December 4, 2005
Oil's Law of Unintended Effects
Locrian who proposed any new law stood forth in the assembly of
the people with a cord round his neck, and if the law was rejected,
the innovator was instantly strangled.''
Gibbon, ``The History of the Decline and Fall of the Roman Empire''
-- If Congress had the rule of the Locrians, a people in ancient
Greece, it would have been fatal to Sen. Byron Dorgan, the North
Dakota Democrat. He recently got 34 colleagues, none of them Republicans,
to vote for his measure to punish oil companies for earning profits
which, relative to revenues, were unimpressive.
measure also would have inflicted collateral damage on everyone
who buys petroleum products, and would have injured millions of
Americans -- many of them currently inciting Congress to smite
the oil companies -- who do not know that they own oil stocks.
Herewith an after-action analysis of a battle that has been fought
before and will be again.
us know much about what is happening with respect to pricing,''
said Dorgan, disclaiming a competence rarely ascribed to senators.
But, quickly recovering from uncharacteristic humility, Dorgan
joined Senate colleagues in exhibitionistic indignation about
the fact that the five largest oil companies, led by ExxonMobil's
$9.9 billion, had combined third-quarter profits of $32.8 billion.
which has more than $50 billion of past profits invested in energy
development projects, made 9.8 cents per dollar of sales, much
less than the 21.2 cents made by a company selling another fluid
that lubricates American life -- Coca-Cola. Nevertheless, another
Midwestern populist, Sen. Charles Grassley, the increasingly eccentric
Iowa Republican who chairs the Finance Committee, admonished the
oil companies to contribute 10 percent of their third-quarter
profits to augment existing federal subsidies that help some Americans
pay their heating bills. Many of those Americans live in the chilly
Northeast and vote for liberals who, in Congress, write this narrative:
much drilling in Alaska and offshore, Congress does nothing to
improve the price of oil. Then Congress spends taxpayer dollars
to soften the impact of the price, thereby encouraging consumption
that raises the price. Then Grassley asks oil executives to join
the moral grandstanding by squandering their shareholders' wealth
-- diverting it to protect oil consumers from some consequences
of their representatives' irrationality.
having flirted with this loopy idea of oil companies tithing themselves,
then contemplated a worse idea -- Dorgan's ``windfall profits''
tax. A ``windfall profit'' is a technical term denoting a profit
made by someone else. Americans do not say there was anything
windfall-like about this year's $2.5 trillion increase
in the value of their houses.
the six largest oil companies will disperse 34 percent of their
cash flow -- $31 billion -- in dividends to shareholders. But
such flows can be shrunk by ``windfall profit'' taxes. That is
explained, with a clarity sufficient even for the dimmest 35 senators,
in a study -- ``The Economic Impact of a Windfall Profits Tax
for Savers and Shareholders'' -- by Robert J. Shapiro, former
undersecretary of commerce in the Clinton administration, and
Nam D. Pham, an economist.
the real rationale for a windfall profits tax is to allow legislators
to strike a histrionic pose, Dorgan's tax, say Shapiro and Pham,
would have produced gross revenues -- depending on where the price
of oil is in the range between $45 and $60 a barrel -- of $18.5
billion to $104.9 billion over five years. But because the windfall
profits tax payments would have reduced corporate income tax payments,
the government's net, say Shapiro and Pham, would have been only
$8.6 billion to $48.7 billion.
that 41 percent of oil company stocks are owned by pension plans
and individuals' retirement accounts. Hence much of the tax's
burden would have fallen on current and future retirees, reducing
both the market value of, and dividends paid by, those stocks.
The cost to all the oil companies' shareholders, in forgone stock
appreciation and dividends, would have ranged -- depending on
oil prices and inflation -- from $21.3 billion to $121.8 billion
Shapiro and Pham conclude that the windfall profits tax would
have discouraged domestic oil production and increased U.S. dependence
on imports from the Persian Gulf. And from Venezuela, thereby
funding the left-wing fascism of Hugo Chavez.
the average price of a gallon of gasoline has swiftly plunged
from the post-Katrina high of $3.07 to $2.15 (compared to $185.60
for a gallon of Starbucks espresso), the recurring populist fever
that always follows oil price spikes has broken. It will be back.
Too bad the Locrians' rule will not be.
2005, Washington Post Writers Group