Robert Murphy

Finally we come to the easiest scapegoat, domestic oil companies. Politicians have been threatening to impose a windfall profits tax, and Maxine Waters infamously suggested outright nationalization at a recent hearing. As with speculators, the theory here is that oil companies can set whatever price they want, and the hapless motorist has no choice but to pony up at the pump. Only by taking away those excess profits can justice be restored, say our politicians and pundits.

Even on its face, this strategy is absurd. If the oil companies really can decide, “Well, we’d like to make $45 billion in profits this year, so let’s set the price of a barrel at $130,” then the last thing the government should do is tax away a large percentage of those profits. Why wouldn’t the fat cat companies respond by jacking up prices even more to recover their profit objective?

In reality, the price of oil is set on the world market. Even though U.S. oil companies are huge, they can’t unilaterally set prices. If the federal government slaps on a windfall profits tax, it will only apply to domestic producers. Their after-tax returns will drop, and they will cut back on investment in future output. With reduced supplies, the world oil price will go up, not down. What’s even crazier, Americans would become more reliant on foreign oil producers, as these state-run companies would have a competitive advantage once U.S.-based firms are slapped with a new tax.

Americans are understandably upset over a faltering economy and in particular over record-breaking gasoline prices. The only solution is to find ways to bring down the price of crude oil. There are definitely steps the federal government can take, such as opening up domestic sources for development. Unfortunately, virtually every proposal put forth in recent months would make our energy situation worse. Picking scapegoats might sell at the ballot box, but it won’t bring relief to consumers.

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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