Editorial: The antiprofit reflex

March 27, 2006
Amid all the unsound reflexes now steering the US Congress on energy, a surging revulsion toward profits must be counted among the most destructive.

Amid all the unsound reflexes now steering the US Congress on energy, a surging revulsion toward profits must be counted among the most destructive. Do lawmakers really want to tell 21st Century Americans that prosperity is tolerable only within limits set by government?

Lawmakers from both major political parties are acting out the political urge to punish oil companies for reporting high profits while prices are high for petroleum products. There has been discussion of a “windfall profit” tax. A tax bill before a House-Senate conference committee contains accounting changes designed solely to hurt major oil and gas companies. A bill likely to be introduced soon in the Senate will be promoted as an antitrust measure but will mostly formalize oil company witch-hunts.

Constituent pressure

Sponsors of these tantrums claim to be under pressure from constituents angry that oil companies are reporting record profits while fuel prices are high. The constituents want their government to act. It does not require an act of political sacrifice to tell them that this desire is eminently wrong. Former Energy Sec. Hazel O’Leary came under pressure from Democratic lawmakers to intervene in the heating oil market when prices rose early in the winter of 1996. She calmly advised her political colleagues that the best course was to let the market solve the problem, which it did. Where’s leadership like that now?

That oil company earnings became very large in a price upswing means only that the companies work in a very large commodity business. In such a business, profits do usually rise when commodity prices are high, which periodically they will be. Commodity prices do fluctuate. Profits of commodity producers do tend to follow them. To the inevitable price-profit coincidence, resentment is a juvenile response.

US oil consumers need an adult understanding of market processes and an appreciation for the scale of energy needs. They get neither from politicians who parlay misguided anger into bad laws and regulations. In view of future energy requirements, in fact, US fuel consumers should be cheering oil company profits.

Oil prices are high-and oil industry profits, too, by association-because global demand is approaching the physical limits of supply. This is not a matter of conjecture or opinion. It is evident fact. Oil prices will stay high until demand subsides and new supply enters the market. Indications that demand is easing came in this month’s Oil Market Report from the International Energy Agency, which lowered its expectation for global consumption growth this year-again. The supply response has been slower to gain traction, not because new sources haven’t emerged but because their production has been offset by disappointments and disruptions in traditional producing areas. But that will change. Markets always cycle away from strain. They also ensure that no period of extreme profitability lasts forever.

But markets need to work. Ensuring that they do should be the government’s priority. Markets can’t work when lawmakers feel obliged to manipulate fuel choices and proscribe profits. An overarching energy challenge makes such a relapse into failed policies of the past especially dangerous. That challenge is the assurance of future supply in a market certain to expand.

Supply challenge

The IEA has estimated that continuation of present trends implies a 50% increase in oil demand by 2030. Few observers consider present trends sustainable. Some combination of supply from untraditional sources and moderation of consumption will ease the call on traditional oil, gas, and coal. Whatever the ultimate market mix, the investment required to meet energy needs of the next quarter-century will be huge; IEA has estimated it at $16 trillion. The essential capital can come only from profits. And the only inducement for placing the capital at risk is the hope for future profits.

When a legislature turns hostile to energy profits, therefore, it discourages the development of future energy supply and foreordains hardship for energy consumers. Lawmakers perform no service with windfall profit taxes and antitrust shams, and constituents impressed by such grandstanding have flawed views of their own interests. Someone should tell them.