TCS Daily

Here We Go Again

By Jack Rafuse - November 2, 2005 12:00 AM

Here we go again. Gasoline prices are dropping as usual with the end of the summer driving season. But oil companies are announcing huge quarterly profits, so the inevitable reaction has begun -- howls on Capitol Hill. Self-proclaimed friends of consumers want the profits refunded to "ease consumers' pain." They propose to do that through a "windfall profits tax," arguing that the government would make better use of the money than would the oil companies.

They point out breathlessly that one company's last quarter earnings were $9 billion, and then multiply it to reach $36 billion for a full year. (As a relative measure, that's about how much US families spend on their pets each year. Comparisons often help when hysteria is setting in.)

Twenty-five years ago, with gasoline prices at record highs and company profits "unconscionable" according to some, like-minded critics won the day in Congress and enacted a windfall profits tax. It was a disaster.

·    It did not allow companies to charge world market prices for "old oil." 
     So they could not spend money to rework oilfields; domestic production 
     dwindled rapidly.

·    It allowed them to charge market prices only for "new oil" from new areas. 
     Companies had to bypass oilfields that they had discovered but not yet 
     developed, and search (wildcat) in less likely places. Again, domestic 
     production suffered.

·    It allowed them to charge world market prices for imported oil. So the 
     companies began to explore more in highly promising places overseas. 
     Domestic production suffered; overseas exploration and development 

·    Critics complained that the companies were abandoning the US. One oil 
     executive responded, "We're not moving out of the US; we're being thrown 

Every subsequent study, including from the US Congress now entertaining the tax, showed that the era's price controls and windfall profits tax contributed greatly to our nation's increased reliance on foreign oil. Those policies did exactly the opposite of what they were intended to do. But without institutional memory, critics seem again ready to fall back on the old, failed policies and "do something" no matter what the result may be.

Not everyone wants a windfall profits tax. Some in Congress advocate opening the Arctic National Wildlife Reserve buffer zone to oil company operations; they are reviled for the thought. Others practically demand that the companies build new refineries to increase total US refining capacity. They point out that there has been no new refinery built in the US for 30 years. That's true, BUT:

·    Increased refining capacity does not add crude oil to US or to world supply. 
     The price of crude oil (and thus of gasoline) depends on the amount of 
     crude oil on the market -- the supply among all the nations that use oil.

·    More US refining capacity will not address those issues.

·    US oil companies have continued to improve efficiency and increase refining 
     capacity to meet US demand for gasoline and other fuels. Refining capacity 
     is tight, but will continue to grow with demand. The main issue is supply.

·    On the other hand, no company can or should spend several billion dollars 
     to provide "excess refining capacity." "Excess capacity" does not pay 
     for itself; any company that proposed to build it would see 
     their shareholders shift investment to other companies that did not plan 
     to build themselves out of profitability.

Others propose doing away with state or locally mandated "boutique" gasolines. At least 20 such gasolines must be sold in particular regions; they require special shipping arrangements and reduce pipeline efficiency. They virtually guarantee gasoline shortages or high prices in those areas.

Maybe it's Halloween week, but there's no treat here. Some of these ideas are tricks -- old, failed ones at that.

Jack Rafuse is a consultant on domestic and international energy, security and trade issues.


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