This morning's news brings two more stories about political pandering to the public's apparent belief that high oil prices are caused by the evil big oil companies: first there's Harry Reid (D) and Richard Durbin (D) wanting to tax alleged “windfall profits” at the oil companies, and then there's Maria Cantwell (D) and Chucky Schumer (D) who'd like to make U.S. commodity futures markets uncompetitive (compared with, for example, Dubai's markets).
I wonder first whether the American electorate is actually as stupid as these politicians would have us believe. For instance, do Americans really believe that a profit of between 6% and 8% is outrageously high? There are many examples of big companies that make far higher profits than that – Microsoft, for example. The oil companies are actually making very modest profits (by any rational perspective) on very large revenues, which means that the profit expressed in dollars is very large. And the attack on the commodities future markets (which are all about price discovery and speculation, which – contrary to some assertions – is most certainly not a dirty word!) is a classic case of shoot-the-messenger. The speculators are no more responsible for the high prices than I am responsible for Ted Kennedy's brain tumor.
The actual cause of our current high oil prices is obvious to anyone with even the most basic understanding of capitalism and free markets. Hopefully that includes most Americans over the age of 6 or 7. The cause is that demand exceeds supply. The answer is equally obvious (and it's the same answer for every such price rise, no matter what the product is): increase the supply. And the oil companies have been patiently explaining to Congress, for the past 40 years, precisely how the supply could be increased: remove the regulations that forbid the oil companies from exploring and drilling – regulations that Congress themselves imposed.
If a windfall tax is enacted, the results are very easy to predict. Investors in oil companies will move their money to other, more profitable ventures (like Microsoft). Oil companies will have to find more expensive sources of capital. This will make exploration and drilling less attractive, and the oil companies will do less of it. We will buy more foriegn oil. Supply will be reduced further, and prices will go up. Not down, you flippin' (mostly D) idiots in Congress – but up.
If the commodity markets here are over-regulated and thereby made more expensive, the commodity traders will instantly move to other markets. The exchanges in places like Dubai, Hong Kong, and Kuala Lumpur will be beside themselves with glee, laughing all the way to the bank. They'll be laughing because we handed them all the highly profitable trading business for no reason at all, a totally senseless and moronic self-inflicted wound that will kill a large American business (commodities exchanges) and do absolutely nothing to help oil prices.
The rest of the world no longer looks to America for economic leadership. They look to us for economic entertainment.
Stupid politician (but then I repeat myself).
Some assembly required...
John Hinderaker (at Power Line) agrees with me – and has a brilliant idea.