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Coronado

Demonizing Big Oil by J. F. Kelly, Jr. 5/9/08

Politicians are under more or less constant pressure to do something. Sometimes, the best course of action is no action on the part of the government, at least until a comprehensive solution can be developed. A poorly thought out, quick response often makes matters worse. No action, however, is a non-starter in politics. Voters want action and they want it now.

The economy has risen to the top of the national worry list and the voters are rightly incensed over the price of food, fuel and other essentials. While we aren’t experiencing riots in the streets, action at the federal level is demanded so politicians, eager to be seen as responsive, feel compelled to do something if only to demonstrate that they feel our pain. The pressure may result in actions that may be popular but which fail to deal with the underlying problems. President Bush’s tax rebate was a lovely thing to do for the taxpayers, but its effect, being temporary, won’t do much to solve the basic problems facing the economy.

An even more futile gesture is the proposal by Sens. John Mc Cain and Hillary Clinton for a holiday from gasoline taxes this summer which Clinton claims could save the average motorist about $70. Sen. Barack Obama, who considers this proposal a gimmick, typical of the Washington establishment’s “solutions” to problems, says it would save the consumer much less. Actually, it may save him nothing at all since it is unlikely that the oil companies would absorb the tax and more likely that they would manage to pass it on to the consumer. Ms. Clinton wants the oil companies to pay the tax out of  ”excess” profits. Both Democratic contenders have spoken of windfall profit taxes.

Such talk plays well to the crowd. Everyone seeks a whipping boy to vent against and big oil presents a convenient target. (By way of full disclosure, I own oil stocks as do millions of Americans through their retirement funds, IRAs, 401k accounts, pension plans, mutual funds, etc.) The public has a mental image of greedy, overpaid oil executives exploiting shortages and manipulating prices to gouge helpless customers. But the notion that the oil companies control the price of gasoline at the pump is largely a myth. It is human nature to want to blame someone, but the anger is misdirected. If it is necessary to blame anyone, try blaming Congress for refusing to permit drilling offshore or in a tiny, remote portion of the Alaskan wildlife preserve which no one visits or is ever likely to. Blame NIMBYism and conservation extremists for opposition to the construction of much-needed refineries. These measures admittedly would not solve but would certainly ameliorate some of our supply problems and dependence on foreign oil.

Believe it or not, The United States is a major producer, as well as consumer, of oil. We could produce much more without harming the environment if we could overcome the unreasonable objections of the extreme conservationists and their activist groups who are responsible for much of the hostility toward big oil. Their actions, by the way, chiefly benefit those they seek to demonize by restricting supplies and raising the cost of oil products while reducing incentive for further high-risk exploration and refinery-building.

Two factors affect the price of gasoline and they are largely beyond the control of the oil barons. The first and most obvious is the supply-demand ratio. Everyone with a brain understands that with China, India and other populous, rapidly emerging economies clamoring for more oil, demand has overtaken supply, exerting upward pressure on prices. Less understood is the second factor affecting price which is uncertainty. Military actions or even the threat of war, terrorism, natural disasters, political unrest, sabotage, or indeed anything which could affect oil production or its transportation, influences the price of oil futures, just as these factors affect the price of other commodities such as grains and other foods as we are now witnessing.

So rant and rave against them if it makes you feel better, but trying to punish the oil companies by imposing windfall profit taxes or by removing incentives for risk-taking will simply make matters worse. By all means, let’s conserve energy and pursue reasonable and cost effective clean energy approaches which may reduce, but will not in our lifetimes eliminate, our dependence on oil. But meanwhile, shouldn’t we be actually reducing our dependence on foreign oil by tapping into our unused offshore and Alaskan potential and by building more refineries? CRO

copyright 2008 J. F. Kelly, Jr.

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