Summer Windfall
June 10th, 2008 by Peter SudermanEvery year, it’s the same old story: Summertime rolls around, the weather gets hot, people start driving, gas prices go up, and Congress starts expressing Grave and Serious Concern about price gouging and oil company profits. Of course, even in the wake of Hurricane Katrina, an FTC investigation produced no evidence of any gouging. Yet today, the Senate is considering whether or not to pass a windfall profits tax — or, as Roll Call labels it, a way to “punish oil companies” for their profits. This seems obviously wrong. Won’t punishing companies for doing well merely discourage them from making more oil (which is what we obviously need right now)? And won’t saddling them with additional taxes just make gas even more expensive? According to the Congressional Research Service, that’s what happened when Carter tried a similar scheme nearly 30 years ago. The idea that higher taxes or caps on energy usage are going to doing anything to lower prices at the pump is just laughable.
Now, as I’ve noted in the past, it’s unlikely that any federal policy is going to significantly reduce gas prices in the short term. (Reducing federal gas taxes might have some effect, though economists disagree as to how much). Worldwide demand is up significantly, mostly in developing countries. But in the medium and long term, the only way to address high demand is to either cut demand or increase supply. High prices will curtail some demand (as the Post reports this morning, people are already changing their driving habits). But as of right now, there’s no viable energy replacement for oil,* which means that demand will continue to remain high. How, in the medium-long run does one address that? By increasingly supply — and the best way to encourage increased supply is to decrease the regulatory barriers to investment, not tax the companies in the position to make that investment.
*Nuclear has the most potential, and if restrictions were lifted, could make a substantial impact on the world energy market. But alternative energy sources like wind and solar are, at this point, simply not capable of meeting our world’s increasing energy needs.
June 10th, 2008 at 11:20 am
FTC Commissioner Jon Leibowitz (installed in 2004 because the last guy was, well, incompetent and too politicized), dissenting from the report of the FTC Investigation you noted:
http://www.ftc.gov/speeches/leibowitz/060518LeibowitzStatementReGasolineInvestigation.pdf
Full disclosure, you know.
June 10th, 2008 at 11:57 am
I wish you guys would be a bit more thorough about this whole gas price thing instead of just pushing the “drill more” idea your corporate donors are pushing. You’re leaving out several factors:
Aside from noting that the “free market” isn’t exactly working as advertised, it’s curious that you never mention either OPEC or these other oil-producing nations. Indeed, most analysts frame the problem with sluggish production is overseas in Europe and in South America, not in OPEC and in the U.S. All this would seem to undercut your various positions on the subject.
I’m also wondering why you never mention the weak dollar, which has reduced America’s purchasing power and leads directly to higher prices on imports–a fact noted in numerous news and industry articles but, strangely, ignored by you, Peter.
You also have never noted the effect of economic sanctions against Iraq (not to mention the current war which must never be discussed ever) and Iran over the past 30 years have crippled those nations’ abilities to meet rising production demands.
In short, the sources of higher gas prices (and the solutions to same) are multifaceted and complex, yet the only solution you ever propose happens to be the one most pushed by your corporate donors—and there’s really no evidence that it will have any significant impact.
June 10th, 2008 at 12:07 pm
The weak dollar is absolutely a factor, and I know quite a few people that argue that the Fed’s interest rate cuts are major contributors to rising gas prices. Monetary policy, however, gets very complex very quickly, and it’s not often the sort of thing that works well for quick blog posts.
As for Russia’s declining output, I guess I’m not surprised that as the country has more or less nationalized its oil industry its effectiveness has declined.
The actions are various foreign countries are relevant to pricing, of course, but there’s not a lot Congress can do in the way of shifting domestic econ policy — which is the bulk of what we cover here — in order to address that.
June 10th, 2008 at 12:16 pm
That’s not what’s happening. They’re deliberately stabilizing output. It’s not about “effectiveness.” In fact, Russia’s output has benefited greatly from the “more or less” nationalization of its oil industry because of the rampant corruption and organized crime syndicates that were in de facto control of Russia’s oil industry. I appreciate your ideology here, but the facts don’t support it.
I’m not sure what you mean here. You mean shifting foreign econ policy?
June 10th, 2008 at 12:24 pm
http://tinyurl.com/6fvk39
There’s a case to be made that Russia’s oil problems are due in large part to its reversion to statist oil policy.
June 10th, 2008 at 12:53 pm
I think the idea that Russia has oil “problems” is in the eye of the beholder. The author of the article doesn’t note that Russia’s production during the time period of his article rose from 6 million to 10 million barrels a day, and that it’s Russia’s current policy to stabilize its oil output, not increase it.
Russia’s problems with its oil industry are well-documented, and have always been bad, no matter who was running things. Most of the article really deals with the problems with Russia’s pushing out of foreign investors, particularly the big oil companies (Exxon, BP, etc.) which are mentioned several times.
That’s not surprising. The article’s author, Leon Aron, is a fellow at the American Enterprise Institute and formerly of the Heritage Foundation—neocon think tanks significantly funded by oil companies. His fawning book on Yeltsin got mixed reviews from the academic community. I’m not saying he’s wrong about everything, but it’s telling that the guy you sent me to is a think-tank “scholar” unaffiliated with an institution of higher education.
June 11th, 2008 at 8:22 pm
“Won’t punishing companies for doing well merely discourage them from making more oil”
“And won’t saddling them with additional taxes just make gas even more expensive?”
Well, it didn’t do that in the 1980s, then why should it do that now?
“there’s no viable energy replacement for oil”
Of course there is…biomass, solar, wind, hydro, tidal, etc., etc., etc….no one source will do it all alone, but together they can do it easy. It merely requires work and encoragement from the govt. (not DIScouragement like we’ve seen more recently). Other contires with FAAAAR less resources than us (both natural & monetary) are already doing this!!
The various estimates of Russia’s oil reserves are all over the place BTW. No one seems to know how much they have, and the some of the OPEC nations are openly lying about how much they still have left.
June 12th, 2008 at 10:21 am
Pandagon’s Jesse Taylor takes Suderman to school:
Sadly, though, guts and courage are in quite short shrift around FreedomWorks.