Saturday, June 14, 2008

Windfall Profits Tax

In what seems like the latest episode of "Back to the Future" or "That Seventies Show" Barak Obama and friends are proposing a new "windfall profits" tax on oil companies. Never mind that nobody can actually define what a "windfall profit" is. The idea is to imply that there is a certain level of profit that is simply unacceptable and must be stopped.

The idea has come about due to record oil prices and record profits being posted by the likes of Exxon. They never mention the fact that Exxon's return on investment is almost half of what the government takes, with zero investment being made on their part. Yet a 9% return on investment is touted as obscene, while the government's 15% take still isn't enough.

What would be the impact of a windfall profits tax? We don't have to wonder. It's been done before. Essentially you're telling the oil companies that while there downside risk is unlimited, their upside potential will be capped at a level deemed appropriate by the government. Why in the world would one put big money at risk for exploration and development under those conditions? Of course, once you reach the level of “windfall profit” there is zero reason to do anything to become more efficient or increase productivity. Once you’ve made your quota, you might as well send everyone home, shut everything down and take the rest of the year off. At a time when we are ever increasingly dependent on foreign oil from countries who don't like us very much, we're going to bend over backward to make sure we don't produce any more at home.

Believe it or not, oil company execs and shareholders are not genetically compelled to produce oil. If there's easier money to be made elsewhere, they'll take their talents and resources elsewhere. That's exactly what happened the last time we tried windfall profits taxes and price controls, and it's exactly what will happen this time.

Politicians don't want you to be energy independent. They want you to be government dependent. They are once again taking an opportunity to demonize the producers in a bid to gain more control over resources. They want to be the gatekeepers, the power-brokers. Now, I'm sure some are well intentioned, just ignorant, but the result will be the same.

I don't know that the big shift to the left can be avoided in the short term. I do believe it will be reversed in the long term, because it can't and wont work. It never has. It never will. The folks who run the post office, Amtrak and the DMV cannot outperform the free market. I guess we just have to learn by demonstration once again. The good news is that ten years from now, some upstart will push through a package of massive tax cuts, privatization and deregulation.

The more things change, the more they stay the same.

No comments: