December 1, 2005
Punishing Success in the Oil Business
By Steve
Chapman
The American economy is based on the pursuit of profit, an approach
that has given us one of the highest living standards in the world.
But now oil companies are in trouble with Congress, and for what?
Making too much money -- for being too good at what capitalism
obliges them to do.
It's like
getting bounced from a Trappist monastery for being too quiet.
Lots of corporate executives are lionized by investors for boosting
earnings. I can't think of any CEO who succeeded by striving to
keep her profits down.
But consistency
has never been the hallmark of our elected lawmakers. Confronted
with painfully high gas prices, they are eager to punish someone
for the resulting discomfort. After the petroleum industry reported
sharply higher profits in the third quarter of this year, there
was no doubt who would be wearing the tar and feathers.
Recently,
the Senate Finance Committee voted to slap the major oil companies
with a $5 billion tax aimed at confiscating some of these "windfall
profits" -- with the votes of four Republicans, whose party
supposedly cherishes free markets. Sen. Byron Dorgan, D-N.D.,
has his own plan. When a barrel of oil reaches $40, the amount
above $40 would be subject to an extra 50 percent tax.
Corporations,
of course, already face a top federal tax rate of 39 percent on
their profits. Tack on a 50 percent surcharge, and oil company
executives may soon be asking the question posed by songwriters
Seymour Simons and Gerald Marks: "Why not take all of me?"
It's true
that the industry has been prospering lately. But since when do
we penalize companies for making investments that turn out golden?
It's not as though Exxon-Mobil controls the world price of oil
-- which remains largely under the control of OPEC and producing
nations like Saudi Arabia. Prices at the pump rose after the United
States suddenly lost a lot of refining capacity a few months back,
but that interruption was the fault of Hurricane Katrina.
Still, a
lot of people think the reason gasoline prices soared in September
is that oil companies are greedy. But if that's true, why didn't
they raise prices a year ago? For that matter, why don't they
raise them now? The critics on Capitol Hill don't seem to notice
that pump prices have fallen by 92 cents a gallon since Labor
Day, a 30 percent decline.
That happened
mainly because of a couple of minor factors known as supply and
demand. Consumers curbed their driving when prices peaked, and
in recent weeks, Gulf Coast oil refineries have increased their
output. Both factors helped to loosen a tight market. And the
big oil companies were somehow powerless to keep prices up.
They usually
are. For all we've heard about their "record" profits,
it's not that lucrative a business. Over the last five years,
the American Petroleum Institute points out, the oil and natural
gas industry netted 5.7 cents on every dollar of sales, compared
to 5.5 cents for all U.S. companies.
For every
boom in the oil patch, there is a bust, which usually lasts longer
than the good times did. During much of the last quarter-century,
the industry has grappled with glut. Measured by its return on
investment capital, report Jerry Taylor and Peter Van Doren of
the Cato Institute in Washington, "the oil and gas sector
has been less profitable than the rest of the U.S. economy over
the past 33 years."
That will
come as a surprise to most people. We remember the high-price
periods with bitter tears, but we take the low-price periods as
part of the natural order.
The Dorgan
bill, oddly enough, seems to recognize that the oil industry has
yet to acquire a license to print money. It would excuse companies
from the windfall profits tax if they invest their extra earnings
in energy production.
But if they
can make obscene profits from oil and gas, why would they need
to be encouraged to do that? And if the usual returns aren't enough
to induce them to invest in their own business, why should they
be punished for a transitory increase in earnings?
As it is,
they invested wisely, and now they are reaping a reward, which
is how the free market is supposed to work. That's the difference
between the rule of government and the rule of capitalism: Capitalism
punishes failure, while government punishes success.
Copyright
2005 Creators Syndicate
