Pandering on petroleum

May 01, 2006|By STEVE CHAPMAN

CHICAGO -- Massachusetts Sen. Edward M. Kennedy is unhappy about the fat profits oil companies are making, and last week he called on the Justice Department and other federal agencies to investigate "illegal manipulation or cheating related to the current gasoline prices." He demanded that oil executives invest their profits in alternative fuels or new technologies or "expanding production in environmentally friendly ways." He warned, "We expect our consumers to be treated fairly."

Oops. My mistake. That wasn't Ted Kennedy. It was George W. Bush.

During the 2000 campaign, conservatives ridiculed Al Gore as a "Pander Bear" for his eagerness to toss principle aside in his shameless quest for votes. Lately, though, pandering has become a bipartisan endeavor. Faced with $3-a-gallon gasoline, the former West Texas oilman has shown he can do a fair impression of a bicycle-riding, granola-crunching, Birkenstock-wearing, corporation-bashing consumer activist.

At least Mr. Bush avoided the worst excesses of people in Congress, some of whom propose a windfall-profits tax on oil. They also want a bill to outlaw so-called gouging, which would be a clumsy form of price control. Democrats are so eager to exploit public discontent that they are even willing to adopt measures that have been calamitous failures.

A windfall-profits tax imposes a penalty for the sin of making farsighted investments. Oil companies spent money drilling holes in the ground in the 1990s even though there was a glut of oil that sent pump prices below $1 a gallon. The customary reward for doing that is to make money when the glut finally ends.

For Congress to confiscate a share of that return amounts to telling oil companies they should not have invested in production. Had they not made those investments, of course, there would be even less oil around today - and prices would be $4 or $5 a gallon instead of $3. A windfall-profits tax is a clever trick, if you want to make sure that gas prices never come down.

You don't have to take my word for it. President Jimmy Carter responded to the last energy crisis by getting Congress to enact a windfall-profits tax. A study by the Congressional Research Service found the tax reduced domestic oil output by at least 3 percent and boosted imports by 8 percent or more. We could run that experiment again, and I'm sure the Saudis would thank us.

Mr. Bush's charge that oil companies may be rigging the market raises the question: When did they learn how to do that? In inflation-adjusted terms, the price of oil peaked in 1981, and it has yet to regain that level.

During the energy crunch of 1979 and 1980, a legend arose that oil companies were secretly dumping truckloads of gas in the desert to create a shortage. The fact that no one ever came forward with proof didn't dissuade conspiracy mongers.

Critics always look for evidence of illegal manipulation, but they might be better off setting traps for the ivory-billed woodpecker. For one thing, executives who do it can be convicted of a felony. Those not deterred by prison face a practical obstacle: If one oil company tries to boost prices above what supply and demand warrant, it will lose sales to competitors who are willing to charge less.

The biggest reason for the soaring cost of motor fuel is the soaring price of crude oil. Far from being under the control of ExxonMobil, price increases are caused partly by growing worldwide demand, partly by supply disruptions in major producing countries such as Nigeria and partly by OPEC's design. Oil companies may benefit from such developments, just as American farmers may benefit from a drought in Argentina, but that doesn't mean they cause them.

In the 1980s, Ronald Reagan argued that freeing energy markets was the best way to cope with tight supplies and punishing prices. He saw that interfering with prices or confiscating profits were not solutions. And his approach ushered in an era of abundant supplies and low prices.

Mr. Bush, however, talks as though he has unlearned that lesson. It takes strength of character to change policy when it's proved wrong. It takes something else to change policy when it's proved right.

Steve Chapman is a columnist for the Chicago Tribune. His column appears Mondays and Wednesdays in The Sun. His e-mail is schapman@tribune.com.

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