas station lines and shortages like the 1970s?
Rather than scapegoating oil companies, Congress should look to its own role in the price of oil and gasoline. Tens of billions of barrels of oil are locked up on public lands in Alaska, the Western U.S. and on the outer continental shelf. Yet there has been a moratorium on new oil and gas development and production off the coasts of California, the East Coast and much of Florida since 1990.
Few politicians were willing to fight against these short-sighted polices when supplies seemed abundant and gas was cheap. That's no longer the case and the policies are foolish.
There are a number of reasons for the spike in oil and gasoline prices after Katrina, but market manipulation by U.S. oil companies is not one of them. It's time for Congress to go back to school. I recommend Economics 101, paying particular attention to lectures about the laws of supply and demand.
Sterling Burnett is a senior fellow with the National Center for Policy Analysis.
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