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My monthly love song for the oil companies

Posted by Chance on June 21, 2006

Yes, its that time of month, where, yet again I talk about how awesome oil companies are…
I was watching a clip of Tim Russert interviewing oil company CEOs, and asking them why they cannot take a 30% profit increase, as opposed to a 60%. While I disagree with Tim Russert’s ability to know what a “just” profit margin is, I do see his point in essentially questioning why profits have increased by so much, when a smaller increase would supposedly be enough money for the company. See a previous post for my best stab at an explanation for oil companies profits. To sum that post up, essentially oil companies need more profits in order to build up crude oil inventory. When crude oil goes up, more profits are needed to purchase that inventory.

Anyway, I can understand consumers griping about high oil costs, but I believe the only thing that the government can do is back off oil production, as opposed to passing more regulations.

What truly troubles me is that politicians seem to genuinely care the oil prices have gone up. Many politicians, and not just Democrats, are continually lobbying for higher gas taxes. Last year, gas taxes (including state, federal, and local) average around 45.9 cents per gallon, and oil company profit is around 6 cents (although that has increased this year). Glen Dean provides the links.

So, why is it okay to put pressure on consumers at the pump through gas taxes, but not through prices caused by the free market?

Well, I can think of two possible (and reasonable) arguments addressing this.

1) Government taxes fund much needed programs (I’m trying to think through the eyes of someone more liberal than myself), whereas oil company profits go towards oil companies and fund the high salaries of CEOs.
2) Gas taxes are needed to regulate consumption.

1) Concerning point #1, it may take a huge debate to fully address. This is like asking, is the Republican way or the Democrat way better? But, let me take a quick swipe. Let’s say gas taxes fund much needed programs for the poor. In my opinion, though, if the poor have to pay huge taxes at the pump, it kind of defeats the purpose for such a tax. I would imagine a higher proportion of the poor’s income goes towards buying gas compared to the rich.

2) There is the argument that taxes are needed to regulate consumption. Here’s the thing though, so do high prices determined by the market. And I would argue that market prices do a better job. When politicians argue for a gas tax, they can essentially pull a number out of the air. They may have derived the number through meaningful math somehow, but that number becomes less meaningful as the price of gas fluctuates.

For the market, however, gas prices have some basis in reality, due to supply and demand. These prices may not be perfect, but they at least follow a general trend reflecting the amount of oil available. As supply drops, and we use more and more nonrenewable energy, prices will rise. As prices rise, we will naturally conserve more. Isn’t this what we want to happen? People won’t drive their SUV for a single loaf of bread, in fact, SUVs will be less popular in general. People will carpool more. There will be bigger pushes for alternative sources of energy.

In my view, the government doesn’t need to regulate oil consumption through taxes, or even subsidize alternative sources of energy. The market is sufficient for that.

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5 Responses to “My monthly love song for the oil companies”

  1. The Prophet said

    In a hurry, I skimmed over your article. I came up with another idea that I didn’t see listed.

    Here’s another idea (And I’m going to sound like a Green Party member here)

    The environment.

    Maybe part of the reason for taxing is to cut consumption, not just to keep the supply, but to encourage people not to drive as much or to carpool in an attempt to save the environment.

    Just a conspiracy… but I know you love conspiracies.

  2. Chance said

    Actually, the environment is a pretty good reason. I was simply looking at it from a conservation point of view, and forgot to consider things such as pollution.

    I do agree something should be done with regards to the environment, even though I do not know what exactly, or to what extent. I would venture to say that some regulations may be too strict, since the last U.S. refinery was opened sometime in the 1970s, but I don’t know if this is an environmental issue, or if its something else. I don’t know enough about the ANWR issue to really make a comment, but I believe there should be a balance between wildlife conservation and loosening the grip of foreign oil.

  3. Chance said

    I should have said “you freakin hippie, why don’t you go marry a tree?” That would have been funny. I’m just kidding of course. Environmental protection is a legitimate function of government, I just do not know to what extent.

  4. The Prophet said

    Here’s something that scares me about taxes and raising them/lowering them.

    Here’s the Libertarian coming out of me. The government has the ability through taxing/cutting taxes to manipulate and control not just the economy but the lifestyles of the nation… i.e. Sin Tax/Gas Tax.

  5. Chance said

    I agree. One perspective that I had adopted over the last year and a half (when I started reading libertarian propaganda) is that I disagree with government directing our behaviors through taxation.

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