Hearings on Big Oil

In the latest Congressional hearings on Big Oil's "outrageous" profits, tax breaks, and climate change. The economic ignorance was especially concentrated in the Democratic congressmen, but they certainly had no monopoly on economic ignorance. Oh, but they did have stories of senior citizens and the poor not being able to afford gasoline and heating oil!

Let us begin with the numbers. Congressman Ed Markey (D) was outraged that the 5 oil companies represented made 123 billion in combined profits. Even if we grant the assumption that it is the Congress' job to regulate their profits, we find out that the profits are reasonable by any standard. Last year Exxon made 404 billion in revenue. Their net income was 40 billion, or about 10 percent. See for yourself, read Exxon's annual report. While this percentage is higher than many industries, it is certainly nothing to be outraged about, especially when you consider that the industry reported extremely low profits throughout the 1990s. A 10 percent net margin is a small price to pay for the management, engineering, and capital that brings refined products to the consumer. Then look at where the profits went. In Exxon's case much of the profits were used to repurchase stock or pay dividends. While the Congress has the image of Wall Street fat cats collecting all of these dividends, it is not the case. Read this study on the ownership of "big oil".

I admit that I do not know much about the tax laws for oil companies, but the financial statements show that oil companies pay a substantial amount in taxes. Exxon paid nearly $30 billion in taxes last year. Any well-bred libertarian would be against unfair tax breaks and subsidies, but it seems oil companies pay quite a bit already. If we want to attack industries with subsidies, few have their hands in the pot more than "Big Corn" with the ethanol hoax and countless farm programs. I believe it would be extremely poor policy to raise corporate taxes when countries around the world are lowering their taxes. The United States should not make it more expensive and difficult to compete.

The Congressman want a tithe (10% of their profits) at the altar of alternative energy from the oil companies. While we will move towards other sources of energy and energy storage, we do not know which technologies or companies will succeed. We could force the oil companies to invest in alternative energy or have the Congress ask very nicely, but it is yet another case of seen and unseen. We would see the additional investment in alternative energy, but we would not notice the oil companies drawing capital away from smaller and more innovative companies in the alternative energy sector. Think about this question for a minute--Is a gigantic, lumbering oil company that is optimized to efficiently refine and transport refined products the best vehicle to research and develop new technologies? Perhaps not. The leaders in providing energy in the future are probably companies few people know.
Let the markets and creative destruction work.

Finally, the Congressmen do not understand prices. They seem unwilling or unable to grasp what a price means. Many of the Congressmen were concerned about climate change from the use of oil. Ostensibly, the primary purpose of this hearing was climate change. Of course, a populist attack on "price gougers" was not far behind. Somebody should let the chairman of the hearing in on a little secret -- the law of demand. For people concerned with climate change, they should welcome the latest price increases in the price of gasoline and heating oil. While demand is rather inelastic for oil, people will change their behavior. In the short term, they drive less, buy more efficient cars, and buy better insulation for their houses. In the longer term, they might relocate closer to their workplace. On the supply side, the high price of oil is the best incentive for research in alternative energy. Pick up a copy of MIT Technology Review or search the internet for companies that are currently developing and improving solar, wind, biofuels, and energy storage technologies.

Coming soon, advice for anyone called in front of a Congressional hearing.