Tuesday, June 10, 2008

Taxing Exxon

"He also singled out Exxon Mobil Corp., the world's biggest oil refiner. Obama said he would seek to tax oil companies such as Irving, Texas-based Exxon on their record profits." --Bloomberg

A couple points:

1) We're already taxing Exxon on their record profits. It's called the corporate income tax. Perhaps this is just semantics, but you ought to say tax them more on their record profits.

2) Inelastic demand means said tax will pass right on through to the consumer.

3) Imagine a simple thought experiment. To simplify things, let's say Exxon earns 10% profit (it's a skooch higher, but this gives us a round number we can imagine easily). Let's say that we want to completely eliminate the profit they are making, ignoring the fact that this would means simply shutting down and providing no gas at all is a better decision. Let's further say that this will realize a complete pass-through to the price of gasoline, lopping 10% off of our gas bill.

In this ridiculous scenario, $4.00 per gallon gas would fall to... (drum roll please) $3.60 a gallon. This is a price well above the level of the "horribly high" gas prices of 2006 and it's a level that, in our thought experiment, gives ABSOLUTELY NO PROFIT to the oil companies.

The oil companies are not the (insert gratuitous swear for emphasis here) problem. Supply being outpaced by demand growth is the problem. Eliminating the oil companies' profit won't do a single (insert gratuitous swear for emphasis here) thing to ease the pain we are feeling, but it will hurt domestic oil producers compared to foreign producers... shifting the balance of production even more in favor of foreign producers, just like when windfall profit taxing was all the rage in the 70's. To the degree that you consider sending money to petro-dictators a bad thing, you should oppose punitive taxation of domestic oil companies.

Supply is the problem that we can address - oil company profits are a tiny drop in a much bigger bucket, and every argument that focuses on the oil companies is a red herring. To address supply problems, we need (1) substitutes or (2) more supply. Substitutes are alternative energy sources, but they are several years off at least. More proven supplies are available in ANWR and on the outer continental shelf, but these are opposed by Democrats. Whether the reasons for opposition are good or bad, they have the direct, predictable result of limiting supply.

And it's a lack of global supply that has driven the no-profit price of gas above $3.50 a gallon (and rising). Harry Reid has said for years "we can't drill our way out of this problem." But if we were drilling then, we'd be much more effectively mitigating the problem now - to a degree that far outstrips the "unconscionable profits" of the Evil Oil Companies.

4) I thought you'd think a wholesale shift in the American consumer from gas-hogging SUVs to light, efficient cars (reducing greenhouse gas emissions nationwide) was a good thing. Cheap gas, if you could snap your fingers and provide it, would immediately reverse these changes.

1 comment:

Jeff said...

I'm a Democrat and an Exxon shareholder. I believe this makes me the most hated person on the planet.