Robert Murphy

High oil prices in recent years are caused not by supply restrictions, but by huge increases in demand. As the economies of places such as China and India boom, they draw oil and other commodities to them. Higher market prices signal the increased scarcity of these resources, causing businesses and consumers around the world to economize more carefully in their usage, whether that means finding alternate production techniques or carpooling to work. At the same time, the high prices give incentives to locate and develop more oil reserves. Given the economic realities, these outcomes are exactly what we want to happen.

Whether or not one views these market forces as benign, jacking up taxes on oil companies will only make things worse. When you raise taxes on an activity, people engage in less of it; that’s the whole point of sin taxes on liquor and cigarettes. But in this case, we’re taxing the companies who produce oil – meaning less production and higher consumer prices.

Raising taxes on the production of oil will reduce its supply, causing oil and gasoline prices to rise even further. They sometimes call it a “windfall” tax, but in truth crude oil doesn’t grow on trees. It can take over a decade and hundreds of millions of dollars of investment to find and prepare an oil field for large-scale production.

Oil companies are already paying exorbitant tax bills. In 2006, the industry paid $81 billion in income taxes, and almost certainly paid more in 2007 as profits were higher. (The industry data for 2007 have not yet been compiled.) Also remember that government forecasts of new tax revenues are usually grossly optimistic, because they ignore the reaction of the target industry. President Reagan ended a Carter-era windfall tax on oil companies that had generated only $80 billion during its lifetime, even though proponents of the tax had anticipated a take of $390 billion.

If politicians are concerned about gas prices, they shouldn’t erect extra hurdles for those companies in the business of finding new supplies of oil. If the government really wants to do something, it can roll back restrictions on offshore and Alaskan drilling. Beyond that, it should just let market prices and the profit motive do their jobs.

A note of disclosure for Townhall’s readers: I have publicly defended oil profits, and opposed new taxes, for years, even back when I was a humble college professor. I want to admit upfront, however, that recently some of my consulting fees have come from nonprofits who are partially funded by energy companies.

Robert Murphy

Robert Murphy has a Ph.D. in economics and is the author of The Politically Incorrect Guide to Capitalism (Regnery 2007).

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