Big government reacts to gas price outrage...

Walter Williams wrote a column today which puts a thick smokescreen in front of the current debate about oil and gas prices as well as the record profits of oil companies.

First, let me just say that I hold dear the concept of free markets and support handcuffing government officials who seek to manipulate the economy through subsidies, tax loopholes, price floors or ceilings, minimum wages, price "gouging" laws, labor laws, or extreme trade policy.

However, I'm afraid that the current situation regarding the oil companies is nothing more than the chicken coming home to roost. A government big enough to give large corporations, including the oil companies, all the tax loopholes, subsidies, breaks and shelters they currently enjoy, is big enough to take them all away.

Here is one example of government interference, according to CATO:

After all, there were 325 oil refineries in the U.S. in 1981, but only 149 remain today. The explanation resides in the fact that we had a lot of refineries back in 1981 not because of market forces or the lack of environmental regulations, but because the government subsidized the existence of small, inefficient refineries.

Whole industries of lawyers and accountants exist solely to advise large businesses on how to shield themselves from tax liability, and certainly our monstrously complex tax code contains many provisions that the oil and gas companies have been able to take advantage of. Since the tax reform under President Reagan, the tax code has been tweaked over 10,000 times according to Neal Boortz, almost always to the advantage of the "poor", the wealthy corporate executives, or the politicians at the expense of the "average American" everyone claims to support and value.

According to the LA Times:

The sheer size of the industry's profit mountain makes it a tempting target. Together, the 29 major oil and gas firms in the Standard & Poor's 500 stock index are expected to earn $96 billion this year, up from $68 billion last year and $43 billion in 2003.

The last new U.S. refinery was completed in 1976.

From AP, posted on Forbes.com:

Together the five companies - Exxon Mobil Corp., Chevron, ConocoPhillips, BPAmerica and Shell Oil USA - reported more than $25 billion in profits in the July-September quarter as the price of crude oil hit $70 a barrel and gasoline surged to record levels after the disruptions of Hurricanes Katrina and Rita.

Critics allege that oil companies have deliberately chosen not to push back against environmental regulations in order to build new facilities. Certainly these oil giants have the ability to pressure Congress for some relaxation from the environmental agenda pursued by the radical left, if they wanted to. The question is: have they tried to lobby against the restrictions? Or have the oil execs decided to accept the environmental agenda, knowing they would one day use it as a crutch to explain high prices and low investment on their part?

The oil industry defends itself by explaining that capital investment in new refineries or production facilities are a 20-year investment, and that uncertainty in future markets have made executives wary about dumping profits into what could become economic quicksand.

Sens. Jack Reed (D-R.I.) and Byron L. Dorgan (D-N.D.) are pushing a bill that would essentially levy a tax surcharge on oil firms when oil's market price exceeds $40 a barrel. The money would be rebated to consumers.

The industry contends that such taxes would be unfair and would restrain exploration.

Wait, I thought we were told that exploration investment was low because of uncertainty over future market demand, not due to a lack of investment capital?

On the other hand, what would stop oil companies from shutting down production were they upset over excessive government action? The consumer seems to be in a tight spot. Either keep paying the high prices to insure a supply, or risk shortages in exchange for potentially lower prices.

A recent vote in the Senate which opens up the ANWR reserve to oil exploration has been condemned by Democrats who claim that we will not see any oil from there for 10 years, and the quantity won't be enough to influence prices. Fortunately, only 13 Senators voted to allow any supply found in ANWR from being exported with 86 voting to ban the exports.

I said Williams' article is a smokescreen. He seems to be interchanging profit and revenue. Even with all of the environmental costs and so forth, the oil companies are STILL making huge profits. If we were talking about record revenue, despite record high expenses, it would be one thing. But, there is no substitute product for petroleum, and the federal government has been complicit in our dependence on it. Instead of bailing out Chrysler, United Airlines or subsidizing Amtrak, it could have invested in a real rail system comparable to the one in Europe which I have ridden several times.

In this isolated case, I am nervous about knee-jerk "free-marketism", because we're dealing with perhaps the most inelastic good in our whole economy, and the current crisis is due in large part to past government interference.

Finally, Williams seems to imply that without mega profit potential, oil is too difficult to produce and market. If an oil company ONLY profited $1 billion in a quarter, is he saying it wouldn't be worth it? If so, then you can expect to see me operating the next big oil and gas business in America sometime in the next decade.

Ultimately, the oil industry fortells the wider future of the American economy. The oil companies claim that future uncertainty prevents them from investment, which inclines me to believe that a major economic downturn is coming and the oil companies know it.

Why else would they be nervous about the future market of the most inelastic good in the world's strongest market?