Summer Windfall

Every year, it’s the same old story: Summertime rolls around, the weather gets hot, people start driving, gas prices go up, and Congress starts expressing Grave and Serious Concern about price gouging and oil company profits.  Of course, even in the wake of Hurricane Katrina, an FTC investigation produced no evidence of any gouging. Yet today, the Senate is considering whether or not to pass a windfall profits tax — or, as Roll Call labels it, a way to "punish oil companies" for their profits.  This seems obviously wrong.  Won’t punishing companies for doing well merely discourage them from making more oil (which is what we obviously need right now)? And won’t saddling them with additional taxes just make gas even more expensive?  According to the Congressional Research Service, that’s what happened when Carter tried a similar scheme nearly 30 years ago.  The idea that higher taxes or caps on energy usage are going to doing anything to lower prices at the pump is just laughable.

Now, as I’ve noted in the past, it’s unlikely that any federal policy is going to significantly reduce gas prices in the short term.  (Reducing federal gas taxes might have some effect, though economists disagree as to how much). Worldwide demand is up significantly, mostly in developing countries.  But in the medium and long term, the only way to address high demand is to either cut demand or increase supply.  High prices will curtail some demand (as the Post reports this morning, people are already changing their driving habits). But as of right now, there’s no viable energy replacement for oil,* which means that demand will continue to remain high. How, in the medium-long run does one address that?  By increasingly supply — and the best way to encourage increased supply is to decrease the regulatory barriers to investment, not tax the companies in the position to make that investment.

*Nuclear has the most potential, and if restrictions were lifted, could make a substantial impact on the world energy market. But alternative energy sources like wind and solar are, at this point, simply not capable of meeting our world’s increasing energy needs.