Tuesday, July 08, 2008

Who is Responsible for High Gasoline Prices?

Depending upon whom you ask, the villain in the high price of gasoline may be evil oil companies, OPEC nations, or greedy speculators. Which, if any, of these is the villain?

People get all flummoxed over the large number of dollars the oil companies make and think they are “greedy,” not realizing what a massive investment it takes to make that profit. These huge companies deal in billions of dollars, rather than the millions or thousands that smaller businesses deal in. But their profits go to stockholders, and it’s not just fat cats that own oil stocks. Millions and millions of Americans benefit from oil company dividend payments, either directly, or through mutual funds or retirement plans that hold oil stocks.

We can blame OPEC for not producing more oil when its member nations have the ability to do so, because more oil on the market would loosen the tight supply/demand factor and cause crude oil prices to come down. But we must understand that for most of the OPEC nations, oil is their only marketable resource, and they want it to last as long as possible. It just isn’t in their interest to reduce their future reserves in order to produce much more than they are right now.

As for speculators, some think they are the only thing greedier than an oil company, while others believe they are merely indulging in a useful financial activity. Speculators may have some upward effect on the price of crude oil, but there just is no consensus on how much they affect oil prices, or if the affect it at all. That leaves us still wondering where the responsibility for high oil prices lies.

Primarily, the fault lies with the U.S. Congress. The prohibitions against developing domestic reserves and the barriers to increasing refining capacity Congress imposed decades ago, due to fears of environmental destruction, have led to increased dependence on foreign oil and tight oil supplies. Had American oil companies been able to drill for oil and build new refineries over the last 25 years, there would be more oil on the market, which would increase supplies and help hold prices down. Instead, much of our oil lies undisturbed below ground and under water, keeping supplies tighter and forcing prices higher.

If Congress restricts the oil industry’s ability to explore for and refine crude oil because of unproven environmental fears, doesn’t it have an obligation to look beyond carbon-based fuels, create a sensible national energy policy, and encourage the development of alternative energy sources such as nuclear, wind, solar and hydro? But Congress has not done that.

Two years ago, as Nancy Pelosi eyed the move from Minority Leader to Speaker of the House, she vowed to cut energy prices if Democrats won control of Congress. "Democrats have a common-sense plan to help bring down skyrocketing gas prices by cracking down on price-gouging; rolling back the billions of dollars in taxpayer subsidies, tax breaks and royalty relief given to big oil and gas companies; and increasing production of alternative fuels," said she.

Her "common-sense plan" and the Democrat-run Congress have achieved nothing, or even less. Instead of helping the U.S. become more self-sufficient, we are still held hostage by some of the world's nastiest nations.

Another factor controlled by Congress is taxation. Some think oil companies should be taxed more heavily, that somehow that would improve the situation. However, over the past 25 years, oil companies remitted more than $2.2 trillion in taxes, after adjusting for inflation, to federal and state governments. That amounts to more than three times what they earned in profits during the same period, according to the latest numbers from the Bureau of Economic Analysis and U.S. Department of Energy. In 2004, oil companies made $42.6 billion in profits, and paid $58.4 billion in taxes. For every dollar of profit, oil companies paid $1.37 in taxes.

Those who demonize oil companies because they think their profits are too high need to remember that the more profit the companies make, the more tax revenue government collects. Thanks to the profits of oil companies, government is better able to fund entitlement programs and pork-barrel projects.

But taxation is a double-edged sword.

Why? Because the money “big oil” remits to government ultimately comes out of the pockets of consumers. Businesses don’t pay taxes; their customers pay taxes. In 2004, that $58.4 billion of oil company tax payments worked out to more than $190 for every man, woman and child in America.

Higher corporate taxes, increased regulation, and meddling in the operation of oil companies have combined to produce the situation we have today. Because we are dependent upon foreign oil, being able to buy gasoline has become a difficult problem for many Americans.

What Americans have to decide is: how much are they willing to pay for gas in return for regulating the oil companies and over-protecting the environment?

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