Energy debates lead to wrong answers

Jack Kemp

5/1/2006 7:05:00 PM - Jack Kemp

There's an old saying that it is better to be thought ignorant than to open one's mouth and remove all doubt. This has never been more evident than in the debate over oil companies, gasoline prices, oil profits and windfall profits taxes.

  Some in the GOP leadership suggest everything from $100 rebates and windfall profit taxes to Federal Trade Commission investigations and congressional hearings on so-called price-fixing and/or gouging. I'm reminded of Richard Nixon in the early 1970s, when he called for devaluing the dollar, wage and price controls, and higher taxes and tariffs - all of which helped cause his downfall and set the economy on a course of simultaneous inflation and unemployment, the likes of which we hadn't seen in our nation's history.

What is sickening is to hear that the GOP would offer a $100 bribe to poor and low-income people.  Can you imagine a political party, ostensibly on the center right, telling people, "Don't earn too much or you won't get a rebate check"?  Compare that to Abraham Lincoln, who said, "I don't believe in laws that prevent a man from getting rich.  I want every man to get rich.  He should be able to earn, save, invest and someday hire others to work for him. That is the American system."

I learned about free enterprise from my dad.  He was a truck driver who, after a good year of wages, put a second mortgage on our Los Angeles home in the 1940s and bought the truck.  He called his one-truck delivery business the California Delivery Service. With the profits from his burgeoning delivery service, he bought a fleet of 12 new trucks and hired more drivers. From Dad I learned my first lesson in free enterprise: Truck drivers' wages are higher when they have trucks to drive than when they don't.

Now, the California Delivery Service was not an oil company, and my dad never worked for Exxon, but what CDS did to grow was to invest in labor and make the capital expenditures designed to produce profits and get a good return on investment.  It worked then and it works now.

  Oil is a global commodity, and its price is set by rising demand and static supply, at least for now.  Demand is growing worldwide by emerging markets like China, India, Russia and Brazil, and supply is limited by Malthusian environmental regulations on drilling, no new refining capacity in the last 30 years and the geopolitical risks in Africa, Latin America and the Middle East. The saber-rattling coming out of Iran and Nigeria doesn't help.

The retail market is competitive, and Exxon, for example, is but one-tenth of the total U.S. market.  They get a 7 percent to 8 percent return on investment and face a 45 percent to 46 percent marginal tax rate on corporate income. 

Our inflexible environmental rules require ethanol in California and some other states, and ethanol is heavily subsidized but without enough refining capacity, so ethanol prices double and Congress slaps a 54-cent tariff on imported ethanol.  Dumb as that is, its even dumber to slap windfall taxes on profits, which (a) raises prices further and (b) cuts back the investment in new production and reduces the search for new oil deposits.

Two-thirds of our domestic oil companies' profits come from overseas, but 80 percent to 85 percent of the shareholders, i.e. owners, are in the United States. Exxon, Chevron and Conoco-Phillips have been investigated more than a dozen times since the 1970s, and each time have been cleared by either the FTC or the Justice Department.

What the price mechanism does in a market economy is direct scarce resources to those areas of the economy that consumers desire and/or need.  As prices rise, capital gets allocated to the demands and desires of the market, and much of those "obscene" profits go into looking for more oil, expanding refinery capacity and encouraging investment in alternative sources of energy - all necessary in this increasingly flattened world, economically speaking.

Distorting markets by windfall profit taxes, price controls, extreme environmental regulation and poor policies like rebates don't work and will only exacerbate the problems we are currently experiencing. Republicans should defend the only system of economic policy that is capable of producing more and better energy while reducing the incidence of poverty. Free markets, free people, free enterprise and free trade have created more wealth, more jobs and ended more poverty for more people than any system in the history of the world.