I’m going to reveal a little secret: This is an election year. How do I know that? Well, the Beltway yet again is placing the blame for its own failings on the oil industry.
Back in the days when we had real leadership in Washington, Ronald Reagan ignored the calls for windfall profit taxes, price controls, and conspiracy investigations. Back then, gasoline prices were even higher in inflation-adjusted terms than they are now. But Reagan stood firm, allowing market forces to work, and the high prices of the 1970s fell sharply in the 1980s.
What a different world it is today. Those now arguing for windfall profit taxes for oil companies never advocate subsidies when prices are low. That biased policy approach is destructive economically because it limits potential profits without limiting potential losses. The effect would be falling investment, reduced production capacity, and higher prices over the longer term. So much for consumer wellbeing.
Let’s look at the real reasons that gasoline prices are high. The most obvious are strong worldwide demand for crude oil, and production problems in Venezuela, Nigeria, Russia, and other regions.
Three refineries on the Gulf Coast shut down by hurricanes last fall only now are returning to operation. Other refineries, in order to continue production then, deferred maintenance until this spring. Others are undergoing spring maintenance now in advance of the summer driving season. And so gasoline production has declined over the last month. None of this has anything to do with conspiracies.
And let’s not ignore the damage done by Congress. The environmental requirement for reformulated gasoline can be satisfied only with ethanol or a chemical called MTBE. But some of that chemical has leaked from storage tanks into water supplies, resulting in lawsuits against the MTBE producers, even though they neither own nor maintain the storage tanks. Congress has refused to give those producers legal protection, as a favor for the trial lawyers, so MTBE is being withdrawn from the market. This means that the price of ethanol is being driven up, making corn producers in the Midwest very happy, but at the expense of gasoline consumers. And let’s not forget the 54 cents per gallon tariff on imported ethanol, another example of Congressional magic.
Oil industry earnings per gallon were about 19 cents in 2005, and have increased to about 23 cents more recently. Federal and state taxes per gallon of gasoline average 46 cents. And so by all means, yes: Let’s have a debate about who is profiteering from the gasoline market.
We really should ignore all the demagoguery; oil prices simply bring out the worst in the Beltway, as public officials use unpopular industries as punching bags in pursuit of their political goals. We expect this behavior from such Democrats as Senator Charles Schumer and House Minority Leader Nancy Pelosi; after all, fish gotta swim and birds gotta fly. But President George W. Bush and House Speaker Denny Hastert and Senate Majority Leader Bill Frist are supposed to be the pro-business, pro-capitalism, pro-free enterprise Republicans. And they simply are unwilling to stand for principle.
Back in the days when we had real leadership in Washington, Ronald Reagan ignored the calls for windfall profit taxes, price controls, and conspiracy investigations. Back then, gasoline prices were even higher in inflation-adjusted terms than they are now. But Reagan stood firm, allowing market forces to work, and the high prices of the 1970s fell sharply in the 1980s.
What a different world it is today. Those now arguing for windfall profit taxes for oil companies never advocate subsidies when prices are low. That biased policy approach is destructive economically because it limits potential profits without limiting potential losses. The effect would be falling investment, reduced production capacity, and higher prices over the longer term. So much for consumer wellbeing.
Let’s look at the real reasons that gasoline prices are high. The most obvious are strong worldwide demand for crude oil, and production problems in Venezuela, Nigeria, Russia, and other regions.
Three refineries on the Gulf Coast shut down by hurricanes last fall only now are returning to operation. Other refineries, in order to continue production then, deferred maintenance until this spring. Others are undergoing spring maintenance now in advance of the summer driving season. And so gasoline production has declined over the last month. None of this has anything to do with conspiracies.
And let’s not ignore the damage done by Congress. The environmental requirement for reformulated gasoline can be satisfied only with ethanol or a chemical called MTBE. But some of that chemical has leaked from storage tanks into water supplies, resulting in lawsuits against the MTBE producers, even though they neither own nor maintain the storage tanks. Congress has refused to give those producers legal protection, as a favor for the trial lawyers, so MTBE is being withdrawn from the market. This means that the price of ethanol is being driven up, making corn producers in the Midwest very happy, but at the expense of gasoline consumers. And let’s not forget the 54 cents per gallon tariff on imported ethanol, another example of Congressional magic.
Oil industry earnings per gallon were about 19 cents in 2005, and have increased to about 23 cents more recently. Federal and state taxes per gallon of gasoline average 46 cents. And so by all means, yes: Let’s have a debate about who is profiteering from the gasoline market.
We really should ignore all the demagoguery; oil prices simply bring out the worst in the Beltway, as public officials use unpopular industries as punching bags in pursuit of their political goals. We expect this behavior from such Democrats as Senator Charles Schumer and House Minority Leader Nancy Pelosi; after all, fish gotta swim and birds gotta fly. But President George W. Bush and House Speaker Denny Hastert and Senate Majority Leader Bill Frist are supposed to be the pro-business, pro-capitalism, pro-free enterprise Republicans. And they simply are unwilling to stand for principle.
Economics, since Adam Smith, if not since bread and circuses, has always been helpless before populism and demagoguery.
ReplyDeleteIt should be noted that Smith was revolted by monopolies and price-fixing, which are inherent to capitalism, let's face it.
Let them have their investigation.
Like the dozens of similar investigations, they'll find that Big Oil did indeed get a windfall profit. A one-time windfall profit. That was their reward for investing up the wazoo (exploration) in a sector that historically returns minimal profits, and benefits us all by being content to chug along.
It's the economist's job to acknowledge that fact, then diffuse the demagoguery about the rest of it. If gasoline stabilizes at $3 or so a gallon, no more windfall. The industry is set up for a certain markup over cost of the crude, and sells it as cheaply as possible to compete.
From Bill O'Reilly's Sunday column:
ReplyDelete[Bush should] strongly suggest that oil companies voluntarily roll back prices to 2005 levels for the good of the country in a time of war. Remember, the oil companies made record profits last year. They'd still be swimming in money if they cut prices 20%.
Anyone? Anyone?
And while I'm on one of my rare forays into the economic stuff around here, how about O'Reilly's rival for Right Wing Twit of the Week (RWTOTW):
ReplyDelete“This is a short-term important Band-Aid to a wound that is bleeding and it is beginning to hemorrhage,” Senate Majority Leader Bill Frist said in promoting the "Gas Price Price Relief and Rebate Act" [100 bucks for every motorist].
This man can never be president. I vote for Hillary first, sweartogod.
Bingo, man.
ReplyDelete