J. William Lauderback

Tax on Big Oil Ignores Basic Economics

The News Leader (Springfield, MO)

August 14, 2006

Everyone is unhappy with today's high gas prices, including Rep. Russ Carnahan. But, unlike the rest of us, his solution is to raise them.

As multiple Missouri papers reported last week, Rep. Carnahan is the latest misguided politician to propose a "windfall profits" tax on U.S. oil companies, a tactic that has been decried by leading economists and repeatedly defeated by Congress. Suggesting we reinstitute this ill-conceived tax reveals a basic disconnect with the fundamental principles of economics.

In the first place, adding more taxes to the production of gasoline will obviously only serve to send already high prices even higher. That's not going to help anything. In the second, suggesting we essentially punish oil companies for high prices at the pump ignores the realities of the oil industry, including how prices are set and who actually owns the oil companies in the first place.

Oil companies don't pull prices out of thin air; they are determined by open trading on the international market. Saddling U.S. producers with extra taxes makes it harder for them to compete with foreign companies, degrades the value of domestically produced oil and increases American importation of foreign fuel. It's essentially the equivalent of granting a U.S. government subsidy to foreign oil companies.

Also, oil company profits are not just stored in a big vault somewhere; they are reinvested in exploration and production, and paid out as dividends to shareholders. These are the people that really own U.S. oil companies, and they might not be who you think they are.

Oil stocks are extremely popular with both individual investors and fund managers. In fact, if you have a 401(k), own a mutual fund or participate in a retirement plan, the chances are excellent that you yourself have some ownership in an oil company.

Arbitrarily levying extra taxes on oil companies unfairly penalizes their shareholders and overlooks the cyclical ups and downs for which the oil business is famous.

Viewed long term, oil industry profits per dollar of sales are right in the middle in relation to other industries and much lower than some such as pharmaceuticals and software.

In the past, America's oil shortages could always be traced to political problems in one part of the world or another. That's not true this time. The high gasoline prices we've been dealing with since last fall are the result of increased demand coupled with what appears to be a diminishing global supply.

Rep. Carnahan is on the right track when he promotes research into alternative fuels. But stripping oil companies of legitimate profits is off base. He needs to have some faith in our free enterprise system and let private companies do what they do best—recognize a need and fill it. And the best way to help them is to leave them alone.

J. William Lauderback is the executive vice president of the American Conservative Union.