Kudos to Congressional Republicans for defending capitalism and rejecting central economic planning. On Tuesday, Senate Republicans denied their Democratic colleagues the 60 votes needed to end debate and pass a windfall oil profits bill. The bill would have put a 25 percent tax (windfall oil profits tax) on profits over what would be determined “reasonable” when compared to profits several years ago. It would have regulated energy futures traders in order to limit market speculation. It would have made price gouging of oil and gas a federal crime during a declared energy emergency by the president. Lastly, it would have given the Justice Department authority to bring charges of price fixing against countries that belong to the OPEC oil cartel. The measure was meant to address and punish those that are responsible for high prices at the pump – namely big oil companies, speculators and oil producing countries. Of course, these Washington contrived villains are not ultimately responsible for high gas prices. Even if they were, the measure would not have solved the problem. It would only have made it worse.
It is amazing what short memories proponents of a windfall profits tax have. In 1980, Jimmy Carter enacted one and from 1980 to 1988 (the last year of the tax) there was a 3 to 6 percent decrease in domestic oil production. This happened because the tax increased the marginal cost of production, thereby reducing the quantity of gasoline produced. A decrease in gas supplies without a corresponding decline in demand means even higher prices at the pump. In a best case scenario, if the tax had been enacted oil companies would pass the tax expense on to consumers in the form of higher prices and we might have to wait in long lines to fill up or be subject to rationing.
Windfall profit taxes are also bad because 41 percent of oil company stocks valued at over $267 billion are currently held in various forms of pension plans and retirement accounts. The tax would cause the values of these accounts to dwindle causing negative effects on national savings and our senior population. Rest assured, while the Democrats believe a windfall profits tax is the right thing to do, the measure’s vengeance would have been mostly felt by the American consumer.
The Democratic bill would have also required traders to put up more collateral in the energy futures markets and would have opened the way for federal regulation of traders who are based in the United States but use foreign trading platforms. The Democratic leadership in Congress clearly believes that a group of speculators have gotten together all of a sudden to conspire to inflate the price of oil futures in order to reap huge gains at the expense of the rest of us. Talk about conspiracy theories. This belief ignores the relationship the current value of our dollar has with oil prices. The rise in oil futures is a direct result of investors trading debased dollars for a commodity that has had, has, and will have into the future enormous value because of its necessity for the world economy. If the government attempts to control the price of oil through regulation of futures trading, it potentially will have the same result that price controls have had in other sectors of the economy – a shortage of the product because the profit motive for producers is either limited or eliminated altogether. Once again the opposite effect of what Congress is trying to accomplish will happen. The price of gas will increase because Congress’s policy will cause a decrease in supply.
Two other provisions of the bill would have made domestic gasoline price gouging a federal crime and given the Justice Department the authority to sue countries in the OPEC oil cartel that price fix. Common sense indicates that when the raw material that goes into a finished product increases significantly in price, the price of the finished product will also increase significantly. There is no doubt that oil companies make large profits, but that profit is needed by them to carry out exploration, excavation, and refining of their product. As to the Justice Department having the authority to sue another country, this is just indicative of how arrogant and wacky supporters of the bill have become.
In essence, the Democratic windfall profits bill was nothing more than election year pandering. It was an attempt to show the electorate that Democrats are on their side when it comes to dealing with bad guys – oil companies, speculators, and OPEC. However, not only would the bill have exacerbated the current energy crisis by adding costs to oil production, depleting national savings, and causing gasoline shortages, it was misdirected in terms of who is ultimately to blame for high gas prices.
The primary culprit responsible for high oil prices are the monetary central planners at the Federal Reserve Bank. According to Ron Paul, the Fed has roughly tripled the amount of dollars and credit in circulation since 1990. It has added 4 trillion dollars to the money supply in the last 3 years alone. This has caused a serious devaluation of the dollar. The Kwacha, which is the Zambian currency, has gained 33% against the dollar in 3 years. Zambia is a much poorer country than the U.S. and its money is on the rise against our greenback. Because the dollar is the international currency of exchange for oil, the debasement of the dollar is responsible for the high price of oil. It is also easy to understand why investors (speculators) are dumping dollars in favor of commodities, specifically oil.
While the politicians in Washington and their friends in the media continue their campaign of blaming greedy business men, unscrupulous investors, and shady foreigners for our gas woes, remember that a rise in prices almost always is caused by too much money chasing too few goods. The supply of oil is fine; it is the too much money part that Congress needs to deal with.