Oil Company "Windfall Profits" – The New Political Catch-Phrase

“The best time to plant a tree was twenty years ago. The second best time is now.” Chinese Proverb

drilling for oilI won’t pretend to be happy about paying higher prices at the gas pump. I know there are many families that are really struggling and many industries, such as shipping and travel, that are being particularly hard hit. Politicians are using the opportunity to invent new catch-phrases that insult our understanding of basic economics in the name of getting votes.

Taxing “Big Oil” is a Big Mistake

I’ll attempt to keep this post mostly apolitical, but I can’t make any promises. One of the two remaining contenders for president recently said, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Oh really? That sounds an awful lot like socialism to me. After all, it was Karl Marx himself who said, “From each according to his ability, to each according to his need.”

Besides, taxing oil companies to reduce profits only hurts the very constituency politicians claim to be protecting. 98% of these companies are owned by shareholders. The large majority of those shareholders are mutual fund investors belonging to the middle class (or institutional investors managing retirement wealth for that same class). If we begin taxing an oil company’s “windfall profits,” causing a decline in shareholder value, aren’t we simply cutting our noses off to spite our faces?

So What is the Answer?

The answer is buried beneath us in places like ANWR, the Gulf of Mexico and the Midwest. The answer is domestic drilling. It is the fastest way to increase supply and reduce our demand for foreign oil. Many of the same politicians who today demand an answer to our energy crisis are the very ones who for years blocked attempts to increase domestic drilling. Environmental concerns are real, but efforts have been made to improve drilling technology to lessen the effects on the environment.

Is It Enough?

No matter what we do as a country, world-wide demand for oil continues to skyrocket. It is this world-wide demand that is driving up the international price of oil. Places like China and India are consuming far greater amounts of oil, per capita* (see comments for correction), than the United States. So even after considerably reducing our consumption of oil domestically, we still may not see any easing in pricing as other countries continue to increase consumption.

photo by giblee

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