Taxing Big Oil and Fuel Companies Hurts You and Me

We have all experienced the anger and frustration over the rise of gas and oil prices over the past 3 years. There is no doubt that our harsh feelings have caused more than a few of us to wish harm or hard times on Exxon Mobil and the rest. From the water cooler at work to the talk radio airwaves, motorists have vented their strong feelings to one another, but nothing seems to be slowing the rise in prices. Indeed, the only relief that has been afforded to us hard-working folks is the departure of summer and the onset of autumn. My experience has been that the fall and winter months are often the only time that gas prices actually fall.

Some politicians have felt this frustration on part of their constituency and have sought to make things "right" in the eyes of the voters, either out of principle or out of political gain. Take for example the MSNBC report of Senator Robert Casey's desire to tax big oil's so-called "excess" profits.

What many do not know (because they have not studied it and because liberal Democratic leaders such as Casey are not informing the citizenry) is that taxing big oil hurts us. It does not hurt the companies, it hurts motorists and other gas/oil consumers. An old joke goes that an economist is anyone who can say "supply and demand". For that matter then a parrot, properly trained to speak that phrase, can be an economist. Though there is much more to economic theory than this, there is not much more.

One of the tasks of suppliers (such as Exxon Mobil) is to offer their products at a price point that agrees with the desires of consumers and consumer choose suppliers that can offer the product they need in the quantity they require and at a satisfactory price. Suppliers of course have some things working against them such as high costs. It costs money to do business. Labor, capital, land, taxes and other expenses go into building, growing, and sustaining a proper business. One mechanism that companies use to stay afloat is to pass some costs on to the consumer. All of the costs that go into a product affect the final price. If a company can not sell its product because it is being underpriced by the competition, then it must reduce its price through reducing its costs. This can mean cutbacks (e.g. lay-offs). Or it can mean that the company reforms its means of doing business in order to produce its wares more efficiently thus reducing cost.

Now when the government under which the supplier operates imposes taxes this increases the cost of doing business. These tax expenses are often passed on to the consumer allowing the company to recoup the expense and have a more desirable bottom line. Taxes are not passed to apply to individual companies, they are passed as part of regulation of entire industries or groups of suppliers. All of these companies will take the same approach, they will pass this added expense on to the consumer. This means you!

Companies within the oil industry produce a practically indespensible product. We are so dependent upon oil that oil companies seem nearly monopolistic. It is as though they have us over a barrel (no pun intended). Because of this sentiment it seems appropriate to tax them and thus hurt these companies. It's like being able to "stick it to the man." This is an inappropriate way of viewing economic policy. Those added tax expenses will end up in higher prices because that's how capitalism works. And no, capitalism is not the problem, our perception and desire for revenge is the problem.

The correct policy would be to reduce or remove government regulation and lower taxes on the oil companies. A few things would happen. First removing government regulation would mean allowing more drilling in more places. This would increase the available supply and reduce the price because whenever supply is great, the price falls. This is good for us. Secondly, lowering taxes for these and other types of companies would lower their operating expenses and allow them to lower their prices without negatively affecting their bottom line. This, again, is good for us. Such measures were at the heart of the so-called "Reaganomics," which the Gipper empoyed in the '80s and which jump started our economy which was headed toward a second Great Depression after the Carter years. "Reaganomics," or supply-side economics works. We must realize that suppliers are not the greedy bad guys and we the consumers are not helpless underlings. Both sides are needed and both sides would do well to not have the meddling federal government standing in the way.

If we take this approach with all industries (that of removing government regulation and reducing taxes on business, particularly small businesses) our free-market system would be allowed to thrive and operate at its highest potential. It works well in its correct incarnation and this why America is so rich. However as we can see in the case of oil companies, at times the current restrictions place on our economoy are stifling. Contact your representatives at the state and federal levels, Republican or Democrat, and encourage them to not wage war against our free-market system. Let capitalism work its magic!

Of course, the ideal situation would be for inventors and innovators to introduce a new alternative fuel. This would introduce a tremendous level of competition to the fuel market and would take our economy to new heights. But until then we must let capitalism work for us in our current state.