It’s that time of year again when the oil companies report their profits and everyone throws a fit. I admit, my own initial reaction to hearing about high profits is negative. But logical decisions and understanding are not based on gut reactions and emotional perceptions. Here is a great article from Investors Business Daily that adds some clarity to the role that profits play in supply side economics (I have added emphasis for skimmers):
Profits: Exxon Mobil’s first-quarter earnings of $10.9 billion, up 17% from a year earlier, are stirring outrage in Washington. Some are calling such profits “obscene.” What a sad lack of understanding of economics.
Case in point: Presidential candidate Hillary Clinton. Like her rival, Barack Obama, she’s pushing a massive “windfall profit” tax on those “greedy” oil companies. “There is something seriously wrong with our economy when Exxon’s record $11 billion in quarterly profits are seen as a disappointment by Wall Street,” Clinton said Thursday. “This is truly Dick Cheney’s wonderland.”
No, what’s seriously wrong is that politicians such as Clinton can cynically manipulate public opinion to enact disastrous policies.
Indeed, rather than be upset at Exxon’s profits, Americans should be thrilled — and angry at a Congress that doesn’t seem to want to encourage the oil industry to make even more.
Our free-market economy is built on profit. Higher profits mean more jobs, higher incomes, more investment in equipment and people, higher standards of living. Yes, profits are the engine for all of this — and that includes the profits of “Big Oil.”
By signaling that supply is scarce, higher profits encourage more production. Except, that is, when Congress through its inept lawmaking stands in the way. And that’s the case now with the oil industry.
Congress seems almost constantly at war with the oil companies — slapping them with taxes and pillorying their CEOs while ignoring the fact that higher profits lead to more exploration, drilling and development.
If anyone is to blame for our current energy mess, it’s Congress. At least 20 billion barrels of oil sit untapped in Alaska and another 30 billion lie offshore. Such sources that could help satisfy U.S. demand for years to come. Yet, Congress has put them out of bounds.
Instead, Congress scapegoats oil profits. In reality, according to Ernst & Young, from 1992 to 2006 the U.S. oil industry spent $1.25 trillion on long-term investment vs. profits of $900 billion.
Truth is, oil industry profits are in line with the rest of American industry. In 2007, a record year, they earned 8.3 cents per dollar of sales. Beverage companies and cigarette makers, by contrast, earned 19.1 cents. Drug makers, 18.4 cents. Indeed, all manufacturers, 8.9 cents on average, made more than “Big Oil.”
Besides, we’ve tried windfall profits taxes before, in the early 1980s, and they were an utter failure. As the Congressional Research Service found, revenues produced for the government were nearly 75% below what was expected. Meanwhile, domestic oil output fell 8%, while oil imports surged 16%.
That’s just poor policy, and even worse economics.
Remember: Oil companies don’t really pay “windfall profit” taxes, anyway. You do. Some 50 million Americans today own oil company stock, either directly or through 401(k)s and mutual funds. Don’t be suckered: “Windfall profits” taxes come right out of your retirement account, not out of the oil industry’s business.
Oh sure, Big Oil’s profits are up. But so are the taxes they pay. In 2006, that came to $90 billion — up 334% in just four years.
This is how Clinton-style populism works. It starts with ignorance and ends with serious damage to our economy.
Oil prices aren’t high because profits are up; they’re high because we don’t have enough oil. By clamping down on drilling, refusing to move forward on nuclear energy and hitting producers with punitive taxes, Congress is doing all it can to ensure we don’t have enough in the future.