Monday, May 01, 2006

Oil Profits

According to Energy Secretary Samuel Bodman, oil and gas prices have increased because supply has been unable to keep up with demand. He also said that it might take a couple of years before they can close the gap. He has sighted increased worldwide demand, Middle East instability, and environmental compliance as chief reasons for the shortfall.

Ultimately these firms need to invest in increasing their capacity. The high costs of environmental compliance have reduced profitability and have acted as barriers to entry, resulting in decreased supply, competition and higher prices.

Now both republicans and democrats have entertained the idea of ‘recapturing’ big profits by windfall profit taxes or repealing tax credits for ‘big oil.’ Part of their rationale is that oil companies have done nothing to ‘earn’ these profits and therefore do not ‘deserve’ them.

They forget the role of profits is not only to reward those producers who do the best job filling our most urgent needs, but they also have an essential role in directing resources to where they are in need most. And to relieve the oil markets we need those profits to encourage investment, competition, and ultimately increased supply of oil and gas. Recently Shell has proposed plans to build the biggest refinery in the US.

The idea that oil companies have done nothing to ‘earn’ high profits is farce. It is fuel that makes it possible to get our food safely to the table, provide medical care, deliver goods and services, and exercise our greatest freedom to come and go as we please. By definition profits represent the net contribution a firm makes to society. When it comes to energy, oil companies have a lot to contribute.

1 comment:

snoozer said...

Well said! Big Oil has to make sure they can produce the most oil in the most efficient manner, and that requires continually investing in newer and better technology. With all the restrictions already placed on the oil industry, this is no easy task, and yet Congress is out to make it more difficult. What kind of economic sense does that make?