Wednesday, April 26, 2006

You Know That Congress is Back in Session When...

...they decide to make some new boneheaded legislation. What's the terrible idea this time? Windfall profits tax, again. Why is this a bad idea? After all, oil is at about $75/barrel, gas is over $2.00/gallon wholesale, and companies like ExxonMobil, BP, and Chevron are raking in money hand over fist on both ends. As both exploration and refining companies, they are pumping full tilt, selling that oil to refiners, then selling the refined to consumers at the prices we're seeing at the pump - $2.51 at Costco today.
Fortunately, according to the Wall Street Journal, President Bush isn't considering the idea.

President Bush tried to get a grip on the politically loaded matter of soaring
gasoline prices today, promising to smoke out any price gougers. But he didn't
propose that the government play Robin Hood and relieve oil companies of big
chunks of their huge and growing incomes.

First, why is a "windfall profits tax" a bad idea? The biggest reason is because it will decrease production. The reason for this is because there isn't an incentive to do so. What's more is that it would only affect US production. Why is this? It's because US companies don't have to repatriate any earnings from outside the US. In effect, if Chevron is pumping 1 million barrels of oil outside of the US - in Indonesia, Nigeria, and Canada let's say, they wouldn't have to ever bring that money into the US. They could use that to fund new operations (non-US operations - that's a key) or expansion and we wouldn't see a dime of it. On the other hand, ExxonMobil's oil fields in Alaska would be subject to this windfall tax. This would actually have the effect of increasing our dependence on foreign oil, because it would be cheaper to do exploration elsewhere where they won't tax oil profits at, say, 50%. It might even cause oil companies to decrease their US production until such a time that it wouldn't be subject to a windfall tax, which would decrease supply, which would increase prices. This doesn't just affect US companies though. BP, Total, and Lukoil would also be affected by it. These foreign companies pump oil from US wells and they would decrease supply from their wells also because that would be subject to taxation under the winfall law.
What if they changed the tax code, just for oil companies? All money made, period, is subject to the tax. That would work, wouldn't it? Unfortunately, no. The effect of that would be one of two things: oil companies would incorporate overseas, perhaps in Bermuda, or you would see Esso, Inc of Canada suddenly purchase ExxonMobil (extrapolate with the other US oil firms). These companies would provide no money to the US and they would still decrease production here due to the terms I explained in the prior paragraph. Again, we would have higher oil prices as a result and depend more on foreign oil and foreign oil companies - because we would have run every US oil company out of the country.
So if a windfall tax doesn't work, why do politicians keep bringing this up? Well, as it says over at Daily Kos, "More of this (.WMV file) from Pelosi and company, and we might actually start inspiring Democrats to hit the polls this November." For those who don't care to listen to the ramblings of Nancy Pelosi, a quick exerpt, again provided by Kos: "We have two oilmen in the white house. the logical follow-up from that is $3 a gallon gasoline. there is no accident. It is a cause and effect. A cause and effect. "
How is this a cause and effect? If I recall, Bush has been trying to open ANWR to oil exploration since he was campaigning. He hasn't pushed alternative fuels, but that's something the market is starting to do all by itself. When gas is at $1.00/gallon, what's the incentive to change? It's cheaper than a 20 oz bottle of Evian, yet you think I'm going to invest in the extra cost of a hybrid, or you think I'm going to drive less? You must be mad. However, with gas prices going up suddenly it makes economic sense to find cheaper alternatives. It's a relatively slow process, but once high gas prices are here to stay, things will move quickly.
Another proposal that is also foolhardy is from South Dakota Senator John Thune. His idea is to suspend the gas tax altogether for a time, or in lieu of that, give everybody in the US $100. The first idea is terrible - that will increase consumption, which will decrease available reserves, which will raise prices and put us back where we already were. The rebate is a better idea if Congress must do something, because that money won't go towards greater gasoline consumption, but instead to shopping or saving.
What about putting a cap on gas prices? We saw what that did in the 70s, and I don't particularly want to go through that now. My time is far more valuable than an extra 50 cents per gallon. In the end, this is a market problem and only a market solution will suffice. What can we do? We can continue to vote with our pocketbooks. Instead of filling up Suburbans, we can switch to Insights and Priuses. We're already starting to see the shift. SUV sales have decreased dramatically and small car sales are up. As gas prices hold steady at this new higher level, the effect will be even more dramatic. Detroit will have a reason to move to hydrogen powered fuel cell vehicles, and consumers will buy them, because hydrogen is dirt cheap. Instead of focusing on this brouhaha, Congress should look at other issues, and there are a lot on their table: the deficit, immigration, education, defense, Medicare, Social Security, and so on. This is a trivial matter that is only good for scoring political points. The problem is that the only way to score those points is to mess up the balance the market has created and either cause a decrease in production or an increase in consumption. Either way the result is the same: higher prices for consumers, either in time or in actual dollars.

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