The front page of the business section of the Houston Chronicle yesterday had a story about how many, including politicians, are calling for the re-implementation of the windfall profits tax. In the story, they quoted a representative of the Sierra Club as saying that they were certain that this being an election year, “action in Congress is going to be sudden and faster than many think”, meaning that there would be some sort of legislation to penalize “big oil” for making so much money. This is insanity!

First off, who are they penalizing? If you increase the taxes on the suppliers of any good or service, what happens? The cost to the consumer will increase to off-set the cost of the tax! Do American’s want to pay more for gasoline just to try to stick it to the oil companies? Is the average consumer to say “wow, even though I’m paying $6 a gallon, I sure feel better knowing that my politician has taxed the hell out of the oil companies!”?

Second, if you take money from US producers, what do you think is going to happen to the price of oil? US producers do not set oil prices. It is a global market now. The US produces 5 million barrels of oil a day and imports 10 million. If you raise the cost of producing oil in the US by increasing the taxes on that oil, you will lose some percentage of that production as the lifting costs and taxes make it uneconomic to produce. So, you shut in marginal production and import more foriegn oil - increasing global demand and decreasing supply. Therefore, the cost of crude goes up and gasoline prices go up!

Third, if you take money from the producers, they have less dollars and incentive to seek out additional domestic supplies, meaning there will be less in the future to replace what is being produced now - again, prices go up!

The bottom line on crude/fuel prices in America is that we are now price takers, not price setters. As long as we import two thirds of our oil needs, we are going to be subject to the winds of global prices. Although, the argument could even be made that even if we produced 100% of our needs, we would still be subject to those same winds as commodity sellers will always seek out the highest price. It wouldn’t matter if the crude was produced in Oklahoma, if China was willing to pay more than folks in the US, that oil is going to China.

This election year mentality of politicians pandering to angry consumers is very dangerous. There is no viable near-term political solution for the issue of higher fuel costs. The only constructive action that politicians can take is to help create a business environment that rewards innovation in finding alternate energy sources and, while those alternate solutions are being birthed and nurtured, allow, and even encourage, US producers to seek additional domestic sources of oil and gas, namely the East and West Coasts and Alaska, helping to somewhat reduce our exposure to potential interruption of foreign sources of energy.

A parting thought on this topic…The environmental groups, such as the Sierra Club, have done a lot of good over the years - they have been valuable in ensuring that there are checks and balances to unbridled exploitation of our precious resources. However, as most, if not all, of these groups have now embraced the “man-made global warming is going to cause the end of the world” scenario, they believe that anything they can do to reduce man-made CO2 emissions is fair game. So, if by encouraging increased taxes on “big oil”, consumers can’t afford the gasoline to run their cars, well, its painful, but ultimately it’s a good result. Fewer cars on the road means less carbon emissions, increasing the chances of “saving the planet” from the evil deeds of mankind. The problem is that my little piece of mankind is my family, friends, neighbors and fellow citizens. I am not willing to tell my daughter that she will be forced to live a life of reduced prosperity because some group of environmentalists decided that it is in Mother Nature’s best interest that America’s living standards be unilaterally reduced because Al Gore made a movie. I want my politicians to stop playing games with consumers’ emotions in order to get re-elected. I want them to create comprehensive energy legislation that encourages the growth of sustainable alternative energy sources, including nuclear, while at the same time, ensuring we have improved domestic energy security from our traditional sources while we grow those alternative sources.

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