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

Steve Chapman

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