Wednesday, May 30, 2007

Price Gouging: Oil Industry or Government?

With oil prices near record highs, politicians are accusing the oil industry of “price gouging” and are calling for an investigation. Of course, there is no such crime as “price gouging,” but that hasn't deterred politicians and the haters of capitalism from trying to portray oil companies as villains. Nor has the fact that numerous previous investigations of the oil industry over the years have never discovered even a single incidence of price gouging.

Last year Exxon Mobil reported $39.5 billion in profits. Sounds like a lot. But oil companies make about 13 cents a gallon on gasoline, while the federal tax is 18.4 cents. State taxes can be even more. As George Will has pointed out, “Senator Clinton's New York collects 42.4 cents per gallon. Forty-nine states—all but Alaska—make more than the oil companies do on every gallon.”

Does the tax money do anything to increase supplies of oil? Absolutely not. The government diverts billions of tax dollars to alternative fuels—which are uneconomic—in the hope they will someday become economic. Meanwhile, a federal moratorium on offshore drilling—effective since 1981—has placed off limits 85 percent of our Outer Continental Shelf bordering the Atlantic and Pacific Oceans and much of the Gulf of Mexico, all of which contain vast deposits of petroleum. Congress also voted not to allow oil drilling on any of the 19 million acres in the Alaska National Wildlife Refuge--even a modest request for 5,000 acres (0.002 percent). Alaska holds more oil reserves than all of the lower 48 states combined, and the prohibited areas of the Gulf of Mexico are said to contain 50 percent more oil than Alaska. Lack of refining capacity has also contributed to curtailing today's available supplies, thanks to federal regulations that have prevented the building of even a single new refinery in the U.S. for the past 29 years. The Wall Street Journal has noted that one company has been trying for 16 years to get the necessary permits but has been unable to do so.

In the past 20 years, Exxon Mobil has earned $266 billion, but it has invested $279 billion to bring more oil and gas into production. Shortly after announcing its 2006 earnings, the company said it will invest another $60 billion over the next three years.

Federal gas taxes are supposed to provide for highway construction and maintenance. But in the 20 years from 1980 to 2000, highway travel grew 80 percent, the number of drivers 30 percent, and highway capacity only 2 percent. Instead of providing sensibly for highway needs, the government diverted money to wasteful mass transit systems, such as light rail, and pork barrel projects for political advantage, such as the “bridge to nowhere,” a $233 million bridge larger than San Francisco's Golden Gate Bridge, which will connect Ketchikan Alaska (population 8,000) with an island of 50 inhabitants (See our essay “No Politician Left Behind.”)

The federal government's losses are far greater than the above examples indicate, because it does not follow accepted accounting practices. The executives of Enron, Worldcom, and some other large companies went to jail for corrupt accounting practices. But the federal government daily gets away with far greater accounting malpractices. Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later, but the federal government does not do so. As a result, according to an article in USA Today May 29, 2007, taxpayers are now stuck with $59.1 trillion in unreported liabilities—or $516,348 for every U.S. household.

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