Oil and Congress don't mix
With the recent run-up in gas prices, Democrats and Republicans alike are hitting new lows in mendacity and intellectual squalor.
By Cait Murphy, FORTUNE assistant managing editor

Let's start with some basic math. The U.S. consumes about 322 billion gallons of gas a year. America's five biggest oil companies made a combined $69.3 billion in 2005. So, if a windfall profits tax took every penny of those profits, and all that money was returned to the public, the price at the pump would fall - all of five cents a gallon.

Of course, you say, the thinkers (most, but not all Democrats) are not talking about taking all profits, just some "unfair" or "excessive" portion of them.

"This is not a time for greed, and that is what we have on this," explained Sen. Edward Kennedy (D-Mass.) with typical clarity.

"We need a windfall profits tax because these profits have been absolutely obscene'' is the sweet reason of Sen. Carl Levin (D-Mich.).

The proposal to impose a 50% tax on oil sold for more than $40 a barrel necessarily would shrink the alleged windfall to a vanishingly small sum. It would also reduce the dividends and rising stock prices that millions of Americans enjoy from their holdings in oil companies. And it would leave Big Oil with less money to invest in exploring for more oil (and therefore to increase the supply of it).

Besides, anyone who thinks Congress would actually ship the proceeds of a windfall tax into the wallets of ordinary Americans really should get out more. It wouldn't, and given Congress's record of economic mismanagement - rising deficits, the gross misuse of benchmarks and a resolute disdain for dealing with real problems like entitlement spending - feeding the beast is stupid.

Some Republicans came up with their own bright idea to deal with rising gas prices: Give $100 to taxpayers to help them fill the tank. That plan would get money into the hands of consumers - except the cash wouldn't arrive until the fall. That's before the midterm elections, to be sure, but gas prices could already be lower by then. And $100 doesn't go very far perhaps a few fill-ups. Remember, too, the federal government is already spending more than it takes in - and no, you haven't missed the carefully calibrated list of spending cuts and management innovations that will cover the cost of this program. It doesn't exist. Chalk up another stupid idea.

No conspiracy here

So far, oil at $70 a barrel has not devastated the U.S. economy, but it is, in effect a tax without a shelter. When consumers have to spend more on gas, they are not spending it on things like bicycles or spiked heels; businesses don't have as much money available for wages or capital investment. High oil prices do hurt.

That does not mean they're a plot designed by Big Oil (and their lackeys in the White House) to reap riches at everyone else's expense. Attention, conspiracy theorists: Exxon does not set the price of oil. A global market of traders does. The rising price of oil is driven by real things - like growing demand, bottlenecks in refining, OPEC policy, concern about Iran, political risk in Venezuela, and speculative pressure. Nothing Congress has mentioned is going to budge any of these factors an iota.

Two things make this particular round of nonsense extra troubling. First, it demonstrates just how few capitalists there are in national politics right now. You don't have to feel warm and fuzzy toward Big Oil companies to ask just what it is they are supposed to have done wrong. They made a lot of money: So what?

Exxon's profit as a percent of revenues was actually pretty mediocre in 2005, ranking it only 116th in the FORTUNE 500. It's a very big company that sells a commodity whose price rose. Since when is that a problem? And if making a lot of money fast is a sin, should we then look at punishing, say, gold traders? Or the investors in Titanium Metals, whose stock price rose 422% last year? To ask the question is to answer it.

The rush to "do something" about oil prices is an illustration of Congress's tendency to see every economic issue as a problem that it needs to solve. Imbalance with China? That can't be good. Let's impose "voluntary" restraints and decide where its currency should be, for good measure. Troubles in agribusiness? More subsidies, please. Steel tariffs; textile safeguards; restrictions on foreign investment; the nasty blather on outsourcing - the examples go on and on. This is a political class that is profoundly anti-market.

No question, the economy needs rules. But the point of them should be to correct failures, and to make the market work more smoothly, not to attempt to rig the outcome to fit this week's headlines (i.e. royalty relief and tax breaks for oil companies last year, punishment this year). Economics 101 has it right: The market itself is a self-correcting mechanism. In the case of oil, that means high prices will do more to induce change away from fossil fuels than any Congressional twitterings. One suspects, though, that anyone noting the utility of the price signal on Capitol Hill these days, among either Republicans or Democrats, would be regarded as a wild-eyed lunatic.

Economic fantasia

The other problem with Congress's proposed solutions to rising oil prices is that they are an insult. Fortunately, their sheer stupidity has sent them into legislative limbo - for now, anyway. (Note, however, that this is the second time in the past year Democrats have brought up the idea of a windfall profits tax; the first was after Katrina). Members of both parties, though, are sure to brag on the campaign trail how committed they were to a) sticking it to Big Oil or b) helping the little guy. That a considerable proportion of these elected representatives are nervy enough that they'll pretend that this stuff was serious - and expect voters to believe them - is disgraceful.

Most people in the U.S. actually live and work in the market economy, not the economic fantasia that is today's Congress. It is no surprise, then, that members of Congress got a hostile earful about the $100 rebate. Americans know that not everyone is a winner in a free economy all the time; so they cope, with diligence, optimism and creativity. At a minimum, they have a right to expect that the people they pay to make policy should do so with a similar seriousness of purpose.

Instead, they got this garbage.

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What Congress should and shouldn't do to lower fuel prices. Click here.

Gas prices hit small biz. Read moreTop of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.