No wonder there is apathy among American voters. This congressional term should be labeled the era of public spectacle. First, the House Government Reform Committee subpoenaed baseball players to testify about steroid use. That’s just the beginning of the camera-laden spectacles. Last week, oil executives testified before Senate Committees to defend their profits. What a waste.
As last quarter’s profits were reported by the oil behemoths, there had to be little surprise that the numbers were going to attract attention. As the St. Petersburg Times reported, the five major companies that testified before Congress “earned more than $32.8 billion during the July-September quarter.”
What surprises me is that while many Americans seem to embrace capitalism as an economic godsend, record profits turn their stomachs. While I am personally not a staunch supporter of capitalism, I understand that it does promote profit maximization. If corporations don’t seek to hold down costs and produce long-term benefits for shareholders, they risk becoming irrelevant and replaced by more efficient firms.
Thus, oil company objectives are little different than other industries in this regard. The empirical evidence supports this assertion. Exxon Mobil announced the largest third-quarter profits of oil companies at $9.9 billion, or 9.8 cents per dollar sales.
But what about Coca-Cola (21.2 cents per dollar), Bank of America (28.3 cents per dollar) or Microsoft (33.2 cents per dollar) profits during the same time period? Strangely, none of the proponents of windfall profit taxes on oil companies seem to be advocating an increase in taxes on a can of Coke or Microsoft software.
The windfall profit tax has been tried before and failed miserably. In 1980, former President Jimmy Carter signed into law the Crude Oil Windfall Profits Tax Act due to higher energy prices.
As the Congressional Research Service found, “the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.” These results run completely counter to our energy policy, expressed by Republicans and Democrats alike, to reduce our dependence on foreign oil.
The prior reasons that show why the windfall profit tax is unnecessary are factual, but are not meant to exempt blame from ourselves. We live in a consumer culture that emphasizes “bigger is better” as far as the size of an automobile, but apparently not in terms of fuel economy.
As a Boston Herald reporter noted, “Between 1977 and 1985, the fuel efficiency of the U.S. economy surged 49 percent. In the past 8 years it’s risen just 15 percent.” Our country’s failure to create more fuel-efficient vehicles can be at least partially blamed on voters who haven’t demanded change.
But why is there no real momentum among congressional leaders to enact true energy transformation? Well, one reason is that the federal government reaps its own windfall from the sale of gasoline.
As the Boston Globe said in an opinion column, “Government revenue from gasoline taxes alone has exceeded oil industry profits in 22 of the past 25 years.” Further, governments – state and federal – have collected $1.34 trillion in gasoline excise taxes since 1977. There is no impetus for change because Congress enjoys the revenue.
The case of rising gas prices – reaching an all-time high average price in the nation of $3.07 per gallon in September – is nothing more than the market adjusting to decreased supply and increased demand. While painful on our wallets, increases in price of fuel we have experienced are a tool to move excess demand more in line with available supply. As supply has once again increased, prices have in fact come down, with the national average gas price on Monday at $2.30 per gallon. In this case, markets have worked effectively and government intrusion is unnecessary.
The respite in gas prices we are experiencing now will not last forever. Long-run energy challenges will require investment to find additional energy supplies and alternative sources. The current oil company profits allow funds for exactly such pursuits, not to pay windfall profit taxes.
Aaron Hill is a senior majoring in economics.